The American Institute of CPAs told the Internal Revenue Service at a hearing Thursday that it supports the agency’s overall goal of changing the U.S. tax system to one that matches tax return filings in real time with information returns from third parties.

Patricia Thompson

The current system does not match the information received by the IRS from third parties to data reported by taxpayers on their tax returns until well after the returns are filed. IRS Commissioner Doug Shulman wants to build a system that will do the information matches upfront when a return is filed (see IRS Commissioner Doug Shulman Wants a Real-Time Tax System).

The real-time tax system would presumably enable the IRS to verify many elements or issues at the time the tax return is filed, correct potential discrepancies before the tax return is processed, and respond earlier to mismatches in information return and tax return data that would be apparent sooner based on the embedment of tax return data in pre-screening filters. The RTTS may have additional benefits, including reduction of identity theft and curbing noncompliance with respect to certain credits, such as the Earned Income Tax Credit.

AICPA Tax Executive Committee chair Patricia Thompson said that as the IRS considers a real-time tax system, it should focus initially on the simplest tax returns, such as Forms 1040A and 1040EZ, and minimize the potential burdens on taxpayers.

“We support the overall objective of RTTS, which is to create a tax system that resolves reporting discrepancies up-front, eliminating the need for millions of IRS contacts with taxpayers,” she said. 

She noted that the AICPA believes the best opportunity for evolving the tax system to be more real time is to work closely with key stakeholders in the development and phase-in of the initiative in several stages. 

“We recommend that the first stage focus on the simplest tax returns initially; specifically Forms 1040A and 1040EZ, as well as those returns involving EIC claims,” said Thompson. “Forms 1040A and 1040EZ will readily cover the population of U.S. taxpayers who receive at least one of the following information returns: Forms W-2, 1099-G, and/or 1098. It is likely that these taxpayers are among the 21 percent of all taxpayers who receive only these types of information returns and would seem most suitable for short-term opportunities involving RTTS.”

Thompson noted that federal tax administration currently relies on the IRS’s Automated Underreporter program, which is generally a post-filing process, as its primary means for identifying mismatches between tax returns and corresponding information returns. She pointed out that the current system is weighed down by technology, resource and training constraints. According to a 2008 report by the Treasury Inspector General for Tax Administration, approximately 5.1 percent of taxpayers were sent inaccurate information on CP 2000 notices of underreporting discrepancies. 

“The TIGTA report suggests that IRS employee mistakes were one cause for the mismatch problems, and that the complexity of the AUR notices was potentially another contributing factor,” said Thompson. “To minimize taxpayer burden, these types of issues need to be addressed before implementation of a proposal like RTTS. We also understand there are substantial concerns with respect to identity theft leading to AUR issues.”

She encouraged the IRS to work closely with stakeholders and taxpayers to ensure the success of the real-time tax system. “This dialogue needs to include comprehensive discussions with a range of constituencies beyond tax return preparer and taxpayer-related groups, such as software providers, the payroll industry, financial institutions, employers, and state and local governments,” she said. “We believe successful implementation of RTTS will only result from a clear and open dialogue about the details and goals of the program.”

The IRS is planning to hold further public hearings on its plans for the new system (see IRS Plans Public Meetings on 'Real-Time Tax System'). Thursday's hearing was the first in the series.