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IRS Oversight Board Weighs Merits of a Real-Time Tax System
The real-time tax system conceived by former IRS Commissioner Douglas H. Shulman is well worth the IRS’s time and effort, panelists said during the 13th public forum of the IRS Oversight Board on May 1 in Washington, DC. The system would enable the IRS to instantly match information reported on tax returns with the income information it already has on file from Forms 1099 and W-2. The system would require employers and other payors to file information returns before taxpayers file their tax returns. Such a system is intended to combat tax refund fraud and foster greater accuracy, efficiency, and honesty, among other benefits. However, panelists advised the IRS to consider several alternatives to current practice that would address potential problems involved with a real-time tax system, such as:
- Security breaches
- Increased risk of tax refund fraud
- Additional burdens on tax practitioners
- Greater costs to taxpayers
- A rushed filing season or an elongated period during which tax refunds would be delayed
Proposal to change deadlines
“To combat tax refund fraud, the IRS needs to be able to validate claims of withholding and earnings on income tax returns before releasing refunds, said Pete Iseberg, president, National Payroll Reporting Consortium (NPRC), who was the first panelist to speak before the IRS Oversight Board. He stated that the myriad of compensation types and the complexity of the common information returns, Form W-2 in particular, mean that employers require a considerable amount of time to accurately determine the amount of compensation they should report on their information returns. Nevertheless, Iseberg believes that the current March 31 deadline for information returns does not make a lot of sense and that the IRS could realistically consider an earlier deadline.
“Employers really don’t take advantage of that additional time, especially in March,ˮ Iseberg said.“Under the current deadlines, you have an amendment rate of about 1 percent. And if you shift that up by a month, six weeks, or more, you start to increase that to 2 percent, 5 percent.ˮ
He stated that the District of Columbia and six other states already required employers to file their information returns by January 31.
Lonnie Gary, chair, Government Relations Committee, National Association of Enrolled Agents, suggested a later filing deadline for tax returns. He stressed that the current filing season, which had been shortened for many taxpayers because of the late release of tax forms affected by the American Taxpayer Relief Act of 2012, had proved challenging enough for taxpayers and tax professions.
“We simply cannot move to a real time system at the cost of further truncating the filing season,ˮ he cautioned. “Either the filing deadline will need to shift later or the IRS will have to require an aggressive due date for the information return data that will be matched. Each of these provides its own challenge — on one hand, the April 15 filing date is deeply entrenched in the American psyche, while on the other hand, information document providers have struggled to meet the current deadlines.ˮ
Real-time tax system in the cloud
Bernie McKay, chairman, Council for Electronic Revenue Communication Advancement (CERCA), testified that the IRS should not be solely responsible for implementing a real-time tax system. Rather, the IRS should partner with the private sector to create an even more widely encompassing system of taxpayer information matching.
McKay stated that software currently available for both taxpayers and professionals allows for the calculation of tax return items based on the IRS code, and that what he had in mind was similar. However, rather than having a taxpayer or preparer fill in the blanks based on the information before them on a paper return, the information would be automatically filled in using income information on the internet that had been placed there by various payors.
“It’s going to the original source,ˮ McKay explained. “That kind of information is available from the original sources: 1099s, various types of financial reporting, and W-2s at the start of the tax season.ˮ
Harry Cooper, executive director, South Carolina Department of Revenue, stressed that while implementing a real-time tax system involving e-filing and rapid exchange of income and identity information, the IRS’s attention should be fixed on security issues. His own state experienced a major security breach this past year, he explained.
“Large amounts of data were infiltrated: 3.8 million Social Security numbers, 387,000 credit and debit card numbers, 3.3 million bank records, and to date, we have spent more than $20 million trying to remediate the breach,ˮ he said.“Since public notice was given by the breach, our cyber attacks have increased by 3,500 percent.ˮ
He stated that South Carolina has learned that security is nonnegotiable and that reliance on technology creates a false sense of security. He suggested the IRS conduct meaningful risk assessment, incorporate the appropriate hardware and precautions, and clearly define the responsibilities of its security officers. He added that the software developers thoroughly understand the real-time tax system and how it works, so they could properly develop the program.