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Guest view: Biden tax crusade puts privacy at risk

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The Internal Revenue Service building is seen in Washington, U.S. September 28, 2020. REUTERS/Erin Scott

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NEW YORK, Sept 29 (Reuters) - What’s inside America’s wallets? Uncle Sam wants to know. President Joe Biden’s $3.5 trillion budget plan includes a proposal to let the Internal Revenue Service monitor the bank balances, payments and receivables of individual citizens in an effort to curb tax evasion. It would cover every bank transaction over $600 – and when coupled with an inevitable shift from traditional money to government-issued digital currencies, constitute a glaring, perhaps unconstitutional invasion of personal privacy.

To tax what people earn, the federal government must learn people’s incomes. Proponents of an income tax have never really had to balance that against the Fourth Amendment of the U.S. Constitution, which protects Americans from unreasonable searches and seizures. It’s easy to overlook the effect on privacy. Progressive era Supreme Court Justice Louis Brandeis gives an example: He co-authored a foundational 1890 law review article advocating for a right to privacy in American law but also championed the 16th Amendment that made direct income taxation possible, according to scholar Jeffrey Rosen.

To mitigate the threat, taxation in the United States generally operates as a “self-reporting” system. Taxpayers self-report their taxable income, calculate their liability and pay their dues. The IRS has power to investigate cheating and compel payment of what’s owed. In the early decades of the income tax, the threat to individual privacy wasn’t so acute.

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That is changing, thanks to a trio of trends. One is the increasingly intricate level of detail demanded as Congress uses tax policy to advance broader social and welfare goals. Not just income and investments, but familial relationships, business activity, charitable giving, health insurance, medical spending and more go into American households’ returns.

The second encroachment on privacy is the format in which personal financial data comes to reside with the government. The paper 1040 federal tax forms that individuals have filed for decades are cumbersome to process but also difficult to physically access, copy or convey outside the IRS’ walls. Filings in digital form are infinitely more transportable, like a gas that easily escapes and spreads far beyond the databases meant to contain them.

When ProPublica published details from the tax returns of the wealthy earlier this year, its findings highlighted the risks of having extensive personal information in IRS databases. Right now, any number of groups, from hackers to foreign attackers, may be siphoning off IRS data and getting intimate knowledge of Americans’ private lives.

Congress’ appetite for spending has grown – witness the estimated $2.1 trillion fiscal deficit the Congressional Budget Office forecasts for 2021 – yet the public’s distaste for tax increases endures. Hence the third trend threatening privacy: the attempt to wring more revenue from existing tax law by increasing financial surveillance. The IRS processed more than 3.5 billion “information returns” in 2018 – more than 10 for every man, woman and child in the United States. President Biden’s “American Families Plan” calls for a vast expansion of information reporting to include “gross inflows and outflows on all business and personal accounts from financial institutions, including bank, loan, and investment accounts.” Congress appears poised to deliver.

Cryptocurrency users have been canaries in this financial surveillance coal mine. In 2020 taxpayers were required to report all transactions in digital currency, taxable or not. In 2018, after seeking vast troves of information about all users of leading crypto platform Coinbase (COIN.O), the IRS got a court order requiring the company to hand over information about 13,000 crypto users, to whom it sent threatening letters. And language slipped into the infrastructure bill would require financial reporting by cryptocurrency processors that have literally no information with which to comply.

At some point, the coming financial surveillance regime may cross the line between reasonable information requests and unreasonable seizure of private financial records. The shift from analog fiat money to central bank digital currency, with its potential for real-time government scrutiny of citizens’ cash flows, raises the stakes. Biden’s proposal, if made law, may wind up before the Supreme Court.

There may be other ways to increase tax compliance. The Government Accountability Office found last year that the IRS’ ability to use and process information was limited by outdated systems and a lack of coordination with other agencies. That implies it might achieve higher collections by better using the powers it has – but hardly suggests more data would increase compliance. In other words, the benefit in terms of revenue is speculative, while the cost in risk to taxpayers is fairly certain.

A prescient warning came from Brandeis in a 1928 wiretapping case. “Ways may someday be developed by which the Government, without removing papers from secret drawers, can reproduce them in court,” he wrote, a development that could expose “the most intimate occurrences of the home.” He could be describing the financial services system of the near future, which will conduct the business of customers in full view of the federal government.

If Congress presses forward with comprehensive financial surveillance for income tax enforcement, perhaps the modern court will recognize the privacy invasiveness of the income tax in a way that the court of Brandeis’ era did not.

CONTEXT NEWS

- Christopher Giancarlo is senior counsel at Willkie Farr & Gallagher and served as the 13th chairman of the U.S. Commodity Futures Trading Commission.

- Jim Harper is a nonresident senior fellow at the American Enterprise Institute, where he focuses on privacy issues and select legal and constitutional law issues.

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Editing by John Foley and Marjorie Backman

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