Can the IRS See Bank Transfers?

Most of the time, the IRS does not have the capability to see bank transfers. This is due to the numerous financial networks that transactions occur through, and the resources required to continuously monitor such systems.

According to the Internal Revenue Service (IRS), they typically do not have direct access to individual transactions unless there are suspicious activities.

If the IRS Could See All Transactions, Would They Need Tax Returns?

In theory, if the IRS had access to all transactions, they would indeed have more information about taxpayers' financial activities. However, this would not necessarily replace the need for individual tax returns. The IRS collects data from various sources, including employment wages, investment income, and other financial transactions. Tax returns allow individuals to report additional sources of income and deductions that may not be captured by other means.

The Role of Suspicious Activity Reports (SARs)

Financial institutions are required by law to report suspicious activities to the Financial Crimes Enforcement Network (FinCEN) using a Suspicious Activity Report (SAR). These reports are typically triggered by unusual or potentially illegal transactions.

If a bank suspects a transaction might be suspicious, such as those involving large sums of money, frequent high-value transactions, or transactions with known money laundering risk factors, they must file a SAR. The IRS can then use this information to investigate potential tax fraud or other criminal activities.

How the IRS Monitors Transactions

Due to the complexity and vast volume of financial transactions, the IRS does not have the resources or authority to monitor and report on every single transaction. Instead, they rely on existing reporting mechanisms, such as Form 8300 for cash and monetary instruments transactions over $10,000.

Total Reporting Requirements:

Domestic transactions over $600 must be reported to the IRS. For transactions involving cryptocurrencies, a substitute Form 8300 may be required. Transactions involving high-value items, such as cash and monetary instruments, are subject to Form 8300.

As a part of the American Rescue Plan Act of 2022, the IRS now has the capacity to monitor certain digital transaction platforms like PayPal and Venmo. It requires all transactions over $600 to be reported to the IRS, which will increase the agency's ability to track and verify financial transactions.

Conclusion

The IRS’s ability to monitor bank transfers is limited due to the sheer volume of transactions and the need to respect individual privacy. While they have the tools to monitor suspicious activities, tax returns remain a critical component of tax compliance, ensuring that all sources of income and deductions are accurately reported.