Taxpayers who have been victimized by identity thieves who stole their tax refunds have become a major concern for local taxpayer advocates.
During a Senate Finance Committee hearing Thursday on improving the taxpayer experience during tax filing season, one of the witnesses, Teresa Thompson, the Local Taxpayer Advocate for the state of Montana, was asked about her main priorities. One of the top priorities she cited in her testimony was taxpayer identity theft and the tax refund delays produced by it.
Identity theft ranked as the top issue, both in Montana and nationally, based on the percentage of new case receipts from Oct. 1, 2011 through March 31, 2012 for the Taxpayer Advocate Service. Thompson is one of 70 taxpayer advocates around the country who are part of the Taxpayer Advocate Service, an independent organization within the IRS. On a nationwide basis, refund hold wage verification ranked second beyond taxpayer identity theft among the top five issues faced by taxpayers who brought their cases to the TAS.
“The dramatic increase in tax-related identity theft cases in the last few years is harming Montana taxpayers, whether or not they are victims of tax-related identity theft themselves,” said Thompson.
She noted that during the 2012 filing season, Montana TAS cases have reflected trends that exist in TAS nationwide, as well as in the IRS as a whole. Montana saw the number of cases brought to the TAS’s attention grow from four in the first six months of fiscal year 2011 to 27 in the first six months of fiscal 2012. Nationwide, the increase was even more dramatic, escalating from 6,427 in the first six months of fiscal 2010, to 10,272 in the first six months of fiscal 2011, to 15,921 in the first six months of fiscal 2012.
“In my office alone, we have six Montana taxpayers whose identities we believe were involved in a single scheme that resulted in returns being filed in the eastern part of the country under their stolen Social Security numbers,” she said. “These taxpayers experienced financial hardships as a result. We have been working with the IRS to issue their legitimate refunds to them and correct the damage from the scheme.”
Thompson noted that some taxpayers filing legitimate returns are also caught up in the IRS’s system of detecting identity theft, leading to tax refund delays (see 7.8 Million Tax Refunds Delayed This Season at IRS). “The IRS uses electronic filters that are intended to screen out fraudulent refund returns, but also sometimes stop legitimate refunds from being issued,” she said. ”When that happens, these taxpayers often come to my office with financial emergencies because they were depending on the refund to make ends meet. We act immediately in such cases to help them prove their returns are legitimate, so the IRS can issue their refund.”
Thompson suggested that the IRS needs to put more resources into assisting taxpayers experiencing significant tax problems caused by identity theft; and at the same time, the IRS needs to continue improving its fraud detection filters for identity theft, to avoid harming innocent taxpayers.”This is a tall order for an agency experiencing staffing cutbacks,” she added.
Many people seeking her office’s help have been frustrated by the difficulty in reaching someone at the IRS through its toll-free phone lines. She believes that budget and staff cutbacks at the IRS’s toll-free sites and walk-in Taxpayer Assistance Centers are making voluntary compliance more difficult.
Beth Tucker, deputy commissioner of operations support at the IRS, contended that the overall average refund timeline remained steady in FY 2012 when compared to FY 2011. “In other words, the delays were isolated to early issues in the filing season, and after that IRS was processing tax returns according to normal refund timelines,” she said.
“At the same time, combating refund fraud, including identity theft, can also affect the time frame of delivering a refund,” Tucker acknowledged. “As previously noted, we are continually improving our screens and filters to help us identify and block fraudulent returns. For most taxpayers, these measures do not impact refund timelines. However, it can add time to processing for some. There is clearly a delicate balance here. We cannot manually inspect 100 million refunds to ensure all are correct—nor is there any justification for doing so. The IRS has a dual mission when it comes to refunds, particularly when they are generated in whole or in part by tax credits. Refundable and other tax credits are provided to achieve important policy goals, such as relieving poverty or boosting the economy.”
GAO Recommends Improvements
A report by the Government Accountability Office on opportunities to improve the taxpayer experience and voluntary compliance was presented at the hearing by GAO director of strategic issues James White. The report recommended implementing modernized systems to provide faster refunds and account updates. Modernized systems would allow the IRS to conduct more accurate and faster compliance checks, which benefits taxpayers by detecting errors before interest and penalties accrue. In addition, expanding pre-refund compliance checks could result in more efficient error correction and reduce the burden of audits on taxpayers and their costs to IRS. The report also called for more self-service tools to give taxpayers better access to information.
Taxpayers who were trying to cope with the tax refund delays this tax season often received conflicting information from the IRS’s online “Where’s My Refund” tool this tax season (see IRS Warns of Tax Refund Delays).
The report noted that taxpayer service has declined this tax season. “Providing good taxpayer service is important because, without it, taxpayers may not be able to obtain necessary and accurate information they need to comply with tax laws,” said the report. “In addition, more and more, taxpayers are relying on IRS’s website to obtain information and execute transactions, making it important that IRS have a modern website. However, as we have reported, IRS has experienced declines in performance in selected taxpayer service areas, most notably with respect to providing live telephone assistance and timely responses to taxpayers’ correspondence.”
Senate Finance Committee chairman Max Baucus, D-Mont., acknowledged the need for tax reform and simpilfication to help with taxpayer compliance. "We know that the great majority of taxpayers follow the law," he said in his opening statement. "More than 80 percent of taxes are paid on time. This voluntary compliance rate shows that most folks are doing their part every April, but improving the taxpayer experience and creating certainty can push that rate even higher."
Sen. Orrin Hatch, R-Utah, the ranking Republican member of the Senate Finance Committee, warned about the expiration of all the tax cuts at the end of the year, which has taken on the label “taxmageddon.”
“This nation faces a real crisis in just a few months,” he said in his opening statement. “What some have called taxmaggedon is rapidly approaching. Unless Congress acts, come Jan. 1, 2013 Americans will be hit with the largest tax increase in history. This record-breaking tax increase will hit every American that pays income taxes. Small business owners will face a top marginal tax rate hike of 17 percent. The number of farmers and small businesses that will face the death tax will grow exponentially.”
Hatch also pointed to the expiration of the alternative minimum tax, which has already occurred, and how the rate of tax on dividends will nearly triple, from 15 percent to 43.4 percent, and the tax rate on capital gains will increase by 59 percent, from 15 percent to 23.8 percent.
“These tax increases are ones for the record book, and Congress should have already prevented them from occurring,” said Hatch. “They are a ticking time bomb for families, individuals, and the American economy.”
Simultaneously with the Senate Finance Committee hearing on Thursday morning, the House Ways and Means Subcommittee on Select Revenue Measures heard testimony from fellow lawmakers about the need to extend several expiring and already expired tax credits, including tax breaks for research and development and for mass transit.
CPA Testimony on Tax Reform
Troy Lewis, a CPA who works as vice president at Heritage Bank, a small community bank in St. George, Utah, was also on the panel. He is the sole proprietor of a small CPA firm, Lewis & Associates, CPAs, in Draper, Utah, and a professor of accounting and taxation at Brigham Young University. Lewis advocated a number of improvements in tax reform and simplification in his prepared testimony, including depreciation, the alternative minimum tax and certain partnership tax provisions. He also sees a need for improvement in correspondence examinations, due dates and basis reporting.
“To improve the taxpayer experience, tax reform should encompass simplification proposals designed to alleviate the complexity and burdens placed on small businesses,” he said. “Many small businesses are organized as entities other than C corporations. Tax reform therefore cannot merely involve changes to corporate tax rates or other tax provisions targeting C corporations if the desired impact is to help all small businesses overcome the burdens and complexities of tax compliance. These improvements must target other key areas.”
He noted that there are a number of areas in the Tax Code that impose substantial burdens on small businesses and individuals, including “pass-through entities” such as partnerships and S corporations. “Simplification is needed in areas such as depreciation, the alternative minimum tax, certain partnership tax provisions, education deductions and credits, retirement plans and small business provisions that exclude non-corporate entities,” said Lewis. “A key point that would also significantly improve the taxpayer experience would be minimizing the overall uncertainty throughout the Code and expanding provisions intended to help small businesses and individuals specifically focusing on non-corporate entities.”
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