The two leaders of the Senate Finance Committee, Chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, have begun developing proposals for reforming the U.S. Tax Code, including giving the Internal Revenue Service the clear statutory authority to regulate tax preparers in case the IRS loses its appeal of a recent court case invalidating its Registered Tax Return Preparer regime.
Baucus and Hatch released the first in a series of papers Thursday outlining various tax reform options that members of the Finance Committee may wish to consider as they work to reform the nation’s tax system. They noted that over the next several months, the committee will convene weekly to discuss the series of options papers on a wide range of issues within tax reform. “The option papers will include ideas from across the spectrum and, as such, do not necessarily have the endorsement of either the Chairman or Ranking Member,” they noted.
Tax Preparer Regulation
Among the initial set of proposals is eliminating the alternative minimum tax, revoking the passports of “seriously delinquent taxpayers,” and passing legislation to re-impose the Internal Revenue Service’s tax preparer regulatory regime in case the IRS loses its appeal of Judge James Boasberg’s ruling in the case Loving v. IRS, which invalidated the IRS’s authority to require mandatory testing and continuing education of registered tax return preparers (see IRS Fires Back at Tax Preparers Who Won Court Rulings).
The legislation would “ensure that the IRS has authority to oversee paid preparers by providing clear statutory authority for the IRS to regulate tax return preparers if the IRS loses its appeal in the Loving case.”
“Due to tax law complexity, taxpayers increasingly rely on third parties to prepare their returns, thereby increasing their exposure to preparer misconduct or error,” said the discussion paper. “In 2011, the IRS started regulating tax return preparers by requiring registration and imposing minimum competency standards. The District Court of Washington, D.C., recently ruled (Loving, No. 12-385 (D.D.C. 1/18/13)) that the IRS lacks the authority to regulate tax return preparers. If the IRS does not prevail in its appeal of the Loving case, it will lose an important tool to increase tax compliance and protect taxpayers from unethical tax return preparers.”
Dan Alban, the lead attorney on the case at the Institute for Justice, a libertarian law firm that successfully brought the lawsuit against the IRS, on behalf of three independent tax preparers, views the proposal as validation that the IRS lacked the statutory authority to impose its regulatory regime on tax preparers.
“As we've said all along, Congress never gave the IRS the authority to license tax return preparers, and the IRS can't give itself that power,” Alban wrote in an email to Accounting Today. “The IRS has tried to pull a fast one, claiming that it has authority to license tax return preparers under an 1884 statute that predates both the modern income tax and the modern incarnation of the IRS. But a federal judge rejected this IRS power grab and ruled that the agency isn't allowed to reinterpret statutes however it wants. Instead, as Judge Boasberg noted, under our system of law, ‘statutory text is king.’ In other words, Congress—not the IRS—gets to make the law.
“This proposal indicates that the Senate Finance Committee also recognizes that the IRS does not have clear statutory authority to license tax return preparers,” Alban pointed out. “This is just the latest indication that Congress itself doesn't believe it has given the IRS the authority to license tax preparers. Previously, Congress has considered eight bills in the past eight years that would have amended the 1884 statute the IRS is relying on (31 U.S.C. Section 330) to allow the IRS to license tax return preparers. But none of those bills has ever passed. And if Congress really thought it had already given the IRS the authority to license tax preparers, it would make no sense for Congress to repeatedly consider bills that would give the IRS this new power.”
The compilation of various tax reform suggestions is a joint product of the majority and minority staffs of the Finance Committee, including input from the committee members’ staffs. The options also represent a list of prominent tax reform options suggested by witnesses at the committee’s 30 hearings on tax reform to date, bipartisan commissions, tax policy experts, and members of Congress.
Baucus and Hatch acknowledged that members of the Finance Committee hold different views about how much revenue the tax system should raise and how tax burdens should be distributed.
“In particular, committee members differ on the question of whether any revenues raised by tax reform should be used to lower tax rates, reduce deficits, or some combination of the two,” they noted. “In an effort to facilitate discussion, this document sets this question aside.”
Identity Theft Protections
Other tax reform proposals aim to reduce the cost to taxpayers of complying with the Tax Code, improve the ability of the IRS to administer the tax laws efficiently, reduce tax evasion and inadvertent mistakes, provide taxpayers with better service, protect taxpayers from identify theft and privacy invasions, and ensure that “all taxpayers are treated fairly and similarly situated taxpayers are treated similarly.”
Among the proposals for combating identity theft are limiting access to personal identifying information, such as Social Security numbers of recently deceased individuals in the Social Security Administration’s Death Master File and partnering with third parties, such as banks and bank card providers, to share successful practices to combat identity theft and tax fraud. Another proposal, from S.3432, Identity Theft and Tax Fraud Prevention Act, sponsored by Sen. Bill Nelson, D-Fla., would improve information sharing with federal, state and local law enforcement.
Tax Gap Proposals
To reduce the tax gap, a proposal from National Taxpayer Advocate Nina Olson would restructure and simplify the penalty system to improve voluntary compliance and ease the administrative burden of the system, for example, by consolidating similar penalties. Other proposals, drawn from legislation introduced Sen. Tom Carper, D-Del., in S.1289, Tax Gap Act of 2011, would require information reporting by federal, state, and local governments on non-wage payments for property or services. Some other proposals from the same bill would improve information reporting by financial institutions on unreported and underreported financial accounts and require additional information on home mortgage interest.
Some other proposals for reducing the tax gap would require electronic filing for certain employee benefit plan information returns and reports, and require life insurance companies to report certain transactions, including sales, transfers and benefits.
The document also offers proposals for repealing the individual and corporate AMT, as well as repealing the personal exemption phase-out, or PEP, the Pease phase-out of itemized deductions. Both the PEP and Pease provisions were revived as part of the fiscal cliff deal at the end of last year for the first time since the Clinton administration.
Another proposal in the document, drawn from a 2010 report by the President’s Economic Recovery Advisory Board on tax reform options, is allowing the IRS to fill out simple returns for taxpayers, modeled after California’s “Ready Return program.
“For taxpayers with relatively simple returns, require the IRS to pre-fill the returns with information it has received from third parties and preliminarily calculate tax liability,” the Finance Committee document suggested. “Taxpayer[s] could either accept and sign this return or make needed changes.”
In the area of improving the taxpayer experience in IRS audit and collection procedures, proposed reforms include increasing the collection of delinquent tax liabilities by making it easier for taxpayers to structure payment plans with the IRS. A proposal, based on legislation introduced by Sen. Rob Portman, R-Ohio, would provide waivers for user fees when installment agreements use automated withdrawals. Other proposals in this area include codifying and improving the correspondence audit process, expanding an IRS pilot program that allows taxpayers and the IRS to use video-conferencing to conduct virtual face-to-face audits, and strengthening taxpayer privacy rights, particularly regarding digital information.
Former IRS Commissioner Mark W. Everson, who is now vice chairman at the tax services firm alliantgroup, sees promise in several of the proposals. "I welcome anything that can be done to simplify the Tax Code and improve tax administration,” he said in a statement. “A number of the steps outlined in the staff discussion draft would be of great benefit to individuals, as well as to small and medium size businesses. In addition, Congress has been slow to address the problem of identity theft. It is noteworthy and high time that they tackle this plague, which is straining our tax and financial systems."
Dean Zerbe, a former senior counsel and tax counsel to the Senate Finance Committee and now a managing director in alliantgroup’s Washington, D.C., office, also likes some of the proposals. "It is important that the Senate Finance Committee has signaled that it is serious about reform and moving forward in an open and transparent manner,” he said. “Any staff paper on tax reform that proposes getting rid of AMT as well as the Byzantine PEPs and Pease is off to a good start. From my time on the committee, I've found that staff discussion papers have been a good way to bring forward issues and allow for more engaged and substantive discussions that can possibly lead to legislation. It is good to see the committee moving from platitudes to particulars as they consider much-needed proposals for reform.”