Baucus Releases Tax Administration Draft
This week, Senate Finance Chairman Max Baucus (D-MT) is moving forward with tax reform, releasing three discussion drafts. Yesterday, he released a draft of international tax reform intended to make the U.S. more competitive with other developed countries. Today, he released a draft on tax administration, intended to improve the way taxes are collected and make it easier for taxpayers to file. Tomorrow, he will release a draft changing how businesses claim costs from their expenses.
Today's draft may not be headline-grabbing material, but it is filled with many ideas to reduce the complexity of the tax code and make it easier for taxpayers to file. The bill is not likely to be controversial and many provisions have bipartisan support. Much of the draft could be enacted outside of tax reform.
Closing the Tax Gap
This draft makes steps towards closing the "tax gap," or the amount of taxes that are owed but not collected either due to purposeful evasion or accidental mistakes. According to a 2011 IRS study, the tax gap was $385 billion – approximately 14 percent of all taxes owed, a rate that was essentially unchanged from the previous study. Assuming the same rate applies today, the annual amount of uncollected taxes is more than $430 billion.
IRS studies show that requiring information to be reported to the IRS, via W-2s for example, dramatically enhances compliance. If information is not reported, the amount eventually claimed on tax returns is underreported by 56 percent, but the percentage drops to 8 percent when information is reported. The Baucus draft enhances reporting concerning bank accounts, mortgages, life insurance sales, college tuition, and sole proprietorships. In these cases, some information is already required to be reported, but is missing key pieces. For instance, taxpayers claiming a deduction for mortgage interest include a form showing the amount of interest they paid, but the form does not include the total balance of the mortgage, which would help the IRS know if the mortgage is in excess of the $1 million eligible for the deduction.
In order to pursue delinquent tax filers, the bill allows overdue taxes to be subtracted from the Medicare payments to delinquent providers. It would also deny passports to people owing at least $50,000 in delinquent taxes.
Within the last few years, tax refund fraud has become increasingly prevalent. Last year, an investigation found a potential of 1.5 million fraudulent returns costing as much as $5.2 billion. The bill would combat fraud by limiting the public dissemination of Social Security numbers. Currently, the Social Security Agency keeps a list of public deaths in the United States, which agencies use for the purpose of stopping benefits after death. The public can also buy a truncated copy of the list that includes Social Security numbers and addresses of the deceased; insurance companies and banks use the list to discover deaths and combat fraud, and genealogists use the list for research. However, IRS Taxpayer Advocate Nina Olson found that the list promotes fraud, by making private data available immediately. The bill puts a 3-year time limit on public access to the list, unless the user can prove a legitimate interest in fraud prevention. The bill would also discontinue using full Social Security numbers on W-2 forms.
Currently, there is a $500 penalty for paid preparers that do not make reasonable efforts to insure their clients actually qualify for the Earned Income Tax Credit, to prevent preparers from knowingly helping to get a fraudulent refund. The penalty would be expanded to include the Child Tax Credit. The draft would allow the IRS to regulate paid tax preparers, an issue currently being litigated. Finally, the IRS could verify employment and salary information against the National Directory of New Hires, a database of current employment information maintained for child support reasons.
Making the Process of Filing Taxes Less Cumbersome.
The draft also changes the filing schedule so it proceeds more logically. Currently, calendar year corporations have to file taxes on March 15, but they often need information from partnerships, who do not have to file taxes until a month later. The bill would reorganize the filing schedule so it proceeds more logically from partnerships to corporations to individuals. The filing day for individuals would still be April 15.
Taxpayers would no longer be required to file corrections to their information returns (like W-2s) for small errors less than $25.
Enable IRS to Verify Information in Real Time
The IRS currently deals with a veritable flood of information: over 150 million returns are filed each year, and an additional 1.4 billion information returns. In addition, technology has greatly improved since the tax code was last rewritten in 1986. The draft would take advantage of new technologies to help IRS process information faster and more accurately. People submitting more than 25 returns would have to file electronically, as would all paid preparers. The draft would require tax returns prepared with software to include a scannable barcode, so the IRS can scan the information instead of manually typing it in.
The bill also makes a host of smaller changes: technical corrections to 38 provisions dating back to 2004 and removing 108 "deadwood" provisions no longer necessary. It improves access to the Tax Court and reduces the Joint Committee on Taxation's workload reviewing smaller corporate refunds.