The IRS Oversight Board said in its annual report to Congress that the Internal Revenue Service needs to reassess its goal of delivering tax refunds within 45 days given the prevalence of electronic filing.
The IRS experienced significant tax refund delays early in the tax filing season after the agency stepped up its efforts to combat identity theft by installing new filters in its computer systems (see IRS Experiences Further Tax Refund Delay Problems).
The Oversight Board said it concurred with a report from the Government Accountability Office last December recommending that the IRS re-evaluate its measure on refund timeliness. “The current measure is a carryover from a time when most tax return filing was done by mailing paper tax returns to the IRS, and refunds were issued via mailed checks,” the IRS Oversight Board said in the report it released Tuesday. “With individual e-filing rates close to 80 percent, the IRS now able to process tax returns on a daily basis, and with most refunds made via electronic deposit, a 45-day goal for issuing refunds is an inappropriate standard. Moreover, at the start of the 2012 filing season, taxpayers and tax preparers voiced a number of complaints about delays in issuing refunds caused by additional checks for refund fraud. The development of realistic, meaningful goals for refund timeliness would greatly clarify the situation.”
Elsewhere in the report, the Oversight Board acknowledged the rollout of the IRS’ s smart phone application and the implementation of the Preparer Tax Identification Number for registered tax return preparers.
During fiscal year 2011, the IRS moved the paid preparer regulation program forward by registering and issuing PTINs to about 750,000 preparers, the report noted. “The IRS is continuing to review the issues surrounding background checks and fingerprinting,” the report noted.
There was a significant increase in the number of individual tax returns filed electronically, the report added. In addition, the IRS successfully administered a number of complex tax law changes, including the enactment of late tax legislation. However, there were numerous challenges.
The level of service on IRS toll-free telephones during fiscal year 2011 was 70 percent, a drop of four percentage points over the 74 percent achieved in fiscal 2010, and below the 80 percent level the board considers acceptable for good taxpayer service.
IRS enforcement contacts, such as written notices, correspondence examinations, or field examinations, were lower than fiscal 2010. Most of the decline is due to reduced math error notices, which were higher the previous fiscal year because of the First Time Homebuyer Tax Credit. The overall exam coverage rate for individual taxpayers was generally flat, although the rate of examinations for taxpayers with incomes over $1 million continued to grow. Corporate exams increased as well.
The report also addressed two longer-term, strategic issues: the tax gap and the IRS’s information technology systems. The report said that the IRS made notable progress with its IT program. However, the tax gap—annual uncollected tax revenue—remains a serious problem that requires attention. The IRS released an updated estimate of the tax gap in January 2012 based on tax year 2006 returns. The gross and net tax gap rose as a result of the overall growth in the US economy through 2006, but the overall voluntary compliance rates remained approximately the same, at 83 percent.
Of great concern to the board are the decreased resources to fund tax administration, coupled with the growing complexity of the tax system. “The board cannot predict that a breaking point will occur, but a continuation of current trends increases the risk that the IRS will experience serious problems in the future,” said the report.
Feedback from Tax Preparers
From meetings with tax preparers, the oversight board noted other concerns, including identity theft, tax law complexity and tax legislation passed late in the calendar year. Preparers also raised concerns about the impact of the IRS’s tax preparer regulation program. They predicted that long-time preparers will likely leave the market rather than face registration fees, testing, and e-file mandates. Other preparers suggested that the real impact won’t be known for several years until it is determined whether the IRS will have the ability and resources to find and address noncompliant, incompetent or fraudulent preparers.
“Preparers hope the new regulatory system will allow the IRS to upgrade preparer competency levels and eliminate many preparer errors that the IRS now tracks,” said the report. “Preparers speculate the financial impact on the average return preparer will be around $500—reflecting the fees and expenses for obtaining a PTIN, providing fingerprints, completing the background checks, competency testing, and continuing professional education requirements.”
The tax preparers who spoke to the board also expressed concerns about how the IRS will educate taxpayers about the new requirements for tax return preparers, address the potential problem of “ghost” preparers (who fail to sign the returns they were paid to prepare) and explain to taxpayers differences in credentials that distinguish CPAs, Enrolled Agents, and newly designated Registered Tax Return Preparers.
“Some Enrolled Agents were concerned that the registration program, in the eyes of the public, will elevate the importance of ‘registered’ tax return preparers," said the report. "Enrolled Agents must pass a more difficult test and complete more continuing education hours, but they are concerned the term ‘registered’ may carry more weight with the public than the term ‘enrolled.’”
Other practitioners stressed the importance of finding a secure solution so they could communicate case-related matters with IRS staff through e-mail. They also said it was important for the IRS to find a way for taxpayers and their authorized representatives to access a taxpayer’s account information and resolve tax account matters online. They pointed out that states such as California have already delivered such online capabilities.
The full report can be reviewed or downloaded at http://www.treasury.gov/irsob/board-reports.shtml.
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