* An article in the WEB CPA WEEK email newsletter said that, according to a report from the Treasury Inspector General for Tax Administration, more than 8 million people file tax returns each year who don’t need to do so, “imposing heavy costs on the Internal Revenue Service”.
TIGTA discovered that taxpayers spent an average of $390 million and 75 million hours per year preparing and filing unnecessary tax returns. The IRS, for its part, spent an average of $11 million each year to process the unnecessary returns
While many low-income taxpayers file the returns to obtain refunds on their withheld taxes, 15 percent of the unnecessary tax returns did not generate a refund. For the other 85 percent, the taxes often should not have been withheld in the first place – in many cases because the filers were under the age of 21 and were claimed as dependents on other people’s tax returns.
Check out my posting on “Dependents and Income Tax Withholding”.
There may be another reason why a taxpayer would want to file a return even though he/she is below the income threshold and there is no balance due or refund requested. By filing a return you “start the clock” running on the time the IRS has to question the return. The IRS has three (3) years from the due date of a filed return, including extensions, to audit that return. If a return is never filed the clock never starts.
* I received a press release from the National Association of Tax Professionals, of which I have been a member for 20+ years, on an interesting item that Congress snuck through as an addition to May’s Irag funding bill. Here is the copy:
The National Association of Tax Professionals (NATP) is recommending Congress correct a provision recently enacted that raises the tax return reporting standard for preparers above the standard for taxpayers, thereby creating a potential conflict of interest between preparers and their clients. The new provision was included in the Iraq war funding bill that became law in May with no prior notification to the tax preparing and taxpaying public.
“We were surprised that this tax provision was enacted without warning and without the characteristic protocol accorded the public to comment,” Paul Cinquemani, NATP Director of Government Relations, said. “The increased standard created what we hope was an unforeseen conflict of interest between preparers and their clients, putting preparers in the unfair position of acting as auditors for the Internal Revenue Service (IRS) while dramatically increasing the cost of return preparation to the American public.”
In a recent commentary submitted to the chairpersons and ranking members of the House Ways and Means and Senate Finance Committees, NATP states that the new law has raised tax preparing standards to a point higher or ‘tougher’ than the standards for the taxpayer for purposes of imposing a costly penalty for the understatement of a tax liability. It goes on to say that for tax preparers to be protected from a possible imposition of an understatement penalty, they must now be able to demonstrate a reasonable belief that a position taken on a return would “more likely than not” be sustained on its merits, or otherwise insist on a disclosure of the position on the return. The standard requires an in-depth and costly research process usually reserved for tax shelter transactions, not for routine, non-tax avoidance items.
“Taxpayers, on the other hand, may take a position on a return that has a “substantial authority” for being upheld,” commented Cinquemani. “Prior to the enactment of this provision, tax return preparers were held to a standard of “realistic possibility of success” that was lower than the standard for taxpayers.” NATP believes that the standards for imposition of a penalty for understatement of a tax liability should at most be equal between tax return preparers and taxpayers so that the potential for a conflict of interest between them does not arise.
NATP states it strongly supports well-targeted efforts to eliminate abusive transactions and close the ‘tax gap.’ It believes public awareness is critical when provisions are enacted that affect the rights of taxpayers when meeting tax law compliance requirements. “There was not so much as a hearing on this vital matter,” stated Cinquemani. “... nor was there any recommendation from Treasury to create this conflict.”
FYI, Gina of GINA’S TAX ARTICLES discussed this way back in June in her posting “Taxpayers Beware?”.
* The IRS reminds us, in Information Release 2007-144, that “Phone Customers Can Still Request Excise Tax Refund”.