A new government report recommends that Congress amend the Tax Code to allow the Internal Revenue Service to assess penalties against tax preparers who fail to comply with the electronic filing mandate.
This year, 79 percent of all individual tax returns were filed electronically, a big increase over prior years, largely due to the e-file mandate imposed on preparers this season. To support increased e-filing, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009, which requires tax return preparers who expect to file more than 10 federal income tax returns for individuals, estates and trusts during a calendar year to e-file, starting on Jan. 1, 2011.
The IRS later decided to phase in the requirement so that in 2011, paid preparers who reasonably expected to file 100 or more returns were required to e-file them. In 2012 the requirement will apply to those who expect to file more than 10 returns a year. The e-file rate for preparers increased this year to about 89 percent, an increase of about 11 percentage points over last year’s rate.
However, tax preparers interviewed by the Government Accountability Office for its report who were new to e-filing told the GAO that they had experienced increased costs and administrative burdens thanks to the new mandate.
Several tax preparers who had been e-filing their returns prior to the mandate said they experienced some of these same problems when they first e-filed, but they now find that e-filing helps their business, for example, by reducing the time they need to file their clients’ tax returns.
The IRS’s plans to identify preparers who are not complying with the mandate are not fully developed because the IRS does not know the extent of noncompliance, which may be low. However, IRS officials told the GAO that some noncompliance probably exists and could increase next year when the mandate will apply to more tax preparers.
By far the most common reason preparers cited for not e-filing was that the taxpayer asked to file on paper. Preparers subject to the mandate who did not e-file a tax return were required to complete Form 8948, “Preparer Explanation for Not Filing Electronically,” and submit it with the return. The IRS has not analyzed why taxpayers chose to file on paper, but it plans to do so in the future. Some reports suggest that taxpayers are worried about security.
The IRS currently does not have the authority under the Tax Code to assess penalties on preparers who fail to comply. The IRS may be able to impose sanctions under Treasury Department regulations that govern practice before the IRS. However, the process is costly and the penalties, which could include suspension of practice, may be harsher than needed, the GAO acknowledged.
The IRS’s Office of Professional Responsibility administers and enforces Circular 230 standards. Prior to imposing sanctions, OPR must provide practitioners with notice and an opportunity for a hearing. Building a case against a preparer is time-consuming, often taking longer than a filing season. Sanctions can include censure, suspension from practice before the IRS, or disbarment. The IRS can also impose monetary sanctions under Circular 230, but officials said they likely would not because the agency does not have the authority to collect any unpaid amount. Such cases must be referred to the Justice Department, adding time and cost to enforcement. Because imposing monetary sanctions under Circular 230 is time-consuming and costly, the IRS could benefit from separate penalty authority under the Tax Code, the GAO noted.
The IRS already has authority under the Internal Revenue Code to impose penalties in other, similar circumstances, such as a $50 penalty per return if a preparer fails to sign a tax return or include a Preparer Tax Identification Number. According to the IRS’s penalty handbook, penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the IRC. Granting the IRS the authority to penalize for failing to e-file would build upon the IRS’s existing penalty regime and provide a more commensurate sanction than those which can be imposed under Circular 230, the GAO observed. Without such penalty authority, the IRS may be limited in its ability to deter noncompliance and enforce the e-file mandate.
Other barriers for the IRS in its electronic filing goals include the digitization of data and the need to make more forms e-filable. The IRS is considering pursuing two options to digitize more data: bar coding and additional transcription. The IRS does not transcribe all of the lines from paper returns. Instead, the IRS’s policy is to post the same information from electronic and paper returns to its databases, so that similar paper and electronic returns have equal chances of being audited.
The IRS has not analyzed the costs and benefits of these options, which could support informed funding decisions. Some forms cannot be e-filed, including two relatively high-volume forms for amended returns and nonresident aliens. The IRS has not developed a complete list of forms that cannot currently be e-filed, nor does it have a time line for adding them to the e-file system. Without adding forms such as these to the system, the IRS will limit e-filing’s growth potential, according to the GAO. The report recommended, among other things, that the IRS conduct analyses on the costs and benefits of implementing bar coding and additional transcription, and create a time line and list of forms to be added to the e-file system.
The IRS agreed with the recommendations. “We are taking a number of steps to better align electronic and paper data capture and to increase processing efficiency,” wrote IRS deputy commissioner Steven T. Miller in response to the report. “Analysis is currently being performed in areas such as bar coding and transcription of additional tax return information. We are also working to ensure that all tax forms become eligible for e-file in order to continue to increase electronic submissions.”
The GAO is sending its report to the chairmen and ranking members of the committees and subcommittees in Congress that have appropriation, oversight and authorization responsibilities for the IRS.
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