The Senate Finance Committee held a hearing on improper payments, including what role is played by tax preparers in claiming the Earned Income Tax Credit on behalf of clients.
The hearing Thursday came in conjunction with the release of a report by the Government Accountability Office on improper payments and the tax gap. In addition to the Earned Income Tax Credit, the report also examined improper Medicare and Medicaid payments.
“The improper payment estimate, attributable to 124 programs across 22 agencies in fiscal year 2014, was $124.7 billion, up from $105.8 billion in fiscal year 2013,” said the GAO report. “The almost $19 billion increase was primarily due to the Medicare, Medicaid and Earned Income Tax Credit programs, which account for over 75 percent of the government-wide improper payment estimate.”
Senate Finance Committee ranking member Ron Wyden, D-Ore., placed some of the blame on tax preparers. “When it comes to combatting fraud, the Government Accountability Office and the National Taxpayer Advocate have said that one of the best ways to go after tax fraudsters is by protecting taxpayers from predatory and incompetent paid return preparers,” he said in his opening statement. “When you look at the facts, setting standards for tax return preparers is the definition of a no-brainer. But at the federal level, there are no standards whatsoever protecting taxpayers from incompetence and dishonesty among paid return preparers. Only four states have set their own standards.”
Among the states regulating preparers is Wyden’s, Oregon. “As a result, across the country, incompetent preparers make mistakes that cause financial nightmares for a lot of families, particularly people of limited means,” he said. “Or worse, unethical, fraudulent return preparers pose as trustworthy businessmen and steal money from people who already struggle to get by. My home state of Oregon is one of four that gets this issue right and protects innocent people from these scofflaws. And it’s not just me saying there should be nationwide protections—it’s the GAO and the Taxpayer Advocate, who are the trusted nonpartisan voices on these issues.”
He said he and committee chairman Orrin Hatch, R-Utah, have a proposal ready to go that would combat fraud in a number of ways, including by regulating paid tax return preparers.
“I’m hopeful that the committee will move it forward soon,” Wyden added. “As GAO points out in its testimony, setting standards for paid preparers will have a double benefit. Not only will it crack down on fraud, it will also help cut down on improper Earned Income Tax Credit payments. That’s because nearly half of the tax returns done by paid preparers improperly claim the EITC.”
Hatch pointed out that the EITC can be as much as $5,500 for an income-eligible family with two children, and in fiscal year 2014, the government paid out nearly $18 billion in improper payments under the EITC. “That’s more than 27 percent—more than one out of every four dollars—of what we spent on the entire program.”
Wyden acknowledged the improper payments also go to other sources, such as defense spending. “The Pentagon cannot get a free pass when it comes to improper payments just because some members of Congress find it easier to focus on health care and tax programs,” he said. “Those issues have to be a part of the debate.”
The GAO report noted that addressing the estimated $385 billion net tax gap—the difference between taxes owed and those paid on time, as a result of taxpayers underreporting their tax liability, underpaying taxes, or not filing tax returns—will require strategies on multiple fronts. Key factors that contribute to the tax gap include limited third-party reporting, resource trade-offs, and the complexity of the tax code.
“For example, the extent to which individual taxpayers accurately report their income is correlated to the extent to which the income is reported to them and the Internal Revenue Service by third parties,” said the GAO. “Where there is little or no information reporting, such as with business income, taxpayers tend to significantly misreport their income.”
The GAO has made many recommendations over the years to reduce the tax gap, the report noted. For example, the GAO recommended in 2012 that the IRS use return on investment data to reallocate its enforcement resources and potentially increase revenues. Since 2011, the GAO also recommended improvements to telephone and online services to help the IRS deliver high-quality services to taxpayers who wish to comply with tax laws but do not understand their obligations. Other strategies the GAO has suggested would require legislative actions, such as accelerating W-2 filing deadlines. In addition, requiring partnerships and corporations to electronically file tax returns could help the IRS reduce return processing costs and focus its examinations more on noncompliant taxpayers. Further, a broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can cause taxpayer confusion and provide opportunities to hide willful noncompliance.
The report also pointed to the role of tax preparers. “Over half of all taxpayers rely on the expertise of a paid preparer to provide advice and help them meet their tax obligations,” said the GAO. “IRS regards paid preparers as a critical link between taxpayers and the government. Consequently, paid preparers are in a position to have a significant impact on the federal government’s ability to collect revenue and minimize the tax gap. We have previously reported that for IRS to improve its enforcement of tax laws, it must continue to seek ways to leverage paid preparers to improve tax compliance.”
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