How Can Theft Prevention, Reporting, and Return Filing Be Improved?

Changing the April 15 due date, moving taxpayer information to the cloud, and allowing personal identification numbers (PINs) for taxpayers who want them were all on the table at a Thursday hearing held by the IRS Oversight Board to explore ways to combat fraud and improve tax administration. The board, composed of presidential appointees with tax, technology, or business expertise, advises the IRS on the best ways to meet taxpayer needs.

Identity theft and fraud

Fraud and identity theft are still rampant, according to Michael Phillips, acting principal deputy inspector general, Treasury Inspector General for Tax Administration (TIGTA), who cited billions of dollars fraudulently claimed on refundable credits such as the American opportunity tax credit. The IRS recently prevented $12.1 billion of potentially fraudulent refunds from being issued, but “more work needs to be done,” he said.

Fraud comes in many forms, observed James R. White, director of tax issues for the U.S. Government Accountability Office (GAO). Given its many sources, such as failure to file, underreporting, and offshore tax evasion, multiple approaches are needed. White recommended increasing third-party information reporting such as contractor service payments and revising the information reported on Form 1098-T, Tuition Statement, and on Form 1098, Mortgage Interest Statement.

“A fundamental tax administration goal for combating fraud,” according to Jeffrey Porter, chair of the AICPA Tax Executive Committee, “is establishing one point of contact within the IRS for prompt resolution of identity theft cases,” as called for by former IRS Commissioner Douglas Shulman and National Taxpayer Advocate Nina Olson. Currently, 21 units exist within the IRS to help victims of identity theft.

The board interrupted Porter to applaud as he began to emphasize that the IRS “should be provided with full funding” to effectively combat fraud. “We believe the Service should continue to increase the level of staffing dedicated to identity theft cases and improve its training of agency employees to ensure the proper response and assistance for identity theft victims,” Porter said.

Porter said the IRS’s proposed regulations authorizing filers of certain information returns to voluntarily truncate a taxpayer’s identifying number is a positive step. In addition, Porter said, the truncation program should be extended to permit truncated Social Security numbers on all types of tax forms and returns provided to a taxpayer. The AICPA has recommended to Congress that it pass legislation so that truncated numbers could be used on Forms W-2, Wage and Tax Statement.

Larry Gray, government liaison for the National Association of Tax Professionals, stressed that getting away from using a Social Security number was instrumental to reducing identity theft. Currently, taxpayers who were previous victims of identity theft are assigned a PIN by the IRS, but most others must furnish a Social Security number. Asked about allowing taxpayers to request a PIN, Porter said he saw no reason that it would be a problem.

Real-time tax system

Under the IRS’s proposed “real-time tax system,” if the IRS found discrepancies between a tax return and data in IRS records, such as a W-2 or Form 1099, the taxpayer would be given an opportunity to fix the problem before the IRS accepts the return. The proposal is in preliminary stages—no regulations have been developed yet. Under the current system, the IRS often matches the data as much as a year or more after the tax return has been filed and processed. The benefits of a real-time tax system make it worth exploring, panelists from various industries concurred, but it also poses some serious challenges.

Bernie McKay, chairman of the Council for Electronic Revenue Communication Advancement (CERCA), recommended that the IRS partner with the private sector to develop a cloud-based approach for such a system. The information would be automatically filled in using income information stored on the internet.

Harry Cooper, executive deputy director of South Carolina’s Department of Revenue, expressed concern that taxpayers may develop a false sense of security with data being stored in the cloud. “Security should be the first and last consideration,” he said. A security breach in South Carolina’s system involving more than 3.8 million Social Security numbers cost the state more than $20 million to fix. However, he also pointed out that a real-time system could help states with collection efforts.

Lonnie Gary, representing the National Association of Enrolled Agents (NAEA), said such a system was conceptually appealing but observed that a further compressed filing season could not be risked, noting, “We are coming off of one of the most challenging tax seasons seen in my career.” He also raised concerns about what would happen if information does not match and the return is rejected, questioning whether the IRS had the real-time customer service capacity to address that during tax season.

Asked by a board member whether June 15 was a viable alternative for tax day to allow more time for the system, panelists agreed it should be discussed. “There is nothing magical about April 15,” noted Pete Isberg, president of the National Payroll Reporting Consortium. “If it’s written in stone, we have stone-carving tools,” he added.

Isberg also outlined a few options for making the current W-2 reporting system better, including quarterly reporting, now required by some states, as well as expanded e-filing, reporting information directly to the IRS rather than the Social Security Administration, and an earlier due date. “March 31 doesn’t make much sense,” he said.