(WASHINGTON) — The Biden administration on Tuesday backed down on a controversial proposal to direct the IRS to collect additional data on every bank account that sees more than $600 in annual transactions, after widespread criticism from Republican lawmakers and banking industry representatives, who said the tax enforcement strategy represented a breach of privacy by the federal government.

Instead, the administration and Senate Democrats are proposing to raise the threshold to accounts with more than $10,000 in annual transactions, and any income received through a paycheck from which federal taxes are automatically deducted will not be subject to the reporting. Recipients of federal benefits like unemployment and Social Security would also be exempt.

The IRS would collect the total sum of deposits and withdrawals from bank accounts with more than $10,000 in non-payroll income. Information on individual transactions would not be collected.

The changes were announced Tuesday by the Treasury Department.

“In response to considerations about scope, it [Congress] has crafted a new approach to include an exemption for wage and salary earners and federal program beneficiaries. Under this revised approach, such earners can be completely carved out of the reporting structure. This is a well-reasoned modification: for American workers and retirees, the IRS already has information on wage and salary income and the federal benefits they receive,” a Treasury Department fact sheet on the changes said.

The changes would exempt millions of Americans from the reporting requirement, and help the IRS target wealthier Americans, especially those who earn money from investments, real estate, and other transactions that are more difficult for the IRS to track.

“Under the current system, American workers pay virtually all their tax bills while many top earners avoid paying billions in the taxes they owe by exploiting the system. At the core of the problem is a discrepancy in the ways types of income are reported to the IRS: opaque income sources frequently avoid scrutiny while wages and federal benefits are typically subject to nearly full compliance. This two-tiered tax system is unfair and deprives the country of resources to fund core priorities,” Treasury Secretary Janet Yellen said in a statement.

“Today’s new proposal reflects the Administration’s strong belief that we should zero in on those at the top of the income scale who don’t pay the taxes they owe, while protecting American workers by setting the bank account threshold at $10,000 and providing an exemption for wage earners like teachers and firefighters,” Yellen said.

The fact sheet says, “Imagine a taxpayer who reports $10,000 of income; but has $10 million of flows in and out of their bank account. Having this summary information will help flag for the IRS when high-income people under-report their income (and under-pay their tax obligations). This will help the IRS target its enforcement activities on those who are actually evading their tax obligations—decreasing costly and burdensome audits for the vast majority of taxpayers who pay what they owe.”

The proposal is a long way from being enacted. It’s currently included in a multi-trillion dollar social spending package lawmakers and the White House have been negotiating for months. If that package is passed into law, this requirement wouldn’t begin until December 2022.

Senate Finance Committee Chairman Ron Wyden D-Ore., who spearheaded the effort to revise the proposal, dispute Republican claims that the goal is to snoop on Americans’ financial transactions.

“The bottom line is, wealthy tax cheats are ripping off the American people to the tune of billions and billions of dollars per year. Tax cheats thrive when the reporting rules that apply to them are loose and murky. Democrats want to fix this broken approach and crack down on the cheating at the top,” Wyden said in a press conference on the announcement Tuesday.

Wyden made clear that even Americans who might make a large purchase over $10,000 wouldn’t be subject to the additional reporting.

“If you don’t have $10,000 above your paycheck, Social Security income, or the like coming in or going out, there’s no additional reporting. We’ve also addressed the scenario where an individual spends a significant amount of savings for a major purchase. There will be no additional reporting in this scenario, as long as the amount of money coming into the account does not exceed wages +$10,000,” Wyden said.

The administration did not specify if the changes will impact the additional tax revenue they might be able to collect through enforcement. The administration has estimated improved tax enforcement could net up to $600 billion in additional tax revenue over the next decade.

The initial proposal, which would have affected nearly every non-dormant bank account in the U.S., raised the ire of Republican lawmakers, who called it a breach of privacy and an example of government overreach. Even with the revisions to the proposal, Republicans in the Senate remained critical.

“So how long is it gonna take for them to say, ‘Well you know we need a little bit more information because we really can’t make much of this.’ Then they’re going to want individual transactions and who knows what,” Sen. John Thune, R-S.D., told reporters.

Sen. Mike Crapo, R-Idaho, cited President Biden’s commitment not to raise taxes on any American making less than $400,000, suggesting that threshold ought to be applied to IRS reporting.

“Why don’t they just put a ban in there that bans the IRS from snooping in the accounts of people who make less than $400,000? That’s the question I think that should be asked with the sponsors of this approach,” Crapo said.

Crapo was hard-pressed to give an example of an alternative way to close the tax gap other than to say mention “closing loopholes.”

Banking industry representatives remain skeptical of any additional reporting requirement, saying it will create a burden, especially for smaller community banks.

Copyright © 2021, ABC Audio. All rights reserved.