Witnesses tell Senate Finance Committee ways to improve tax system

Witnesses gave the Senate Finance Committee a variety of suggestions on how to fight tax identity theft and fraud, reform the tax system, and fund the IRS during a hearing on Tuesday. The committee heard from witnesses representing the IRS, the Taxpayer Advocate Service, the Social Security Administration (SSA), and the AICPA.

Tax filing season

Jeffrey Porter, chair of the AICPA Tax Executive Committee, shared with the committee feedback on the just-concluded tax filing season, which got off to a delayed start because of the late enactment of the American Taxpayer Relief Act of 2012, P.L. 112-240. He noted the challenges the IRS faced in administering this tax season, but also told the committee in his written testimony that the “adverse impact extends to taxpayers and tax return preparers who face additional burdens attributable to the disruption to normal and efficient work streams and planning. In this context, our members and their clients faced a very compressed and difficult filing season this year.”

He also informed the committee that the delayed release of forms “caused significant anxiety for taxpayers.” He wrote that the “delay created an aura of confusion, particularly for my elderly clients, and sometimes required additional efforts by them.”

Porter also brought to the committee’s attention problems with Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, and amended Forms 1099-DIV, Dividends and Distributions. While the forms must be furnished to taxpayers by Feb. 15, brokerages can amend them at any time, and he reported that one large brokerage firm issued corrected 1099s on April 2 this year, causing many taxpayers who had already filed their Forms 1040 to have to file amended returns.

To solve this problem, Porter’s written testimony told the committee that the AICPA recommends “you consider legislation that would permit taxpayers to report de minimis changes in their income from a corrected Form 1099 or amended Schedule K-1 (from a partnership, trust, or S corporation) in the year of receipt of the amended form.”

Identity theft

Porter identified tax identity theft as, “one of the most important topics for our members this year.”

Acting IRS Commissioner Steven Miller acquainted the committee with the IRS’s recent efforts to combat identity theft and refund fraud. He testified that more than 3,000 IRS employees currently work on identity theft issues and more than 35,000 have been trained to help taxpayers recognize identity theft. He also described the IRS’s increased fraud detection efforts and noted that the IRS has suspended or rejected more than 2 million suspicious returns this filing season.

Miller also discussed barriers to further progress: “One is the sheer volume and complexity of these crimes, as identity thieves continue creating new ways of stealing personal information and using it for their gain. Another is the need to further upgrade our technology in order to implement improvements such as more sophisticated filters and better taxpayer authentication procedures.”

Miller described several proposals that would help the IRS stop refund fraud caused by identify theft. These included:

• Expanding IRS access to information in the National Directory of New Hires to allow for data matching and verification of taxpayer claims during processing;
• Granting the IRS authority to require or permit truncated Social Security numbers on W-2 forms; and
• Enacting a $5,000 civil penalty for tax-related identity theft.

Porter applauded the IRS’s issuance of proposed regulations (REG-148873-09) implementing a pilot program to allow truncated Social Security numbers on certain payee statements. He urged the IRS to make the program permanent and to extend it to “all types of tax forms and returns provided to a taxpayer, employee, or other recipient.” He also urged Congress “to consider a legislative proposal to change the Sec. 6051 reporting requirement to permit truncation of employee SSNs on all copies other than the copy filed with” the SSA.

Porter also expressed the AICPA’s support for civil penalties for tax-related identity theft, including penalties on fraudulent tax return preparers. He noted that some tax return preparers will claim increased refunds for clients and pocket the extra money themselves. “The AICPA fully supports efforts,” he wrote, “such as H.R. 5630, to deter such outrageously unethical behavior.”

In assessing the IRS’s efforts to combat tax identity theft and refund fraud, Miller testified, “Although we cannot stop all identity theft, our efforts thus far have provided a solid foundation upon which we will continue to build and improve.”

National Taxpayer Advocate Nina Olson, on the other hand, was not so optimistic. “I remain deeply concerned,” she remarked in her written testimony, “that victims often have to wait in excess of six months to have their cases resolved and receive their refunds, and the IRS has yet to implement an effective program for overseeing cases with multiple issues that require coordination among functions, thereby allowing too many victims to fall between the cracks of IRS bureaucracy.”

Acting IRS Commissioner Steven Miller; Jeffrey Porter, chair of the AICPA Tax Executive Committee; and National Taxpayer Advocate Nina Olson. Photo by Sam Kittner.

Access to death information

Marianna LaCanfora, the Social Security Administration’s acting deputy commissioner for retirement and disability policy, discussed restricting access to death information as a way to combat identity theft. She noted that, “Just as access to accurate death information helps agencies to combat fraud and reduce improper payments, we understand that the public availability of death information could contribute to fraud perpetrated by criminals.” 

Therefore, she said in her written testimony, the SSA believes “that this information should no longer be accessible to those entities or individuals who might misuse it.” However, she also noted that, “we [the SSA] do not currently have a legal basis to withhold nonstate death information under [the Freedom of Information Act].” She called on Congress to “strike the proper balance between restricting access to death information and making it available to those entities that legitimately need the information to combat fraud.” She also applauded a proposal in President Barack Obama’s proposed FY 2014 budget that would delay for three years after an individual’s death the release of that individual’s information on the Death Master File (DMF) that the SSA maintains.

Acting Commissioner Miller also discussed in his written testimony the president’s budget proposal to restrict access to the DMF and said, “this change would make it more difficult for identity thieves to obtain identifying information of deceased persons in order to file fraudulent returns.”

The national taxpayer advocate also recommended that Congress take immediate steps to restrict public access to the DMF.

Access to tax return information

In her testimony, Olson raised the issue of increased access to taxpayer return information as the IRS steps up efforts to share information with state and local law enforcement (see “IRS’s Identity Theft Liaison Pilot Program With Law Enforcement Expands to 50 States”). She noted that state and local authorities are not governed by the strict rules of Sec. 6103 that require the IRS to keep taxpayers’ return information confidential.

With increased information sharing, she noted, “it is only a matter of time before one or more local officials—who unlike IRS employees do not receive regular training about the importance of protecting this information—use tax return information carelessly or inappropriately.”

While such information is released to state and local authorities only with the taxpayer’s consent, Olson believes taxpayers assume those authorities have the same legal obligations as IRS employees to keep their information confidential. She informed the committee, “It is critical that safeguards be put in place immediately to prohibit law enforcement authorities who receive tax return information for a specified purpose from using or re-disclosing that information for any other purpose without additional taxpayer consent.”
 
Wage reporting

LaCanfora also discussed two proposals in the president’s budget to improve the wage-reporting process and help prevent fraud. The first proposal would reduce the electronic wage reporting threshold to 50 employees (from the current 250). She wrote this would “increase the percentage of electronic filing to approximately 90% of all W-2s.” She listed several benefits: “This will enable us to take better advantage of automation, reduce the work effort required to process paper forms, reduce errors caused by manual processing, and speed the process of correctly posting wages.”

The second proposal would require employers to report wages quarterly instead of annually. LaCanfora wrote that this change would “enhance our ability to detect fraud and curb improper payments in our programs.”

IRS budget

Miller described the current budget environment as a barrier to IRS progress on identity theft and fraud, and he noted that the IRS budget has been reduced by $1 billion in the past two years. According to Miller, however, the IRS funding level in the president’s proposed FY 2014 budget would allow the IRS to hire 800 more full-time employees dedicated to identity theft work.

The national taxpayer advocate testified that, “significant reductions in the IRS’s budget since 2010 are harming taxpayers and undermining the IRS’s ability to raise the revenues on which the rest of government depends.” She described it as, “self-defeating to apply across-the-board budget cuts to the IRS as a means to reduce the budget deficit, because the IRS collects substantially more than one dollar in federal revenue for each dollar it receives in appropriated funds.”

Olson did acknowledge that the Finance Committee is not responsible for the budget, but she urged the committee members to work with the members of the Appropriations Committee to ensure the IRS “is adequately funded to do its job.”

Return preparer regulation

Although the IRS’s program for regulating tax return preparers has been struck down by a federal district court and the case is currently on appeal (Loving, No. 12-385 (D.D.C. 1/18/13), appeal docketed No. 1:12-cv-00385-JEB (D.C. Cir. 2/21/13)), Miller and Olson both discussed their belief that the program should continue. Miller told the committee that the president’s proposed FY 2014 budget includes $18.3 million for continued implementation of the return preparer regulation program. In his written testimony, he said the program “complements the IRS’ efforts on refund fraud and identity theft, given that these crimes often involve individuals who prepare tax returns on behalf of others to obtain fraudulent refunds.”

Olson urged Congress to “grant the IRS the authority to continue to implement its well-designed initiative to improve standards in the tax preparation industry” if the IRS loses its appeal in the Loving case. She noted that the Finance Committee has twice approved legislation that would permit the IRS to regulate tax return preparers.

Porter informed the committee that “The AICPA has always been a steadfast supporter of the IRS’s overall goals of enhancing compliance and elevating ethical conduct. Ensuring that tax preparers are competent and ethical is critical to maintaining taxpayer confidence in our tax system. Indeed, these goals are consistent with AICPA’s own Code of Conduct and enforceable tax ethical standards.”

He testified that “the AICPA generally supports the IRS tax return preparer program,” and specifically:

• Registering paid tax return preparers and the issuance of unique preparer tax identification numbers;
• Expanding the ethical umbrella of Circular 230 over all paid income tax preparers;
• Creating a continuing education and competence construct geared towards the “unenrolled” preparer community who prepare Form 1040 series returns; and
• Recognizing the potential for taxpayer confusion regarding the relative qualifications of different paid preparers through the issuance of Notice 2011-45, which constrains “registered tax return preparers” from misleading advertising and solicitation and will require these preparers to use the following statement in ads: “The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov.”

Penalty reform

Porter also raised the issue of penalty reform with the committee. He noted that the AICPA recently expressed its concern over the current civil tax penalty situation and suggested improvements. He wrote in his testimony that the AICPA “strongly encourage[s] an inclusive and transparent framework for approaching this difficult task, similar to the collaborative efforts that culminated in [the Improved Penalty and Compliance Tax Act of 1989]. We urge Congress to work with taxpayers, practitioners, professional organizations, and other stakeholders in developing a systematic and thoughtful approach to civil tax penalty reform and penalty administration.”

Information reporting

Porter also addressed information reporting and its current effectiveness. He brought up several factors for the committee to review and wrote, “the AICPA recommends addressing sources of the tax gap through the consideration of information reporting options.” He also noted that “information reporting can assist voluntary compliance by providing summary information to taxpayers for reporting on their tax returns.”

Due dates

Porter expressed to the committee the AICPA’s support for the Tax Return and Due Date Simplification and Modernization Act of 2013 (S. 420), which was introduced in February. He explained that “tax return due dates have been a concern for the AICPA for several years. Under the current system, the statutory due date for partnerships to file a tax return is the same day as for trusts, many estates, and individuals, and one month after the due date for corporations. As a result of these due dates, it is almost impossible for taxpayers and practitioners to file a timely, accurate return on the original due date if they have investments in partnerships.”

Under S. 420, information from flowthrough entities would be due before the flowthrough entities’ investors have to file their returns. Porter also wrote, the bill “simplifies and better aligns other types of tax return and information return reporting due dates.” He noted that this would “increase the accuracy of tax returns and reduce the need for extended or amended corporate and individual income tax returns, resolving many of the current due date problems.” He also mentioned the bill would help reduce the filing season compression.

Tax reform

Olson and Porter testified on the topic of tax reform. Olson noted that “it has been 27 years since Congress last enacted comprehensive tax reform, and it has been 15 years since Congress last passed major taxpayer rights legislation. There is a significant need for legislation in both areas.” She urged Congress to “simplify the tax code to reduce [the] burden on taxpayers and the IRS.”

Porter testified that “the AICPA strongly supports the leadership taken by the Committee in studying tax reform and potential solutions” and that “the AICPA is committed to assisting this Committee and Congress in the development and passage of tax reform proposals which focus on simplifying the tax system for families and businesses.”

On behalf of the AICPA, Porter suggested six proposals to improve the administrability of the tax law:

• Repeal the alternative minimum tax;
• Harmonize and simplify education incentives;
• Enact consistent definitions;
• Simplify the kiddie tax rules;
• Simplify and harmonize retirement plan options; and
• Repeal various unused provisions.

He reiterated that the AICPA “strongly support[s] the Committee undertaking a comprehensive consideration of tax reform,” and he recommended that they consider the AICPA’s Compendium of Legislative Proposals and the AICPA’s Tax Policy Concept Statement No. 1, Guiding Principles of Good Tax Policy.
 
 —Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.