The IRS and tax preparers can reach out to taxpayers hurt by the current economic downturn to help them meet their tax obligations, IRS Commissioner Douglas Shulman told the AICPA National Tax Conference on Oct. 27. (Watch the speech here.)
While the Service is mindful that many taxpayers are experiencing tough times, it must nonetheless administer the tax laws impartially, Shulman said.
“We certainly don’t want to see previously compliant taxpayers fall into noncompliance, but we are going to need to be sensitive to taxpayers who are under genuine economic duress,” he said. Taxpayers must believe that they, their neighbors and competitors are paying what they owe, since “even a small erosion in that belief could lead to big problems in the tax system.”
Shulman’s address to the AICPA during the annual conference in Washington, D.C., was his first to the Institute since taking office in March. Shulman said that amid the financial storms, he is committed to maintaining a dialogue with CPAs and other tax professionals and exploring trends and new thinking that will affect both the Service and practitioners.
Shulman said the tax gap—the estimated amount of taxes owed but not paid—is an issue likely to gain prominence going forward. The tax gap was an IRS and congressional priority before he took office. He said an important tool in shrinking the gap could be greater use of “soft notices” that tell taxpayers of an apparent underreporting of income or underpayment of tax before the more formal measure of an audit. A pilot program last year showed promise, he said.
“As I’ve said on numerous occasions, the IRS is not going to audit its way to greater compliance,” he said. “But I believe we can drive greater productivity in our enforcement endeavors by being innovative and creative in our approaches.”
Two more tools are recent authority to require information reporting by brokers of adjusted basis of securities sold and reporting of merchant transactions by credit card, debit card and electronic vendors, he said.
“I’m a strong believer that we need to enhance the data we have in-house through information reporting and that we should support new proposals for information reporting,” Shulman said, adding that he “couldn’t be happier” that Congress approved the measures in early October as part of the Emergency Economic Stabilization Act of 2008.
As a former top official of both the Financial Industry Regulatory Authority and the National Association of Securities Dealers, Shulman is well-positioned to gauge the hurdles that must be overcome to implement the sweeping new reporting systems, as well as to appreciate their potential for shrinking the tax gap. He cited a Government Accountability Office estimate that 7 million taxpayers—more than a third of those with securities transactions—may have underreported capital gains, half of them because of errors in basis reporting.
Shulman also said he aims to make the IRS the best place in government to work, acknowledging that the agency must recruit new talent to replace a large number of employees approaching retirement age. The Service also must beef up its ability to monitor sophisticated transactions that are increasingly global in scope.
In fact, he said, global tax considerations are no longer the exclusive province of multinational corporations. Americans’ personal income from foreign sources doubled between 2001 and 2006, and Americans paying taxes in foreign jurisdictions increased 30% from 2003 to 2005, he said.
“So I think we’re going to have to be on top of our game when it comes to global tax administration, both in the individual context and the corporate context,” he said.
He also sees an opportunity for the IRS and CPAs to work together to manage the U.S. tax implications of the planned convergence of U.S. GAAP with IFRS. Some U.S. companies could start filing financial statements according to international financial reporting standards as early as next year, with the SEC’s road map proposing full conversion by 2014.
“Our goal is to make sure that the Service is going to be able to provide the service, guidance and dialogue needed from a tax perspective when IFRS becomes more of a reality,” Shulman said. The Service has talked with the AICPA and others about joint training of IRS employees and CPAs in accounting firms to prepare for the tax implications, he said.
Dialogue with the AICPA already proved valuable to the Service in preparing guidance on recent changes in the preparer penalty standards of IRC § 6694 and will continue now that Congress has again revised the section, he said. The change from a “more likely than not” threshold to “substantial authority,” harmonizing the preparer standard with that of taxpayers, also was a provision of the Emergency Economic Stabilization Act.
One of the 450 CPAs attending gave the commissioner high marks for tackling complex issues during his first few months in office.
“He seems to have very quickly come up to speed and put his arms around a pretty big institution,” said David Lifson, past president of the New York State Society of CPAs and a member of two AICPA task forces. Lifson said he was glad Shulman mentioned soft notices and other measures that could help promote a culture of tax compliance and to balance service with enforcement, which at times has been an elusive equilibrium for the IRS. “It’s nice to see, after the balance was pushed one way to the consumer side and the other way to the enforcement side, that we now have maybe the equivalent of the three bears—too hot, too cold, but now just right.”
Paul Bonner is a senior editor for the JofA. His e-mail address is email@example.com.