WASHINGTON — The Biden administration, bowing to an aggressive lobbying campaign by the banking industry and pushback from Republicans, has agreed to support a far more limited plan for the Internal Revenue Service to try and crack down on tax cheats.
Senate Democrats are expected to roll out a new proposal on Tuesday that would narrow the scope of information that banks must provide to the Internal Revenue Service about customer accounts. Under the new plan, banks would only be required to provide data on accounts with total annual deposits or withdrawals worth more than $10,000, rather than the $600 threshold that was initially proposed. The reporting requirement would not apply to payroll deposits for wage and salary earners or to beneficiaries of federal programs such as Social Security.
The narrowing of the plan comes after a steady lobbying campaign by banks and Republicans, who argued that the Biden administration’s desire to bolster the I.R.S. to shrink the $7 trillion so-called “tax gap” amounts to an invasion of privacy and government overreach.
Critics of the proposal have incorrectly suggested that the I.R.S. would be tracking information about individual transactions. The administration has said the I.R.S. would not monitor specific customer transactions but would instead use the bank account information to spot discrepancies between what individuals report on their tax returns and what their bank accounts show.
The Biden administration insists that audit rates for those making less than $400,000 would not go up and that the program is focused on collecting unpaid taxes from the rich.
The Treasury Department said that the Biden administration would back the narrower proposal because the I.R.S. already has information about American workers and retirees. While it would give the agency visibility into far fewer bank accounts, a fact sheet that will be released by Treasury on Tuesday and was obtained by The New York Times said that “only those accruing other forms of income in opaque ways are a part of the reporting regime.”
“We are pleased so many members of Congress are committed to ensuring the top 1 percent pay the taxes they owe, just like teachers, firefighters, and other wage workers,” Alexandra LaManna, a Treasury spokeswoman, said. “We look forward to continuing to work with them to enact this critical proposal.”
Senator Ron Wyden of Oregon, the Democratic chairman of the Senate Finance Committee, and Senator Elizabeth Warren, Democrat of Massachusetts, will unveil the new plan on Tuesday afternoon.
“The main reason Republicans have latched on to this issue as the one to lie about every day is because they know their tax agenda is a political loser,” Mr. Wyden will say, according to prepared remarks. “The American people overwhelmingly want to ensure mega-corporations and billionaires pay their fair share, so Republicans have largely given up on their tired-trickle down arguments.”
Banks already submit tax forms to the I.R.S. about the interest that customer accounts accrue. But the new proposal would require they share information about account balances so that the I.R.S. can see if there are large discrepancies between the income people and businesses report and what they have in the bank. The I.R.S. could investigate the gaps to see if those taxpayers are evading their obligations.
The Treasury Department has estimated that its original proposal to require banks to report account balances, along with plans to beef up the enforcement staff at the I.R.S., could raise $700 billion over a decade.
In a letter to House Democrats last month, Treasury Secretary Janet L. Yellen urged lawmakers not to water down the information-reporting proposal. Originally, that part of the plan was projected to raise $460 billion over a decade. The Treasury Department estimated that the narrower plan that Congress had been considering could raise between $200 billion and $250 billion over that time.
The Treasury Department believes that those are conservative estimates and that the “deterrent effects” of the policies could still generate $700 billion of additional tax collection in next decade.
Despite the slimmer scope of the proposal, Republicans are not about to give up their line of attack.
Representative Marjorie Taylor Greene, Republican of Georgia, took to Twitter on Tuesday morning to declare, “Democrats need to keep their grubby little hands out of people’s bank accounts. The I.R.S. does not need to monitor how you spend your money. It’s none of their damn business.”