United We Stand, Divided We Fall

John Koskinen the IRS Commissioner testified to Congress on May 7th , 2014. He had much to say about the IRS and its 2014 tax filing season but focused on tax return preparers and the earned income tax credit. In regard to the tax return preparers, it makes sense to give the IRS the legal authority to regulate them especially given some of their prominent roles in earned income tax credit fraud and income tax refund fraud. It will help ferret out the fraudulent, the incompetent, and those requiring additional education or other interventions. In regard to the earned income tax credit and its 22% to 26% error rate, one proposal is to scrap the earned income tax credit completely which we advocate. Another proposal is to add more data analytics surrounding the open questions about whether the individuals are married and how many dependents they have. That could help verify those open questions or subject the returns to more scrutiny. Some sensible reforms requiring action by Congress include expanding the ‘math error authority’ of the IRS to correct returns when there are not only computation errors in the return but also incorrect table look up errors and database related errors (for instance, W-2 amounts on the return that don’t match the W-2 amounts submitted by the company). Another suggested reform which would help not only to combat earned income tax credit fraud but also tax refund fraud is the required acceleration of information return filing dates. It makes no sense to issue refunds until the basis for those refunds, usually a W-2, is proofed against the employer copy. If Congress is unable to do that, all refunds should be held until the data is available. The IRS needs to protect the country from the fraudsters. As usual, the one bad apple is spoiling the barrel of apples for the rest of us.
However, let’s get more serious here. Besides the earned income tax credit issue and the tax return preparers, the IRS needs added resources to achieve 4 other major objectives in the next year. It needs to combat Income Tax Refund fraud (which if left unhandled will cost $20 billion each year), meet the requirements under the ACA, close significantly the $450 billion tax gap, and insure all citizens are paying their fair share of taxes by dramatically increasing tax audits. Instead of providing the $3 billion of additional resources and manpower to meet these objectives, the IRS budget has been slashed by $526 million or 5% in FY2014 alone. From FY2011, the IRS budget has been slashed by $1.287 billion or 10%. That budget is less than the FY2008 budget by $236 million. From a manpower perspective, the numbers of personnel are down almost 8,000 employees or 8% from FY2010. Our recommendation is that these $1.287 billion cuts be restored in FY2015 and $1 billion be added every year for 3 years. Progress on these 6 objectives should be reported to Congress each year in May.
Harry Pukay-Martin