Committee Urges IRS to Combat ‘Phantom Preparers’

An outside advisory committee to the Internal Revenue Service is asking the agency to reinforce its standards for security, privacy and fraud prevention, including “phantom prepared” returns.

In its 2012 Annual Report to Congress, the Electronic Tax Administration Advisory Committee made its number one recommendation that the IRS “reinforce tax industry software technology and infrastructure standards regarding security, privacy, fraud prevention, and e-authentication to promote and safeguard taxpayer data and confidence in the tax system.”

The IRS has come under increasing pressure in the past year to crack down on the growing problem of identity theft-related tax fraud. Congress has held several hearings in recent months to examine the problem, including one on Thursday by the Crime Subcommittee of the House Judiciary Committee (see Congress Probes Tax Prep Fraud and Identity Theft).

Among the fraud trends identified in the report is the problem of “phantom prepared” returns, that is, tax returns prepared by another for compensation and filed as self-prepared. The problem has been growing in recent years since the IRS stepped up its efforts to regulate the tax preparation profession. By not signing the returns, some tax preparers believe they are able to sidestep scrutiny and the new requirements for registration, testing and continuing education.

“’Phantom prepared’ returns lack accountability and in many cases may lack accuracy, thereby undermining the efforts of the return preparer initiative taken on by the IRS and confidence therein,” said the report. “The number of returns prepared by phantom preparers is difficult to determine, but industry speculation indicates a growing trend. If left unchecked this could create significant issues to the tax system. From lack of accountability, no professional training, and limited experience to outright preparer fraud, the increase in individuals who prepare a tax return for compensation and do not sign the tax return needs creative solutions to maintain gains in professional preparation standards and for taxpayer confidence to be maintained in the system.”

The report noted that the federal government is facing a future of increasing abuse and misuse of the tax system through tax fraud, identify theft and other uses of taxpayer information for illegal gains. “This increasing fraud and system misuse serves to undermine not only confidence in the tax system but also can bolster relaxation on the issue – an “everybody is doing it” mindset,” said the report. “IRS is acutely aware of the issue and making great strides to develop fraud detection and prevention systems and build on the broad experience they have, including this year’s MeF [Modernized e-File] system and improved issue detection elements. The focus should remain on issue prevention and detection, but an increased emphasis should be placed on enforcement and accountability. With increased enforcement and punishment to both taxpayers and professional tax preparers where applicable, in conjunction with prevention and detection, the return on investment of misuse of the tax system will be less attractive.

Other key recommendations in the report include moving forward on electronic filing of employment tax and information tax returns; creating Internet tools for taxpayers and tax professionals; leveraging tax delivery service channels; and funding the Modernized e-File and Customer Account Data Engine systems to completion.

“Through its recommendations, ETAAC provides an important voice to the IRS,” said David Williams, director of the IRS’s Return Preparer Office, in a statement. “We appreciate the long hours and focus the ETAAC brings, and we will carefully review these recommendations.”

The 14-member committee provides an organized public forum for discussion of electronic tax administration issues and the overriding goal that paperless filing should be the preferred and most-convenient method of filing tax and information returns.

“ETAAC commends IRS on surpassing its goal and receiving more than 80 percent of individual tax returns electronically. IRS can now turn its attention to employment tax returns and re-focus on delivering electronic interactions to taxpayers and tax professionals,” said ETAAC chairman Mark Steber.

ETAAC submits an annual progress report to Congress each June. The IRS Electronic Tax Administration created the ETAAC in 1998 as required by the IRS Restructuring and Reform Act of 1998.

The report is the result of research and analysis as well as meetings with senior IRS executives. Public comments on the report may be sent to etaac@irs.gov.