Internal Revenue Service Commissioner Doug Shulman warned Thursday of a delayed tax season next year unless Congress resolves questions over the alternative minimum tax patch and other tax extender items, and talked about the tax refund delays this tax season.
“I would be remiss if I did not acknowledge that in the first few weeks of the tax filing season, we experienced some delays in processing a subset of e-filed returns,” Shulman said in his prepared remarks for a hearing before the House Ways and Means Oversight Subcommitee. “These were temporary issues that affected a subset of taxpayers who filed in late January and early February, and the issues were resolved by mid-February. And, even with the delays, the IRS was generally delivering refunds in our normal 10- to 21-day time frame. I recognize that this group of taxpayers encountered delays this filing season and we regret the inconveniences caused.”
However, Shulman noted that even with the initial issues during tax season, the overall average refund timeline remained steady in fiscal year 2012 when compared to fiscal year 2011. “In other words, the delays were isolated to early issues in the filing season, and after that IRS was processing tax returns according to normal refund timelines,” he said.
Some Accounting Today readers have reported much longer delays beyond the first few weeks (see
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To take advantage of the benefits of daily processing, the IRS automated some manual compliance checks—which are done before refunds are issued. However, a programming error caused the IRS to hold a much higher than expected number of returns for additional review. The IRS expected about 12 percent of returns to be affected by this compliance check. However, during the first week of the filing season about 80 percent of returns filed that week were affected. According to IRS officials, they did not detect this issue during pre-filing season testing, but it was identified when the filing season began. IRS officials reported that they had solved the problem by the end of January.
Shulman ended his statement during his testimony before the Ways and Means Oversight Committee calling on them to pass the annual patch for the AMT and resolve questions over already-expired and soon-to-expire tax credits, or else they could once again delay the start of next tax season.
“In recent years, taxpayers increasingly face uncertainty about what the tax law will be for the next filing season,” said Shulman. “This year, we at the IRS are very concerned with the status of the AMT and so-called extenders. If the AMT and extenders are not dealt with in a timely fashion, we may have to delay the start of filing season for many millions of taxpayers as we have done in prior years and I have written to this committee before that it is imperative that whatever action Congress decides to take on AMT and extenders that this action happen by the end of the year, which would still be late from an operational perspective, but not longer than that in order to prevent even more widespread disruption this tax filing season.”
Congress also needs to decide on the fate of the Bush-era tax cuts, which were extended for two years at the end of December 2010 and are due to expire at the end of this year after the elections. When Congress decided to extend the tax rates so late in the year, it delayed the start of last year's tax season.
After the hearing, the Republican leaders of the Ways and Means Committee and the Select Revenue Measures Subcommitee issued a joint statement saying they would conduct a review of the tax extenders in April.
“Far too many provisions in the tax code are temporary, making it hard for employers to plan, invest and create new jobs for American families,” said Ways and Means Committee Chairman Dave Camp, R-Mich., and Select Revenue Measures Subcommittee Chairman Pat Tiberi, R-Ohio, in the joint statement. “That is one reason why we are committed to comprehensive tax reform. An important part of comprehensive reform is to conduct a thorough review of the various targeted provisions in the Code commonly referred to as 'tax extenders.'"
In 2010, they noted, House Republicans led the charge to review these provisions and over 70 (estimated at over $100 billion) were cleaned out of the Tax Code. “In 2012, we must again examine these extenders, and the Committee will begin that process after the April recess,” they added. “We look forward to hearing from interested parties about the merits of these tax policies.” They plan to announce a hearing in April.
During Thursday’s hearing, Shulman was also asked about the continuing problems with IRS customer service. He acknowledged that there were problems, but his written testimony said that as of March 3, 2012, IRS telephone assistors had answered 7.3 million calls. The IRS also completed 29.5 million automated calls, a 45.5 percent increase over last year’s 20.3 million calls, reflecting a growing taxpayer appetite for quality self-serve options. “Accuracy rates for both customer tax law and account questions remain in the 90-plus percentile with minimal change over last filing season’s levels,” he noted.
But subcommittee members remained concerned. “I have serious concerns about the effect of recent budget cuts on taxpayers, tax collection, and agency operations,” said ranking member John Lewis, D-Ga. “In her most recent report to Congress, the National Taxpayer Advocate states that the most serious problem facing taxpayers is that the IRS is not adequately funded to serve taxpayers and collect taxes. I fully agree with this statement. This year, the agency’s budget was cut by over $300 million. This cut harmed taxpayers and telephone service. Telephone calls have increased by 34 percent, but the hours phones are answered have decreased by 20 percent. Only 65 percent of taxpayers seeking telephone assistance are able to speak to an IRS employee, and they must wait an average of 17 minutes.
"Taxpayers seeking in-person assistance also have been harmed,"Lewis added. "This is clear from the very long wait times at Taxpayer Assistance Centers. The budget cut also harmed agency operations. The cut forced the agency to lay off thousands of employees. The majority of these employees worked in Enforcement. They protected and collected revenue. This reduction does not help tax collection or reduce the deficit. It makes no sense.”
Tax Preparer Regulation Update
Shulman also addressed the status of the IRS’s tax return preparer program. “Since September 2010, almost 840,000 individuals have registered and obtained a Preparer Tax Identification Number, or PTIN, and are now in our tax professional database,” he said. “And we are learning some interesting facts about not only the size, but the nature of the tax preparer community. For example, over 60 percent of PTIN holders are not attorneys, CPAs or enrolled agents. Once PTIN registration was in place, we began the next phase of the program aimed at ensuring a minimal level of competency for all return preparers.”
He noted that the IRS launched a new competency test last November for certain tax return preparers who prepare Form 1040 returns, but who are not attorneys, CPAs, or enrolled agents, or supervised by one of them in a firm. These individuals also have a new requirement to complete 15 hours of continuing education each year from IRS-approved providers.
“Let me add also that from the beginning we planned to exempt CPAs, attorneys, and enrolled agents from the testing and continuing education requirements as they already have more stringent testing and education requirements,” said Shulman. “As we’ve set up the registration, testing and continuing education components of our return preparer initiative, it is also important that we focus on finding unscrupulous preparers who damage the good name of honest return preparers and undermine the overall tax system; therefore, we have a comprehensive strategy to focus on preparer enforcement and compliance. Our compliance efforts will be focused on places of highest risk – where the vast majority of preparers who play by the rules should want us to focus. We will also continue to conduct undercover shopping visits to return preparers suspected of engaging in fraud, and we will continue to work closely with the Department of Justice to pursue civil or criminal action against unscrupulous return preparers.”
Identity Theft
Shulman also discussed the agency’s efforts at combating identity theft. “I would simply like to reiterate that the IRS is intently focused on executing a two-pronged identity theft strategy that focuses on both fraud prevention and victim assistance,” he said. “We continue to improve our programs to prevent and detect identity theft and although we cannot stop all identity theft, we are working hard to resolve issues created when identity theft occurs. And in calendar year 2011, the IRS protected $1.4 billion in refunds from being erroneously sent to identity thieves. Finally, working closely with the Justice Department, IRS criminal investigators are pursuing those who are behind these schemes. In January, the IRS and Justice Department announced a nationwide sweep that targeted 105 people in 23 states, and our efforts in this area continue.”
New filters installed in the IRS’s systems to combat tax refund fraud and identity theft have been blamed for the refund delays.
New Technology
Shulman noted that this was the first tax season when a more automated tax processing system would be in place.
“In January 2012, the IRS for the first time since the beginning of automated processing of tax returns five decades ago began processing tax returns daily instead of weekly,” he said. “The new system, known as CADE 2, is a major milestone for the tax system and the IRS. CADE 2 addresses myriad issues that have historically created issues in the tax system.”
He said the new system would provide more up-to-date information to customer account representatives, speed account issue resolution, allow for faster refunds, and provide a platform for more real-time analytics and compliance. “It will also eliminate structural technology problems that could lead to time-lag problems, such as when notices are sent to taxpayers,” he added.
Budget Cuts
Shulman discussed the agency's budget cuts in his testimony. “Over the last several years, the IRS budget requests have reflected strategic investments in the IRS that serve to reduce the deficit, along with substantial efficiency and other targeted reductions that reflect our commitment to effective stewardship of the resources that we are given,” he said. “These savings and efficiencies reflect an across-the-board commitment to finding better and more efficient ways to administer the tax system. They come from a variety of sources, including reductions in outside contracts, training and all but case-related travel. However, even with these efficiencies, the IRS would not have been able to meet the level of budget reduction enacted for FY 2012 without substantially reducing our headcount.”
He noted that the IRS had already instituted an agency-wide hiring freeze and has only been replacing attrition on an exception basis. Attrition savings were not sufficient to meet the 2012 levels, however, so the IRS resorted to voluntary incentives designed to accelerate retirements of those who were retirement-eligible, or close to eligible.
As of March 5, 2012, buyout incentives were given to approximately 1,000 workers, Shulman noted. “As a result of these measures, the IRS has approximately 5,000 fewer staff on the payroll this filing season, as compared to last year,” he said. “Of the 5,000 person reduction, approximately 3,000 are in Enforcement, with the balance of the reduction principally coming from Taxpayer Service.”
