An outside advisory committee to the Internal Revenue Service is asking the agency to reinforce its standards for security, privacy and fraud prevention, including “phantom prepared” returns.
David Williams
In its 2012 Annual Report to Congress, the Electronic Tax Administration Advisory Committee made its number one recommendation that the IRS “reinforce tax industry software technology and infrastructure standards regarding security, privacy, fraud prevention, and e-authentication to promote and safeguard taxpayer data and confidence in the tax system.”
The IRS has come under increasing pressure in the past year to crack down on the growing problem of identity theft-related tax fraud. Congress has held several hearings in recent months to examine the problem, including one on Thursday by the Crime Subcommittee of the House Judiciary Committee (see Congress Probes Tax Prep Fraud and Identity Theft).
Among the fraud trends identified in the report is the problem of “phantom prepared” returns, that is, tax returns prepared by another for compensation and filed as self-prepared. The problem has been growing in recent years since the IRS stepped up its efforts to regulate the tax preparation profession. By not signing the returns, some tax preparers believe they are able to sidestep scrutiny and the new requirements for registration, testing and continuing education.
“’Phantom prepared’ returns lack accountability and in many cases may lack accuracy, thereby undermining the efforts of the return preparer initiative taken on by the IRS and confidence therein,” said the report. “The number of returns prepared by phantom preparers is difficult to determine, but industry speculation indicates a growing trend. If left unchecked this could create significant issues to the tax system. From lack of accountability, no professional training, and limited experience to outright preparer fraud, the increase in individuals who prepare a tax return for compensation and do not sign the tax return needs creative solutions to maintain gains in professional preparation standards and for taxpayer confidence to be maintained in the system.”
The report noted that the federal government is facing a future of increasing abuse and misuse of the tax system through tax fraud, identify theft and other uses of taxpayer information for illegal gains. “This increasing fraud and system misuse serves to undermine not only confidence in the tax system but also can bolster relaxation on the issue – an “everybody is doing it” mindset,” said the report. “IRS is acutely aware of the issue and making great strides to develop fraud detection and prevention systems and build on the broad experience they have, including this year’s MeF [Modernized e-File] system and improved issue detection elements. The focus should remain on issue prevention and detection, but an increased emphasis should be placed on enforcement and accountability. With increased enforcement and punishment to both taxpayers and professional tax preparers where applicable, in conjunction with prevention and detection, the return on investment of misuse of the tax system will be less attractive.
Other key recommendations in the report include moving forward on electronic filing of employment tax and information tax returns; creating Internet tools for taxpayers and tax professionals; leveraging tax delivery service channels; and funding the Modernized e-File and Customer Account Data Engine systems to completion.
“Through its recommendations, ETAAC provides an important voice to the IRS,” said David Williams, director of the IRS’s Return Preparer Office, in a statement. “We appreciate the long hours and focus the ETAAC brings, and we will carefully review these recommendations.”
The 14-member committee provides an organized public forum for discussion of electronic tax administration issues and the overriding goal that paperless filing should be the preferred and most-convenient method of filing tax and information returns.
“ETAAC commends IRS on surpassing its goal and receiving more than 80 percent of individual tax returns electronically. IRS can now turn its attention to employment tax returns and re-focus on delivering electronic interactions to taxpayers and tax professionals,” said ETAAC chairman Mark Steber.
ETAAC submits an annual progress report to Congress each June. The IRS Electronic Tax Administration created the ETAAC in 1998 as required by the IRS Restructuring and Reform Act of 1998.
The report is the result of research and analysis as well as meetings with senior IRS executives. Public comments on the report may be sent to etaac@irs.gov.
8 Comments
Let's start by requiring all do-it-yourself tax software vendors to include a service statement like, "If you pay someone to assist you in the preparation your return, they are required to sign your return as a paid preparer. They are also required by law to be registered with the IRS."
It may not stop the "for $50 I will help you do it online"; but it would be a good way to educate consumers of the requirements and the risks involved if requirements aren't present.
Posted by: shirehopper | July 4, 2012 9:21 PM
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I can see two possible ways to eliminate 99% of "phantom preparers". 1) Require all returns must be done by a paid preparer and the PTIN must be entered to submit and accept the return. 2) Require a unique identification number be placed (printed or electronic) on each return that links back to a specific software ID license. This way the IRS can create a list of unique ID's, give them to approved software companies who dole out a unique ID to a specific software license. Then, they must require that the software has internet communications in order to print/submit the file so the ID can be sent back to the Software company.
Option 1 will not go over well with a majority of taxpayers, but I presume people like Tego will love it. Option 2 will create even more pains for the software companies with additional administrative requirements and ultimately raise the price of software even more. But hey, it'll be just like the Health Care, won't it? The limits to catching "phantom preparers" with option 2 would be those returns that are written on paper forms and filed.
Posted by: Zeo | July 4, 2012 9:08 AM
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I agree it is next to impossible to ctch these returns, unless they are coming from specific softwares that the average taxpayer would not have access to. Most of the taxpayers use Turbo tax or similar software, while preparers use major prep software. I like the idea of using a check box for any preparer. Other than that, we need to stop trying to legislate the accountant out of business. At some point in time those phantom preparers will start coming to light and if prosecuted will send a message.
Posted by: pcw@xfoneusa.net | July 4, 2012 8:11 AM
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"Phantom Preparers" has been in the tax indutry since paid preparers are required to sign. This can not be avoided because there is an option for a taxpayer to prepare for him/herself and sign as self-prepared. Although they didn't. If all of the tax returns will not be process unless sign by a tax professional, then this "Phantom" will be a superhero.
Posted by: nessie | July 3, 2012 11:46 PM
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More regulations do not solve the problem or any problem. They make it more difficult and anenforceable. Simplicity and fairness in any regulation is a must.
Posted by: geomar | July 3, 2012 3:57 PM
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Everytime I turn around someone is criticizing or demanding more from the IRS! Instead of complaining, congress needs to budget the proper staffing and major improvements to software and systems programming.
Posted by: mitywarrior | July 3, 2012 11:47 AM
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I think one way to at least curb the abuse would be for the IRS to change the section from "Paid Preparer" to just "Preparer". There can be a "checkbox" like the self-employed for a paid preparer.
Then for the ones that say "self-prepared" or something similar, the IRS could require the software companies to put some code or something similar to track how many "self-prepared" returns are coming from one specific computer or something similar.
If it is too great, the IRS could supoena a software company to find out who the returns belongs to....
My two cents...
Posted by: James P | July 3, 2012 11:30 AM
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Taxpayers who put up with "Phantom preparers" are at best fools, and at worse major cheats.
Without cooperation of the taxpayers who use them, it will be difficult to catch the "Phantoms."
And in a delayed answer to a preparer who stated he only has been filing "simple return" for a limited number of clients for many years, and will quit rather than pay a relatively few dollars for registration and testing, happy to see your likes go by the wayside. Especially since "simple return" sometime take on unintended complexities due to unexpected situations. What then Mr Simpleton? I would hope you had the good sense to suggest the client go to a real professional rather than the "proverbial housewife" making pin money at her kitchen table.
To quote, "No one ever became poor underestimating the intelligence of the American public." (You can look it up.)
Posted by: tego@verizon.net | July 2, 2012 1:34 PM
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