National Association of Enrolled Agents (NAEA) Government Relations Chair Roger Harris Wednesday testified before the Internal Revenue Service Oversight Board about potential options for closing the tax gap.
âWhile economists and statisticians may parse IRS data and arrive at any number of conclusions, common sense seems to indicate that any serious strategy to narrow the tax gap will of necessity include measures aimed at shoring up reporting compliance,â said Harris. âMany factors contribute to reporting non-compliance, which means that focusing on the right issues may prove a significant challenge.â
Harris pointed out that great portion of underreported income is believed to come from sources for which there is no information reporting, ranging from capital gains income from securities sales and auction sale proceeds to rents and royalties income. He cited the cash economy as another area with the potential for high rates of underreporting. Harris identified the complexity of the tax code as a key obstacle that prevents even the most well-intentioned self-preparers from understanding their tax liabilities.
The following three proposals for closing the tax gap set forth by the Joint Committee on Taxation (JCT) are viewed by NAEA as modest, common sense steps to increase compliance through information reporting.
Publicly-traded securities basis reporting would likely result in more accurate reporting of capital gains income and/or losses. While many taxpayers struggle when asked to provide cost basis for securities they sold, in most cases brokerage firms are well-placed to provide this information. Harris acknowledged there are probably administrative challenges to transferring some of the responsibility of cost basis calculation from the taxpayer to the broker, both for the broker and for the taxpayer. NAEA supports the taxpayer's right to an explanation of how a basis was calculated and the right to appeal the calculation, so long as the taxpayer presents a lawful method of alternate calculation.
Real estate tax reporting would lead to more accurate deducted amounts. Many taxpayers do not differentiate between taxes and assessments when calculating their deduction. This proposal would provide more oversight of such deductions by the IRS. Harris cautioned, however, that a taxpayer's home sale at any point in the calendar year may cause both inaccurate reporting and difficulty for IRS document matching programs.
Auction sales proceeds reporting was the third NAEA-supported proposal Harris addressed. Citing a 2005 Nielsen study that found that 724,000 eBay sellers rely on eBay sales as their primary or secondary source of income, an increase of 68 percent over the last two years, and another 1.5 million individuals supplement their income with eBay sales, Harris reasoned that this proposal would increase compliance among a fast-growing group of taxpayers.
âIn addition to the proposals above,â Harris concluded, âwe firmly believe one other reform option would help to close the tax gapâthe regulation of unenrolled return preparers. Our members are repeatedly faced with fallout from the work of incompetent or corrupt paid preparers.â
Harris recounted actual reported incidents in which corrupt tax preparers who based their fees on the expected refund (i) fabricated businesses, (ii) included earned income credits for which the client was not eligible and (iii) filed âHead of Householdâ returns for both husband and wife, swapping the children between the two over three years in order to claim the highest possible refund. Faced with the prospect of re-filing botched returns and paying back taxes, interest and penalties, one taxpayer chose to return to the unethical preparer that created her tax problems in the first place. The enrolled agent in this case commented, â...while I did the right thing, my new client âwalked.' I know that he (the unethical preparer) gave her sunshine and daisies and I gave her the cold, hard facts. In the absence of an audit, sunshine and daisies are hard to compete againstâ¦â
Harris cited a GAO study that found several instances of incompetent preparation by chain preparers, often resulting in large refund overclaims. He quoted National Taxpayer Advocate Nina Olsen's view that âuntrained and unscrupulous preparers present a serious problem.â Olsen advocates the establishment of minimum levels of competency for return preparation by developing a federal system to register, test, and certify unenrolled return preparers.
NAEA supports the enactment of a bill that would require all tax preparers to be licensed and regulated. Enrolled agents believe that if enacted and fully implemented such a bill would be a significant legislative contribution for improving upfront compliance. To read NAEA's written comments before the IRS Oversight Board, go to http://www.naea.org.