by Ken Rankin

Washington — Internal Revenue Service Commissioner Mark Everson gave his agency a passing grade for its handling of the 2004 filing season — and, for once, representatives of the nation’s tax practitioners agreed with him.

Testifying before a House Ways and Means subcommittee at the end of March, Everson told Congress that the IRS has made significant progress in promoting electronic filing, and that there has been marked improvement in taxpayer service over the past year.

At press time, the IRS had received nearly 68 million individual returns, and almost two out of three of them were e-filings, he said. In addition, the number of online filings and Free File submissions were both running better than 20 percent ahead of the 2003 pace, Everson said.

Although returns processed during the 2004 filing season were up nearly 2 percent above the previous year, Everson assured congressional leaders that the quality of service provided to American taxpayers had not suffered because of the record IRS workload.

In contrast to previous filing seasons, when millions of taxpayers in need of assistance couldn’t even get through to the service on the telephone, the tax commissioner said that Americans were able to connect with the agency this year.

“All told, we have reduced taxpayer call-waiting time in half, reduced the number of abandoned calls by 50 percent, and doubled the number of refund inquiries from our Spanish-speaking taxpayers,” he told the subcommittee.

Additionally, “we now have a world-class telephone call routing system,” Everson said. “A call is directed to the right person, someone who knows something about charitable contributions or IRAs — whatever the subject may be — and the system balances workforce planning against predictable workload patterns to reduce waiting time.” As a result, the number of taxpayers experiencing busy signals on the assistance line decreased from 400 million in 1995 to 600,000 in 2003.

Everson wasn’t the only witness at the hearings to praise the IRS for administering a successful 2004 filing season. Tax practitioners were equally positive about the service’s performance this year.

American Institute of CPAs Tax Executive Committee chair Robert Zarzar told Congress that this year’s tax season unfolded “largely without any significant problems,” and that both taxpayers and accountants “generally are pleased with the service’s performance.”

Panama City, Fla., enrolled agent James D. Leimbach echoed those sentiments, noting that the members of the National Association of Enrolled Agents believe that the 2004 season “has run very smoothly.”

Part of the reason for that smoothness can be traced to the enhanced communication between the IRS and practitioners, Leimbach told Congress.

“NAEA members did experience some processing problems in e-filing during the opening of filing season” when “overwhelmed filing centers” sent out a number of erroneous rejection notices, he explained. But thanks to fast footwork by the tax service, those problems were minimalized.

“I would have to praise IRS for its Quick Alert system, by which practitioners can receive e-mailed notices of problems,” Leimbach said. “Information is the key — if we have it, we can plan around it.”

That said ...
The 2004 tax season wasn’t entirely glitch-free, however.

The AICPA’s Zarzar cited a series of “information return problems” that bedeviled tax practitioners and their clients.

“Compliance with the new 15 percent dividends tax rate has proved to be the biggest challenge for taxpayers” in 2004, he told Congress. “Brokerage firms and mutual funds are having major difficulties determining which dividends that a taxpayer receives qualify as a ‘qualified dividend’ for the new 15 percent tax rate, resulting in large numbers of erroneous Forms 1099-DIV being mailed by financial institutions to taxpayers.”

This situation created “havoc for many taxpayers” who “filed their Form 1040, only to receive an amended Form 1099-DIV from a financial institution after the fact from a financial institution,” Zarzar told Congress. “The taxpayer and preparer are faced with the dilemma as to whether an amended return should be filed, or whether the earlier filed return remains a realistic and reasonable ‘snapshot’ of the taxpayer’s tax position for 2003.”

Another problem cited by the AICPA involved the difficulties experienced by many colleges in complying with new student tuition payment reporting requirements. Those rules require “eligible education institutions” to supply students with Form 1098-T to disclose the amount of qualified tuition and related expenses that a student is required to pay when enrolled at an eligible institution.

“A number of AICPA members have informed us that educational institutions are making a number of mistakes on the Form 1098-T, including incorrectly including income on the information return and reporting inaccurate education tax credit information,” Zarzar told the subcommittee.
“Practitioners suggest that the instructions and tax regulations for the Form 1098-T are not fully developed, and that the eligible institutions are not generally experienced in tax compliance.”

Enrolled agents, meanwhile, encountered problems this year because the IRS was late in providing key materials to practitioners, including the tax service’s 2003 CD-ROM, Leimbach said. “Many practitioners rely on this [CD] to get their updated forms and publications,” and its availability is “particularly important for practitioners who live in areas where they don’t have access to high-speed Internet service,” the NAEA representative said. “Unfortunately, some practitioners reported that they didn’t receive their CDs until as late as Feb. 20.”

Compounding that problem were delays in the distribution of Volume 2 of the IRS’s “Package X” of updated tax forms and instructions, he said.

A more deeply rooted problem that continues to perplex taxpayers and practitioners alike is the worsening complexity of the federal tax code, several witnesses maintained. They also made it clear that this problem is aggravated by constant congressional monkeying with the tax laws.

Tax Executives Institute executive director Timothy J. McCormally explained that the 19 tax bills enacted by Congress during the five years ending in 2002 altered 292 code sections and required 515 changes to forms and instructions.

Each of these changes, “no matter how laudable in isolation, will require revision of forms and instructions, as well as new training efforts that cannot help but detract from the IRS’s goals of achieving currency on audits.”

The AICPA, which has long championed efforts to streamline the tax system, testified that “one of the best ways of ensuring a positive tax season for taxpayers, practitioners and the IRS is through the passage of major tax simplification.”

Zarzar said that the institute favors outright repeal of the alternative minimum tax, but would also support less extensive reforms, such as pending legislation that would soften the impact of the AMT on many taxpayers. That bill also calls for simplifying the definition of a “child” for tax purposes.

American Bar Association tax chair Richard Shaw told the subcommittee that unnecessary controversies are created by the fact that the tax code contains no less than five different definitions of a “child.”

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