IRS Holds First Hearing on Real-Time Tax System

The IRS held a public hearing on December 8 to gather feedback on how to implement a system in which the IRS would match information on tax returns with data from third-party information returns during the processing of the return. Under the proposed “real-time tax system,” if the IRS found discrepancies between the tax return and data in IRS records, the taxpayer would be given an opportunity to fix the problem before the return is accepted.

Under the current system, which IRS Commissioner Doug Shulman described as a “look back” system in a speech to the fall meeting of the Council for Electronic Revenue Communication Advancement last October, the IRS conducts compliance activities months after the tax return has been filed and processed. Shulman said, “This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.” He noted that the IRS has up to three years to audit individuals’ returns, and that by the time issues are resolved, the taxpayer “may no longer have the money that was refunded to them” and may also owe penalties and interest.

At the December 8 hearing, the IRS heard from representatives of the tax professional community, New York State, federal oversight agencies, and low-income taxpayer clinics. Patricia Thompson, chair of the AICPA’s Tax Executive Committee, presented the AICPA’s feedback on the proposal.

Thompson said that the AICPA supports the overall objective of the real-time tax system, and she cited potential benefits, such as reducing identity theft and curbing noncompliance. She recommended that the system be phased in and that the first stage focus on the simplest returns: Forms 1040A and 1040EZ. She also pointed out that even some of the simplest information returns could cause mismatching issues. For example, Form 1099-INT may show a mismatch where a married couple with a joint bank account files separate tax returns.

Thompson also noted that year-end tax legislation could cause challenges for the IRS when trying to administer a real-time system.

In addition, she expressed concern that the plan will mandate rejecting filed returns where there are discrepancies. The IRS does not currently reject returns when there are discrepancies between the tax return and information returns filed with the IRS. Thompson argued that “rejection of the taxpayer’s tax return should not be a mandated result” when the IRS and the taxpayer cannot resolve disagreements about mismatched information.

Thompson also urged the IRS to provide more information about how the system will be designed so that stakeholders can assess how it will affect tax practitioners and taxpayers.

Finally, she raised the issue of how a real-time tax system would affect the annual filing process, due dates for returns, and those taxpayers who currently file early in tax season in order to get their refunds sooner.

The IRS plans to hold another hearing early in 2012.