Answers from the New IRS Commissioner

[kcjenkins]

February 20, 2014
By Roger Russell

IRS Commissioner John Koskinen took some time to provide answers to several of the questions that were asked (also see Tax Pros Have Questions for New Commish and IRS Commissioner Sees Further Appeals on Tax Preparer Lawsuit as Unlikely). The entire interview will appear in the April edition of Accounting Today, and online.

Question: You mentioned a voluntary system of tax return preparer certification. How would that be different from the current Enrolled Agent path?

Commissioner Koskinen: It would be more of a minimum level of requirements. Education for the Enrolled Agent is much more thorough, and allows [the Enrolled Agent] to practice before the agency. This would be an attempt to make sure that people have a minimum understanding and can meet standards, but wouldn’t be at the level of detail that would allow them to practice before the IRS.

Question: There’s a feeling among tax preparers regarding the due diligence requirements that they are being conscripted to do the IRS work for them.

Commissioner Koskinen: The EITC is kind of a separate category, and we’ll talk about that in a minute, but as a general matter, I was delighted to see the question because we really don’t want preparers to feel that they have to now go collect every document, review each document, in effect audit the return at the level an IRS agent would do. We think they need to be comfortable that there is support for what it is they’re putting in the return just as the taxpayer would be comfortable with that, but we don’t think that the preparer needs to be in the position of having certified that they’ve actually got all the documents in tow and they’ve looked at them all and they’ve in effect done the first review as if they were a revenue agent. So as long as they’re comfortable that the information they’ve got is appropriate for the return, which is what their standard has been for a long time, we don’t intend to have changed that as a general matter.

Now EITC is a case where we’ve more recently asked for more activity by preparers because the statute seems to get more complicated by the day, and we have the challenge of improper payments under the program that has been determined to be at a large volume. So we are asking preparers to answer a set of questions that they are satisfied that the information they are putting into the return is appropriate and has some basis behind it. When people have a large list of deductions, we’re not asking the preparer to go through it and certify each deduction but to look at it and say this is the information that would be appropriate for supporting the return. Similarly, for EITC we’re not asking them to start doing house visits to find out whether the children are actually living, but to at least have made enough of a preliminary inquiry that they’re satisfied that the return they’re filing is accurate. I recognize there are more questions for EITC than other areas.

We don’t mean to be driving preparers out of the preparation of EITC refunds. And there’s been a trend in that direction. There’s a somewhat smaller percentage of those returns that are now coming in through preparers as opposed to people doing them themselves, and we certainly didn’t intend to have preparers decide that it’s not worth the effort. We need their help. It’s an area where I think a lot of the improper payments are just individuals not understanding the somewhat complicated rules, particularly regarding dependents.

Our information is that eligibility [for the EITC] changes for about a third of the people every year. It just tells you how fluid that situation is. I understand and appreciate that preparers don’t want to be revenue agents, but this is one area where we hope that we can get cooperation from preparers and work with them. While the penalties have been increased, for the average preparer who is doing a perfectly good job and doing it as best he can, we’re trying to work positively with them.

The bigger problem is the people on the periphery who are going to help fill out the return and not sign it. Probably a reasonable number of people filing returns on their own are actually having them prepared by somebody who is a peripheral preparer. So I understand that the EITC is a little out of the norm and we just hope we get as much cooperation as we can, but as a general matter we’re not intending to have preparers feel that they have more requirements than they’ve always had to make sure that the information on the returns is correct.

Question: Given the limited resources available to the IRS, do you see a conflict now or developing down the road between service and enforcement as equal responsibilities? Will there come a time when you might have to prioritize one over the other?

Commissioner Koskinen: I view compliance and taxpayer services as two sides of the same coin. We need to be out chasing those who one way or another haven’t paid the right amount to get them to pay the right amount, but on the other hand if we can’t answer taxpayers’ questions, if they feel that they really can’t get information they need, they are likely to go to the low side of the equation. At some point it gets to be corrosive, and it gets to the point where people say, ‘Well, maybe I’ll just take my chances whether they can find me.’ The Taxpayer Advocate had a good point, that 98 percent of the money we get comes from normal filing season compliance, while 2 percent comes from our compliance activities. That 2 percent is $50 to $60 billion a year so it’s real money. But we have to be careful, and I’m concerned that we don’t undermine compliance by providing really crummy taxpayer service. And I think that’s the risk that we’re now at.

I think it’s important for people to understand that the level of taxpayer service isn’t because employees aren’t working hard. I’ve now been to nine different cities, had town halls in each of those places, I’ve seen several thousand IRS employees, and their general issue is not their compensation or the fact that they’re working too hard. Their issue is that they’re concerned there aren’t enough people to allow them to provide the service that they think taxpayers deserve. So I think the problem is if we say that compliance is 98 percent related to taxpayer service, so we should do more in taxpayer service to get the numbers up. You could do that, but the amount of money you’ll lose on the other side is much bigger. Compliance revenues [that are generated] by our own activities are four to five times the budget of the entire agency. It’s a Hobson’s choice. Of the 10,000 employees we’re down over four years, 3,100 are revenue agents and revenue officers, so to some extent compliance and enforcement are suffering, but at the same time our taxpayer services are not good at all.

[JohnH]

"We don’t mean to be driving preparers out of the preparation of EITC refunds. And there’s been a trend in that direction. There’s a somewhat smaller percentage of those returns that are now coming in through preparers as opposed to people doing them themselves, and we certainly didn’t intend to have preparers decide that it’s not worth the effort. "

That horse is already out of the barn.

[Cathy]

For at least 20 years, every IRS seminar I've ever attended, we were always told that the Earned Income Credit was the single
largest source of taxpayer related fraud in the entire tax system, however, the EIC continues to grow by leaps and bounds each year. If we ran our businesses whereby we would increase yearly the weakest link in our revenue source, I doubt if there would be many of our
businesses profitable today, if any of us would still be in business without having gone belly up under the circumstances.

It's no secret that people buy social security numbers to use on their tax returns. Year ago, people sold their "extra kids' numbers
for $50 each. Today's going rate is $650 per number. I purposely stay away from Wal-mart this time of year because I'd hate to be
arrested for clawing a few eyes out when I see these sales taking place.

I think it's time for IRS to take ownership of the fraud occurring with the EIC rather than trying to make it sound like it's due to uneducated preparers. They have been told over the years about the real problems behind the fraud and have chosen to do nothing about it for many, many years. And now, after we preparers have done our part in the "Mandatory" e-filing target dates, we are left out in the cold with "seeds of doubt" planted in taxpayers heads about preparers who shouldn't be preparing tax returns because our court system ruled their testing rules unconstitutional. The next time I find myself training an IRS auditor about the tax code in relationship to one of my clients
tax returns, I'll continue to keep my cool and pray I am able to do so until I retire.

[kcjenkins]

I agree, but I don't blame the SC, who ruled correctly that the Constitution gives the power to legislate to Congress, so it's up to Congress to decide how to regulate preparers. That will come, I believe. But there are, as you indicate, many steps the IRS could legally take to reduce fraud, and to catch the crooks, and they are not doing many of them. Comparing addresses, and flagging any address used in over 100 returns, would be an obvious and easy first step. Ditto for bank accounts used by multiple taxpayers.