IRS Moves Forward With Real-Time Tax System to OK Returns Up Front

Internal Revenue Service Commissioner Douglas Shulman Dec. 8 took a major step forward in his quest to revamp the way individuals file their income tax returns, vetting the creation of a real-time tax system in which return information would be matched against other third-party data before returns are accepted by the IRS.

Under the plan, first announced by Shulman in April, IRS is exploring the possibility of embedding third-party information into its pre-screening filters so that mismatches between return information and data from W2s and Form 1099s could be identified prior to filing. Where there are mismatches, taxpayers would be given an opportunity to correct them.

The objective is to get away from back-end auditing, Shulman told a large audience at an IRS public meeting on the subject Dec. 8. As it stands now, taxpayers file their returns at one time, and months, or even years, later the service discovers there are problems and begins working on them.

Undeniable Benefit—and Pitfalls

Speakers at the public meeting said the proposal has undeniable benefits, in terms of correcting potential discrepancies before returns are filed, allowing taxpayers to respond earlier, reducing identity theft, and curbing noncompliance with credits, such as the earned income tax credit.

At the same time, there are significant pitfalls, they said, in that tax refunds would be delayed, and CP 2000 notices showing proposed changes to income tax returns based on comparisons of information reported by employers, banks, businesses, and other payers could come months or years after a return has been accepted—with failure-to-file penalties accruing all the while.

“Even certain of the simplest information forms could present challenges to the IRS in the context of a real time tax system,” Patricia Thompson, chair of the American Institute of Certified Public Accountants Tax Executive Committee and partner with Piccerelli Gilstein & Co., said. In addition, Congress’s proclivity for year-end legislation would wreak havoc with a real-time tax system.

The greatest concerns revolved around what would happen to returns where taxpayers were unable to resolve mismatches with the IRS. Speakers were unanimous in saying the IRS should not reject those returns.

Time Needed for Resolution

Taxpayers may have to contact multiple parties to resolve issues, and originators of information may have to send corrected information to update the IRS’s system, they said, all of which takes time.

A reasonable, relatively non-burdensome process for explaining discrepancies is needed, Thompson said, such as an IRS unit dedicated to the process. At the very least, Shulman said, if the proposal goes forward, many employees will be shifted into real-time resolution.

Others said the IRS should consider transitioning real-time in over a period of years, or for certain returns, such at the 1040 or 1040A. The IRS could also do “soft rejects” that give the filer a short window in which to change the return before processing it as filed.

Practically speaking, a real-time tax system is currently infeasible. IRS does not receive all the information return data in time to perform matching during the filing season, Lonnie Gary, partner in Young, Craig and Co., said on behalf of the National Association of Enrolled Agents. The initiative will require an aggressive due date for the information return data that is to be matched, he said.

A real-time system could require the tax season to be pushed back so that employers, financial institutions, and brokers have time to get all the necessary information to the IRS. Yet April 15 “has an iconic status for Americans,” said Robert Weinberger, a long-time former H&R Block vice president of government relations. “It’s baked into our DNA.” Delaying the filing season, even just the mid-January starting date, is likely to be quite controversial and trigger opposition, especially if it means delayed refunds, he said.

Legality of Rejecting Returns

In a parlay with Shulman, Keith Fogg, Villanova Law School associate professor and Federal Tax Clinic director, said the IRS cannot reject a paper return that meets even minimal standards. “Once the document comes in, IRS has a return in its hands and it can’t say, ‘this is not the return we wanted, take it back and give us another one,’ ” he said. “You’ve got a return and you’ve got to do something with it.”

Shulman quickly responded that the proposal is not necessarily to reject returns, acknowledging that, as a legal concept, that might not work. There is quite a nuance around the term “rejecting” a return, he said, and IRS language on that point has shifted.

Fogg also said the difficult question of engaging with taxpayers as the IRS attempts to resolve issues will be even more difficult for low-income taxpayers. The IRS should shift the burden of correcting mismatches onto tax preparers who will be better able to deal with it, he said.

Refunds

Taxpayers hungry for their refunds are not likely to take well to delays due to IRS checking out mismatches, many speakers said.

“Many taxpayers rush to file their tax returns to quickly receive their refunds,” Kathy Pickering, H&R Block vice president, said. “With an average refund of $3,000, this is the largest lump sum of money many taxpayers receive all year.” Receipt of it is important not only to them, but to the economy.

Pickering questioned if discrepancy cases, which represent less than 3 percent of the 140 million returns filed annually, warranted a change of the magnitude being considered.

Source: By Diane Freda

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One comment
  1. Now if people would just impnemelt a little strategy along with this and buy precious metals to fight inflation, then the blood supply to government would REALLY be cut short

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