The Internal Revenue Service’s Oversight Board heard about the various problems encountered by tax practitioners and taxpayers, including the shortened tax season, identity theft and tax fraud.
“We are coming off of one of the most challenging filing seasons I’ve witnessed in my many years as a tax professional,” said Lonnie Gary, chair of the Government Relations Committee at the National Association of Enrolled Agents, at Wednesday’s hearing. “While the ever increasing complexity and instability of the Tax Code provides the assurance that even a ‘good’ filing season will prove challenging, the unprecedented lateness of the American Taxpayer Relief Act of 2012 made planning impossible for many Americans and also compressed a filing season that is already all too brief.”
Gary argued that the IRS’s plans for developing a “real-time tax system” would not be feasible without further truncating the tax-filing season.
“Real-time document matching is infeasible today because IRS does not receive all the information return data in time to perform matching during filing season,” said Gary. “The question before us is how the Service will acquire the information return data in a timely fashion. Something will have to give. Either the filing deadline will need to shift later or the Service will have to require an aggressive due date for the information return data that will be matched. Each of these provides its own challenge—on one hand, the April 15th filing date is deeply entrenched in the American psyche while on the other hand information document providers have struggled to meet the current deadlines.”
Jeffrey Porter, who chairs the American Institute of CPAs’ Tax Executive Committee, testified about tax fraud and identity theft at the IRS Oversight Board hearing. He noted that some actions that the AICPA believes would reduce the threat of identity theft would require legislative or regulatory changes. Porter said the IRS’s proposed regulations authorizing filers of certain information returns to voluntarily truncate a taxpayer’s identifying number is a “positive step towards protecting the privacy and security of personal information.” He added that the AICPA is pleased that the proposed regulations would make the truncation program permanent because the AICPA has supported making it permanent for several years.
In addition, Porter said, the truncation program should be extended to permit truncated Social Security numbers on all types of tax forms and returns provided to a taxpayer. That would require a change in the law and the AICPA has recommended to Congress that it pass legislation so that truncated Social Security numbers could be used on W-2 forms.
“A fundamental tax administration goal for combating fraud,” Porter said, “is establishing one point of contact within the IRS for prompt resolution of identity theft cases,” as called for by former IRS Commissioner Douglas Shulman and National Taxpayer Advocate Nina Olson. Currently, 21 units exist within the IRS to help victims of identity theft. Porter emphasized that the IRS “should be provided with the proper resources to fund its mission, since the fight against identity theft fraud is taking a toll on IRS resources.”
He praised the expansion of the IRS Law Enforcement Assistance Program to help state and local law enforcement officials obtain tax return data vital to investigating identity theft cases and the continuing emphasis by the IRS on criminal investigations.
Increased staffing and training are key components of the fight against identity theft, according to Porter. “We believe the Service should continue to increase the level of staffing dedicated to identity theft cases and improve its training of agency employees to ensure the proper response and assistance for identity theft victims,” he said.
Real-Time Tax Challenges
Bernie McKay, chief public policy officer and vice president for corporate affairs at Intuit, testified on behalf of the Council for Electronic Revenue Communication Advancement, or CERCA. He noted that the issues of enhancing the accuracy of tax returns and combating identity theft and fraud are strategic priorities, not only for the IRS, but are shared by CERCA as well.
Like Gary, McKay shares concerns about the viability of a real-time tax system. “Just as has been the case in the United Kingdom, where the Real Time Tax concept originated, the comprehensive implementation by government of the initiative is not only a daunting agenda, but, depending on the chosen strategy, potentially a high-cost investment for the IRS, and thus the taxpayer, and could represent a high cost to the private sector as well, particularly the small business community whose reporting requirements could change significantly,” he said.
James R. White, director of tax issues on the Government Accountability Office’s strategic issues team, pointed out that the IRS is already doing matching, though not in real time. “During 2012, IRS began to match wage and tax withholding data reported on information returns, such as Form W-2, to tax returns in March rather than later in the spring or summer after the tax return filing season,” he said in his prepared testimony. “IRS is exploring the possibility of more extensive matching of information and tax returns before issuing tax refunds. IRS is considering the implications that expanding earlier matching could have for taxpayer and compliance and tax administration efficiency. This approach could also help IRS address identity theft-related fraud.”
Tax Preparer Oversight
Michael R. Phillips, acting principal deputy inspector general at the Treasury Inspector General for Tax Administration, said that TIGTA remains concerned about the ever-increasing growth in identity theft and tax refund fraud and their impact on tax administration. He pointed to the role of tax preparers and discussed how the IRS’s tax preparer regulation regime had been derailed by a court decision early in tax season.
“Every year, more than half of all taxpayers pay someone else to prepare their federal income tax returns,” he said. “Near the end of 2009, the IRS announced a suite of proposed reforms that were designed to improve taxpayer compliance by providing comprehensive oversight and support of tax professionals through its Return Preparer Program. The IRS stated that a well-educated and competent tax return preparer can prevent inadvertent errors, possibly saving the taxpayer from unwanted problems later. In September 2010, TIGTA reported that it will take years for the IRS to implement this Program and to realize its impact. In January of this year, the United States District Court for the District of Columbia enjoined the IRS from enforcing the regulatory requirements for return preparers. The IRS subsequently announced that it had reopened its preparer tax identification number (PTIN) system for new applications and renewals after the court clarified that the injunction did not affect regulations requiring tax preparers to have a PTIN.”
Phillips argued that tax preparers who steal and disclose any taxpayer’s federal tax information as part of an identity theft scheme cause serious harm to taxpayers. “TIGTA focuses its limited investigative resources on investigating identity theft and refund fraud that involves any type of IRS employee involvement, the misuse of client information by tax preparers, or the impersonation of the IRS through phishing schemes and other means,” he said. “For example, TIGTA found that a preparer stole the personal identifiers of several individuals and unlawfully disclosed the information to co-conspirators so they could fraudulently obtain refunds. The subject of the investigation and his co-conspirators ultimately defrauded or attempted to defraud the IRS of at least $560,000 in tax refunds.”
TIGTA has made numerous recommendations on the subject of tax fraud, identity theft and the Return Preparer Program, Phillips pointed out. These included recommendations that the IRS should implement additional controls to identify and stop erroneous claims for refundable credits before refunds are issued.
“In addition, we recommended the IRS develop or improve processes that will increase its ability to detect and prevent the issuance of fraudulent tax refunds resulting from identity theft,” he said. “Further, we recommended that the IRS improve its oversight of return preparers and better ensure preparers are electronically filing tax returns as required.”
Larry Gray, government relations liaison at the National Association of Tax Professionals, said he agreed with some of the suggestions for combating tax-related identity theft made by National Taxpayer Advocate Nina Olson in her 2012 Annual Report to Congress. Those include restricting access to the Social Security Administration’s Death Master File while still making it available to entities that need it to combat fraud, working more closely with the Bureau of Prisons to stop prisoners who are engaging in tax fraud, piloting and then further implementing a Real-Time Tax System that effectively uses upfront matching of third-party information to that reflected on tax returns, and improving information sharing with federal, state and local law enforcement.
However, he also sounded a note of caution. “Everyone that makes a mistake or files an erroneous tax return is not necessarily fraudulent,” said Gray. “That may seem an obvious statement, but it bears thought and focus, particularly in light of the emotion and concern on the part of Congress and the IRS. We see calls and proposals for penalties, increased sanctions and additional detailed legislation. We see legislation that utilizes penalties as a source of funding. In particular, we’ve seen rhetoric and anecdotes directed to the preparer community as a locus for fraud and unscrupulous behavior. We neither deny nor dispute anecdotes. We take issue with a broad-brush characterization of tax professionals as the authors and source of the fraud and identity theft problem we’re experiencing.”
Gray pointed out that the United States tax administration system enjoys the highest voluntary compliance in the world largely because of the contributions of those tax professionals that over 60 percent of taxpayers rely on for advice and help.
“There’s a reason why the American public seeks professional help with their tax returns: the law and its regulations are just too complicated,” he said. “They continue to change and proliferate. Very well-intentioned “experts” have a hard time preparing tax returns correctly. The IRS itself, including counsel, has a very difficult time coming up with correct answers. It may be that another look needs to be taken at what we mean by the word 'fraud.' In the vernacular world of taxpayers, what might be considered fraudulence is a misnomer because the action they take is done ignorantly with full intent to comply with rules and regulations that are just too convoluted for them to understand. To complicate matters, they often perpetuate erroneous action by sharing it with others as innocent advice.”