The Internal Revenue Service Advisory Council's 2008 Report contains more than 70 recommendations on a wide variety of issues affecting tax administration. The recommendations focus on communication, relief and assistance due to the economic downturn."It's refreshing to see that communications are a concern," said Robert Kerr, senior director of government relations at the National Association of Enrolled Agents. "The IRS is charged with a bifurcated task - enforcement and education. In both realms they have to communicate fairly complex things."
Other issues addressed in the report include compliance risk management, transparency, income tax gap analyses, preparer requirements, and improving employment tax reporting and worker classification compliance.
IRSAC was established in 1953 as the Commissioner's Advisory Group, a tax policy and issue advisory committee. Renamed in 1998 to reflect the agency-wide scope of its focus as an advisory body, its primary purpose is to provide an organized public forum for representatives of the public and senior IRS executives to discuss relevant tax administration issues.
Meanwhile, a primary issue affecting practitioners is the new regulations under Code Section 7216, regarding disclosure and use of tax return data by tax return preparers, said Frank Degen, incoming chair of IRSAC. "The controversy over the disparity in preparer versus taxpayer standards stole some of the thunder from Section 7216,"
he said. "I check the message boards every day, and a lot of preparers aren't aware of the changes."
The regulations reinforce the concept that taxpayers should be able to establish and exert better control over the use and disclosure of their own tax information, and generally prohibit "tax preparers" from using or disclosing tax return information that they obtain from their clients for any purpose other than preparing a tax return without specific written consent.
"In the old days, a taxpayer would call up his preparer and tell him, 'A guy from the bank is going to call, just give him the information from my return.' Now you need written authorization," Degen said.
Two aspects of the new rules are particularly important, and not generally understood, according to Degen: "Violation can actually lead to criminal prosecution. Moreover, the definition of 'tax preparer' goes way beyond the traditional definition in the Tax Code. It now includes administrative, clerical and secretarial support staffs. Therefore, it's important that the IRS communicate this to every tax preparation firm."
The report makes 12 recommendations for the IRS to communicate the rules to tax practitioners, including: an information CD to be sent to all preparers and firms that can be identified through tax return filings; a publication with specific language that must be included in the disclosure; press releases about the new regs; notification of all tax prep businesses based on the Standard Industry Codes used on the tax return for their businesses; and including a message on all 1-800 IRS numbers informing taxpayers of their right to restrict the use and disclosure of their tax return data.
The Automated UnderReporter and Computer Paragraph 2000 correspondence cycle is an issue that has frustrated both tax practitioners and taxpayers, Degen explained.
The AUR/CP2000 Program is a part of IRS efforts to ensure accurate income reporting compliance by matching income and payment information that the IRS has on file.
"Sometimes taxpayers leave items off that have been reported to the IRS," said Degen. "Lots of times it's just an oversight. The IRS sends out CP2000 letters that say, 'We're proposing you owe us x dollars,' and give you 30 days to reply. Or it could be a similar letter from a campus examination, Letter 566, Initial Contact Letter, where the IRS wants additional documentation for an item such as amount of property taxes or a charitable contribution."
"In both cases, the taxpayer has 30 days to respond," he continued. "When taxpayers send back the documentation near the end of the 30-day cycle, they often get the next letter in the cycle, the escalation letter."
For AUR notices, the next letter is the Statutory Notice of Deficiency, Letter 3219. For campus examination, the notice stream begins with Letter 566, followed by Letter 525 and then the notice of deficiency, Letter 3219.
The 90-day letter requires the taxpayer to petition the Tax Court within 90 days or the IRS will assess the tax. Outside of the 90-day period, the taxpayer's only remedy is to pay the tax and sue for a refund in federal district court - the taxpayer loses the right to have the issue determined by the Tax Court without first paying the assessed tax.
"The problem is that taxpayers are answering letters and the IRS was escalating before they had the opportunity to work the documentation," said Degen. "It causes a lot more taxpayer agita."
The process creates unnecessary anxiety and often-duplicative efforts for both taxpayers and tax practitioners, according to the report. During this intervening time period, the taxpayer and the practitioner are forced to begin preparation of the Tax Court petition and may actually prepare and file the petition in order to not lose the ability to resolve the issue through the process afforded by the Tax Court procedures.
"The report's suggestion is simple," said Degen. "If the taxpayer responds, the IRS should send a letter acknowledging they received the correspondence and will contact the taxpayer after having made a determination. Then it suggests that a hold be put on the account so no further letters are sent."
WHO'S OUT THERE?
The report notes that studies show that part of the tax gap is the result of paid preparer error. Although paid preparers annually prepare the returns of over 80 million taxpayers, the IRS does not have a single database or other way to identify the paid preparer community.
The report recommended that the IRS develop a system to identify all paid preparers through the use of a unique ID number, and should conduct research to effectuate a better process to monitor and control paid preparers utilizing these unique identification numbers.
"It is expected that these measures should lead to more accurately prepared tax returns and would enable the IRS to provide focused resources for outreach and education efforts," the report stated.
"The identification of preparers is simply a first step," said Degen. "One of the problems is that nobody knows how many people actually prepare returns."
Although there are currently bills in both the House and Senate to identify preparers and provide some regulation, these will expire and will need to be reintroduced in the next Congress, noted the NAEA's Kerr.
"Meaningful regulation is a pro-taxpayer move. At the end of the day, the taxpayer is left holding the bag as victims of unethical or incompetent preparers," he said. "When the preparer's mobile trailer is gone or the storefront is closed, the taxpayer has no one to get back to."
"Second, it would level the playing field for honest preparers," he continued. "There's a lot of forum-shopping on the part of taxpayers. They might go through the interview process, then pick up their paperwork and go down the street because someone promised their friend a huge refund. Third, it would ensure that preparers demonstrate a fundamental competency. The results of a bad haircut pale in comparison to a bad tax return, yet most barbers and beauticians are licensed, while tax preparers are not. And it's easier for the IRS to police 1.2 million preparers than 80 million taxpayers."
Simply numbering preparers, as the report recommended, is not the full solution, according to Kerr. "Preparers who have a number can represent that it's meaningful when, by itself, it's not," he said. "To be meaningful, preparers should be able to demonstrate competency or currency and be under the sanctioning authority of the IRS."
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