RECOMMENDATIONS FROM TIGTA

According to its website, “The Treasury Inspector General for Tax Administration (TIGTA) was established under the IRS Restructuring and Reform Act of 1998 to provide independent oversight of IRS activities. TIGTA promotes the economy, efficiency, and effectiveness in the administration of the internal revenue laws. It is also committed to the prevention and detection of fraud, waste, and abuse within the IRS and related entities.”

In some respects TIGTA is like the “Internal Affairs” department of the IRS. It also issues reports and makes recommendations to both the IRS and Congress, and, like the Taxpayer Advocate Office, submits a semi-annual “Report to Congress”.

In one recent report TIGTA made the following suggestion to the IRS -

“The Internal Revenue Service (IRS) should increase its efforts to educate elderly taxpayers about potential exemptions from withholding tax on certain retirement payments in order to reduce unnecessary tax return filings, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

While the IRS' public website, www.irs.gov, instructs taxpayers on how to determine whether to file a Federal tax return and if income tax withholding is necessary, printed publications, such as the instructions for filing IRS Form 1040, do not expressly state whether taxpayers should continue to have income tax withheld on Social Security, pension and annuity payments.

In August 2007, TIGTA issued a report examining the characteristics of unnecessarily filed individual income tax returns (Reference Number 2007-40-130, August 17, 2007). That report found that more than 8 million tax returns were unnecessarily filed in 2003, 2004 and 2005. Eighty-five percent of those returns were filed to obtain a refund of taxes withheld.”

Basically the report says that 8 Million + unnecessary tax returns with no tax liability are filed by senior citizens each year, most of which are simply to get a refund of federal income tax withheld from pensions.

This is similar to the fact that there are also many unnecessary tax returns filed by dependent children simply to get a full refund of federal income tax withheld. I discussed this issue in some detail back in 2007 in my post “Dependents and Income Tax Withholding”.

I also agree that many seniors should also refrain from having federal income taxes withheld from pension income if they consistently have “0” tax liabilities on the Form 1040 (or 1040A) each year. However I also realize that there are seniors who would rather be “safe than sorry” and have tax withheld as an arse-covering measure “just in case” so they will not have to write a check to their Uncle Sam at tax time.

I do advise clients who do not need to have tax withheld from pensions and annuities to stop doing so, but do not make an issue of it if they want to cover the arse. The problem I have is not with senior clients who have tax withheld from such income unnecessarily – but with those with tax liabilities who do not have any, or enough, federal or state tax withheld.

In another report TIGTA told the IRS that changes should be made in the layout and typeface of 1040 individual tax forms, including more use of boldface, colors and explanations, to help reduce taxpayer errors.

According to the report, each year the IRS sends out more than 7 Million notices to taxpayers informing them of math errors on their tax returns. TIGTA thinks that more than 2.3 Million of those errors could have resulted from unclear or inadequate forms and instructions. An analysis of taxpayer errors on 2005 tax returns identified three areas where modifying the 1040 and its instructions could reduce errors - computing the deduction for personal tax exemptions, the omission of dependent Social Security numbers or Individual Taxpayer Identification Numbers, and children claimed for the Child Tax Credit who exceeded the age limit.

The report says that taxpayers made more than 210,000 errors computing their exemption amounts. Another 170,000 taxpayers failed to include their dependent’s SSN or ITIN on the 1040, and approximately 137,000 taxpayers were denied the Child Tax Credit in 2006 because the child’s age exceeded the age requirement.

TIGTA recommends that the IRS use improved labeling and include the use of bold type to draw attention to instructions. Other suggested changes to the Form 1040 include adding language explaining the purpose and description of the exemption line, a statement that a SSN or ITIN is required for each dependent claimed, and the inclusion of the qualifying age requirement necessary to claim the Child Tax Credit. TIGTA also recommended that the IRS seek Congressional approval to use additional colors on tax returns and instructions to highlight important warnings and information.

I don’t know – a multi-color 1040? I am used to the light blue color of the form, just as I am comfortable with the red color of the NJ-1040 (appropriate – considering NJ’s financial situation). While I would agree that in some cases IRS instructions and “prompts” could be improved or more effectively highlighted I don’t think I would want a “more colorful” 1040.

TTFN

ANOTHER GOVERNMENT UNDERCOVER STUDY OF TAX PREPARERS

The office of the Treasury Inspector General for Tax Administration has prepared a report titled “Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors” based on an “undercover” operation conducted during the recent tax filing season.

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The following is from the memo to the Commissioner of the IRS Small Business/Self-Employed Division which appears at the beginning of the report.

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“In February and March 2008, TIGTA (Treasury Inspector General for Tax Administration) auditors posed as taxpayers in a large metropolitan area and paid to have 28 tax returns prepared at 12 commercial chains and 16 small, independently owned tax return preparation offices. Auditors paid commercial chains approximately $2,800, averaging $234 per return, and independently owned offices approximately $2,100, averaging $132 per return.

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The preparers were unlicensed and unenrolled. That is, they were not practitioners (attorneys, certified public accountants, enrolled agents, or enrolled actuaries). Preparers made substantial errors when completing tax returns and correctly prepared only 11 (39 percent) of the 28 tax returns (i.e., the tax returns showed the correct amount of taxes owed or refunds due). Of the remaining 17 tax returns that were prepared incorrectly:

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· 11 (65 percent) contained mistakes and omissions that auditors considered to have been caused by human error and/or misinterpretation of the tax laws.

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· 6 (35 percent) contained misstatements and omissions that auditors considered to have been willful or reckless.

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If these incorrect returns had been filed, the net effect to the Federal Government would have been $12,828 in understated taxes (the amount is the net effect because there were instances in which tax liabilities and tax refunds were both overstated and understated).

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We recommended that the Commissioner, Small Business/Self-Employed Division, develop and require a single identification number to control and monitor all paid preparers.”

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The study used 5 scenarios with income ranging from $16,000 to $85,000 using filing statuses of Single, Married Filing Joint and Head of Household. These scenarios included a wide variety of tax law topics related to income, deductions and credits. Detailed information on the scenarios is included in the report.

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Six (6) of the returns that were prepared in the study included business expenses. According to the report none of these 6 returns were prepared correctly.

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The report also states that six (6) preparers acted “willfully or recklessly during the preparation of the five scenarios. These preparers added or increased deductions without the auditors’ permission and in some situations after the auditors had questioned whether they were entitled to receive the deductions.”

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The TIGTA operation is very similar to one conducted by the Government Accountability Office (GAO) a few years ago which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

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The first thing that I noticed is that the TIGTA undercover “auditors” paid on average $100.00+ more per return to the commercial chains than they did to the independent tax preparers ($234 vs $132)! Of course this did not surprise me – it is a known fact that Henry and Richard and their ilk overcharge.

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Unfortunately I could not find anywhere in the report a breakdown of how the errors made applied to commercial preparation chains vs independent preparers or how the 6 “willful and reckless” preparers fell into these two categories.

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Click here to download the complete report.

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This report echoes the concerns of Congress, fueled by the earlier GAO study, that all paid tax preparers be registered or licensed. Bills have been introduced in both houses to regulate paid tax preparers.

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I, too, am in favor of having the IRS register “unenrolled” tax preparers. I would also welcome the creation of a “Licensed Tax Preparer” (LTP) status. There is already in place the beginnings of a registration process – the IRS currently issues to preparers a special “Preparer Taxpayer Identification Number” so we will not have to reveal our individual Social Security Numbers when we sign tax returns we have prepared for compensation.

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My only concern is that all of the legislation so far has required that registrants pass a test, similar I would expect to the EA exam in order to be allowed to practice.

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For one thing, it would be very literally impossible for the IRS to properly test the probably more than a million current “unenrolled” preparers. They had enough problems administering the EA enrollment exam, with only a few thousand participants each year, and have “outsourced” the EA exam to a private company.

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More important – I have been preparing 1040s for over 35 years without any problems with the IRS. At this point in my career I have absolutely no intention of taking a test to prove that I know what I am doing. While I am not against some kind of competency exam for new preparers, any legislation requiring the registration of tax preparers must include a “grandfather” clause.

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I would suggest that all current tax preparers – for example who have prepared at least fifty (50) 2007 federal individual income tax returns – who have been preparing tax returns consistently for at least five (5) years, and who have earned a minimum average of 20, or even 40, hours of continuing education credits per year for the past five years, be exempt from any kind of test and “grandfathered” in.

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In closing I should point out that I do agree that incompetent and unethical tax preparers are not limited to employees of Henry and Richard and their kind – there are indeed these type of preparers among the unenrolled “independents”, as well as the “enrolled” preparer community (remember all the accounting “ethical improprieties” involved with Enron and other such companies were made by CPAs). I have discussed the issue in my post “Let the Client Beware”.

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So what do you think?

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TTFN