Senate Finance Committee chairman Max Baucus, D-Mont., unveiled a series of proposals Wednesday to combat tax fraud and make the tax-filing process simpler and more efficient.
The proposals come a day after Baucus released a series of proposals in a discussion draft focused on international tax reform (see Senator Unveils Proposals for International Tax Reform). Baucus has been working on putting together a comprehensive tax reform bill with his counterpart in the House, Ways and Means Committee chairman Dave Camp, R-Mich., and the discussion drafts represent a last-ditch effort to get such legislation at least introduced in Congress before the end of the year. However, with the number of days in the legislative calendar rapidly dwindling and partisan gridlock still holding up an agreement on next year’s budget, the prospects for passage of a comprehensive tax reform package appear to be remote, especially with the 2014 midterm elections less than a year away.
Nevertheless, the tax reform proposals that Baucus unveiled in his discussion drafts could eventually make their way into some future legislation. The package of reforms draws heavily from proposals offered by both Republican and Democratic members of the Senate Finance Committee, his office noted.
“Our tax code today is inefficient, and incomprehensible to the overwhelming majority of Americans,” Baucus said in a statement. “This complexity is eroding confidence in our economy and creating uncertainty for America’s families and businesses. Enough is enough. This discussion draft explores ways to simplify the tax process for all Americans.”
Tuesday’s set of proposals include a number of reforms to modernize tax administration, minimize compliance burdens, reduce tax-related identity theft, and shrink the tax gap. Specifically, the discussion draft offers proposals to simplify the tax filing process through greater use of technology, provide the IRS with new tools to combat tax-related identity theft and assist victims of this crime, and reduce the tax gap by increasing information reporting and providing IRS with additional collection tools.
Among the proposals related to information reporting, taxpayers would no longer be required to file corrected information returns if the error is less than $25. The IRS would be required to develop a simple Internet platform for preparing and filing Forms 1099 that is functionally similar to the Business Services Online platform that employers use to file Forms W-2. Tax returns generated by a computer but filed on paper would have to contain a scannable code that would enable the IRS to more efficiently upload the return information. Information returns, including Forms W-2 and 1099, would have to be filed with the government by February 21st of each year, rather than by the current law dates of February 28th (for paper forms) and March 31st (for electronic forms). Information returns must still be delivered to recipients by January 31st.
Baucus also proposed a number of reforms to electronic filing. The number of returns that trigger an electronic filing requirement would be gradually reduced over a three-year period from 250 returns per year to 25. Paid tax return preparers would have to electronically file all tax returns and information documents that they prepare for their clients. Forms M-3 and 990 would need to be filed electronically. The Treasury Department would have the authority to delay implementation if appropriate. Electronic filing of Forms 5500 by employee benefit plans would be increased. This proposal is based on a provision of S.1289 (112th), TAX GAP Act of 2011, sponsored by Sen. Carper.
The second set of reforms in the staff discussion draft would provide the IRS with new tools to combat tax-related identity theft and assist the victims of this crime. Access to the Social Security Administration’s public death data—the Death Master File—would be restricted for three years, but an exception would be provided for individuals or entities with a legitimate fraud prevention or business need for the information and who agree to keep the data private. Disclosure to third parties would be permitted if they agreed to protect the information. Penalties would apply to any unauthorized disclosure.
Form W-2 would no longer include the taxpayer’s full Social Security Number. Instead, the IRS would require use of only the taxpayer’s truncated SSN or other taxpayer identification number. The IRS would be granted authority to use the Department of Health and Human Services’ National Directory of New Hires to verify employment data.
Identity Theft Safeguards
The staff discussion draft would also establish new criminal penalties for tax-related identity theft. Filing a tax return using another person’s identity would be a felony subject to a fine of not more than $250,000 fine and/or up to 5 years in prison.
The staff discussion draft also provides aid to taxpayers who have been victims of tax-related identity theft by requiring the IRS to notify taxpayers that it determines to be victims of identity theft. In addition, the IRS would be required to assign each victim a single point of contact to help facilitate rapid case resolution.
The IRS would be required to report to Congress on the viability of expanding the existing personal identification number (PIN) program available for victims of tax-related identity theft. The report would have to consider whether allowing all taxpayers the option of obtaining a PIN from the IRS to secure their return filing is an effective way to combat tax-related identity theft. The report would also have to determine whether the IRS should authenticate taxpayer identity and distribute PINs to participating taxpayers through an internet platform similar to my Social Security (http://www.ssa.gov/myaccount/) used by the Social Security Administration.
Expanded Tax Preparer Penalties and Information Reporting
In addition, the due diligence requirements currently imposed on tax return preparers with respect to the Earned Income Tax Credit would be extended to include the Child Tax Credit. A tax preparer who does not comply with the Child Tax Credit due diligence requirements would have to pay a penalty of $500 for each failure.
The third set of reforms in the staff discussion draft aims to reduce the tax gap by increasing information reporting in certain areas, providing the IRS with additional collection tools, and clarifying that the IRS may regulate tax return preparers. Banks would have to report the existence of bank accounts, including accounts on which no interest was earned, during the taxable year. Information returns on mortgage interest must include the outstanding balance of the mortgage; the address of the encumbered property; property taxes, if any, paid from escrow; and the loan origination date.
Life insurance companies would have to file information returns on the sale of a life insurance policy into the secondary market. Colleges and universities would have to report the amounts received (rather than either amounts received or billed) for tuition and other higher education expenses on Form 1098-T.
Businesses would have to show how much of their gross receipts and expenses are reflected in separately filed Forms 1099 by breaking those amounts out on their Form 1040 Schedule C. The staff discussion draft also requests a report from the Treasury Department on how to improve tax compliance by sole proprietors.
Under another proposal, the IRS would be authorized to impose a levy of up to 100 percent on payments to Medicare providers that are seriously delinquent in their taxes. The State Department would be authorized to revoke passports of individuals with seriously delinquent tax debts in excess of $50,000.
The IRS would be authorized to waive fees for installment agreements if the taxpayer agrees to make payment through automated withdrawals.
Regulation of Tax Preparers
In the recent case, Loving v. IRS, the Unites States District Court for the District of Columbia concluded that the IRS and Treasury Department do not have the authority to regulate tax return preparers that only prepare returns for their clients. This case is currently on appeal to the United States Court of Appeals for the District of Columbia.
The staff discussion draft amends 31 U.S.C. 330 to make it clear that the Treasury and IRS have the authority to regulate all paid tax return preparers. “No negative inference is intended or should be taken with respect to whether the IRS and Treasury Department have the authority to regulate return preparers in past periods,” said a summary of the discussion draft.
In addition to the proposals detailed above, the staff discussion draft includes several other administrative changes, including expanding taxpayer access to the U.S. Tax Court, and permitting the IRS to share certain tax information with the Bureau of Labor Statistics.
A detailed summary of the tax administration staff discussion draft can be found here, and a one-pager on the draft can be found here. The full staff discussion draft in legislative language can be found here.
Baucus plans to release proposals to reform cost recovery and accounting on Thursday. The discussion drafts are based on bipartisan ideas and incorporate bills introduced by both Republicans and Democrats.
He also called for additional feedback from members of Congress, key stakeholders and the general public on the discussion draft and on a number of additional issues, including ways to better protect taxpayer’s rights.
Feedback on the tax administration discussion draft should be sent by Jan. 17, 2014 to Tax_Reform@Finance.Senate.gov.