Internal Revenue Service Commissioner Doug Shulman described the IRS’s efforts at improving the agency’s technology to detect tax fraud and ferret out unreported sources of income during a speech Wednesday.
Shulman described how the IRS is using advanced analytics technology and increased information reporting requirements to find problems with the information that taxpayers are self-reporting.
“There’s general agreement both in the U.S. and around the globe that withholding and third-party information reporting are powerful tools to improve and maintain taxpayer compliance,” said Shulman during a speech at the Johns Hopkins Carey Business School in Baltimore. “Indeed, over 96 percent of income that is subject to substantial information reporting and/or withholding, such as wages, interest, and dividends, is accurately reported on timely tax returns. However, most estimates show that only around 50 percent of income is accurately reported where there is little or no information reporting. Information reporting streamlines the process for the vast majority of honest taxpayers. And at the same time, it makes it more difficult for those trying to game the system.”
Shulman noted that the IRS has always been an information intensive enterprise. “It’s the organization of data and ultimately the knowledge and intelligence we extract from the information we receive that really matters,” he said. “It can show us the areas of greatest non-compliance...and thereby, contributes to more efficient and effective compliance programs.”
Shulman discussed some of the recent changes in the law that have given the IRS new information reporting tools. However, he did not mention the repeal of the controversial 1099 information reporting requirements in the Affordable Care Act and the Small Business Jobs Act, which would have required businesses to report all purchases of goods or services of over $600 per year from another business. Still, several more expanded information reporting requirements are now in place, including for investment income.
“IRS research exposed the huge scope of misreported capital gains and losses largely due to taxpayers not accurately reporting their securities’ cost, or ‘basis,’" said Shulman. “Congress took action and beginning this year, brokers must supply to their investors easy-to-understand basis information to help them file accurate and complete returns. The Joint Committee on Taxation estimates that the new law will yield almost $6.7 billion in revenues over a 10-year period.”
Shulman also noted that beginning in 2012, electronic payment processors, including credit and debit card processors, will also be required to make an annual information report to the merchant and the IRS stating the gross amount paid to the merchant during a calendar year. “This will help improve voluntary tax compliance by business taxpayers and help us determine whether their returns are correct and complete,” he added.
Shuilman described how the IRS is now using analytical technology to crunch the data.
“We also are working to ensure that we continually analyze data about taxpayer trends, and use that data to improve our compliance operations,” he said. “I created an office of compliance data analytics—reporting directly to me—that works with our business units to create hypotheses of ways to improve compliance; launches pilots to test those hypotheses; and then changes business operations when the pilot turns out to be fruitful. The goal is to up our game, and take full advantage of the advances in technology and analytics to continually update and modernize the way we do business.”
However, as a report released Wednesday by the Treasury Inspector General for Tax Administration demonstrated, the IRS's ability to catch problems with claims for many tax credits is still lacking (see IRS Can't Tell Who Deserves Energy Tax Credits). The report found that hundreds of prisoners and people under the age of 18 were receiving Residential Energy Credits, which are only supposed to go to homeowners.
Shulman said that one piece of the IRS’s technology will finally be in place for next tax filing season, the long-awaited customer account data engine upgrade. “Since the late 1980s, the IRS has been trying to move its core account database, which holds basic taxpayer information, such as your current account balance, whether you have outstanding amounts due, and whether you’ve made any recent payments, from a weekly or bi-weekly batch processing cycle to a daily cycle,” he said. “The promise is quicker refunds for all taxpayers, up-to-date information at the fingertips of our customer account representatives, and a platform for more real-time analytics and compliance. We are now on track to deliver this relational account database for the tax filing season commencing in January 2012—a major milestone for the tax system and the IRS.”
Shulman elaborated on his plans for next-generation technology at the IRS that would allow the agency to essentially prepare an individual’s returns. He had initially discussed some of these plans in another speech last month (see IRS Commissioner Proposes Tax Technology Overhaul). He described the plans in further detail in Wednesday’s speech and described how they could benefit tax preparers, but also catch tax problems before a return is filed.
“I also see technology as one of the keys for unlocking a potential new tax structure that could fundamentally change the way taxpayers and tax practitioners prepare and file individual returns,” he said. “It would deal in real time and avoid audits that may take place three years after a return is filed. In this long-term vision, the IRS could get all information from third parties before individual taxpayers filed their returns. Taxpayers or their return preparers could then access that information, via the Web, to prepare their tax returns. Taxpayers or their return preparers could then add any self-reported and supplemental information to the returns, and file it with the IRS. The IRS could embed this third-party information into its pre-screening filters, and could ask the taxpayer to fix the return before we accept it if it contains data that does not match our records. This is a real game-changer as it could help ensure more accurate returns and far less of the troublesome back-end auditing.”
In addition, Shulman described the IRS’s efforts at cracking down on international tax evasion through its voluntary disclosure program, which has been recently revamped. He said the IRS was preparing for the next wave of its efforts, cracking down on banks, bankers and their intermediaries.
“As we increased our enforcement efforts and gained significant momentum, we gave taxpayers their best chance to come in voluntarily and avoid going to jail,” he said. “Now, in a typical year, we get 100 or so taxpayers who use our voluntary disclosure program. For this program, we thought that figure would rise to maybe 1,000. So, we were very pleased that we had approximately 15,000 voluntary disclosures from individuals who came in under a special program we created, which entailed payment of back taxes and stiff penalties. And since it closed, we’ve received an additional 4,000 voluntary disclosures from individuals with secret bank accounts from around the world. We’ve even launched a second disclosure program with much tougher financial penalties— but no jail time— if taxpayers come clean with us. We are now mining the information we have received to date and have launched our next wave of investigations on banks, bankers, intermediaries and taxpayers.”
Shulman also talked about the IRS’s efforts at tax preparer registration and regulation, noting how technology advances had allowed virtually anyone to market themselves as a tax preparer.
“Over the past 20 to 30 years, the reality of tax filing in this country has changed and today more than 8 out of 10 taxpayers use a tax preparer or tax software,” he said. “Despite the fact that paying taxes is one of the largest financial transactions that the average American family has each year, today there are no basic competency requirements for tax return preparers. In fact, while in most states you need a license to cut someone’s hair, today almost any Tom, Dick or Harriet can prepare a federal tax return for any other person for a fee. Now, even though the IRS is a large institution, we have the mission to provide top quality customer service, as well as effective compliance programs, to 140 million individual Americans as well as tens of millions of businesses and non-profit organizations. As the leader of the IRS, I am always looking for points of leverage – and our return preparer initiative is just that.”
Shulman said the IRS has now registered over 700,000 tax return preparers and will begin its testing and continuing education requirements next year.
“In essence, we are in the process of ensuring a basic competency level for tax return preparers and focusing our enforcement efforts on rooting out unscrupulous preparers,” he said. “We have registered over 700,000 return preparers and next year will start requiring any preparer who is not a CPA, attorney or enrolled agent to take a competency test and annual continuing education. The goal is to ensure that taxpayers receive top quality service from this important industry, which is a key ally in our efforts to boost overall service and compliance.”
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