National Taxpayer Advocate report

[Jiggers]

From the National Taxpayer Advocate report just released:

"Rethinking the “Pay Refunds First, Verify Eligibility Later” Approach to Tax Returns Processing. Under current procedures, the IRS processes income tax returns before it processes most information returns, including Forms W-2, Wage and Tax Statement, and Forms 1099, which report interest, dividends, and other payments. “This sequence makes little logical sense,” the report states. From a taxpayer perspective, the sequence leads to millions of cases where taxpayers inadvertently make overclaims that the IRS does not identify until months later, exposing the taxpayer not only to a tax liability but to penalties and interest charges as well. From the government’s perspective, this sequence creates opportunities for fraud and requires the IRS to devote resources to recovering refunds that should not have been paid and that it often cannot recover. This sequence also prevents the IRS from making pre-populated returns available as an option to taxpayers.

The report recommends that Congress direct the Treasury Department to prepare a report identifying the administrative and legislative steps required to allow the IRS to receive and process information reporting documents before it processes tax returns. It recommends setting a goal of making these changes within six years."

Boy, that would put a big dent in RAL's and the big rush of filing returns early!

[tilt53]

It would also reduce the number of CP2000 notices that come out during tax time for the previous year. Wouldn't that be a blessing?

[taxmandan]

W-2s, etc. filed by Jan. 31st, processed by theIRS by May 1st each year, so tax returns could not be filed until May 15th- Sept 15th, with extensions available until March of the next year. Boy, there goes my summer time relaxation !!

[David1980]

Well, for all the W-2's being transmitted electronically which seems to be almost all of them anymore is there any reason they can't process them earlier than May 1st? Seems to me the problem is in their processes. It ought to be almost entirely automated and since it's coming to them in digital format noone should have to do anything. It should just work.

Then, when they get the HOH return with 2 kids and $13,000 of wages they can actually check when that return is transmitted whether the W-2 info matches their records and just reject the return, instead of pay thousands in EIC that will never get paid back.

[Nashville]

Results

Some results if this happens:

1) Many people will decrease their withholding and estimated tax payments.
2) Some people will fill out W-5s, such that they receive $300-$400 per month in Advance EIC. This will create uncollected revenue for taxpayers who do not qualify for EIC.
3) Congress and the Executive Branch will jump the case of the IRS, as they view tax refunds as a major vehicle to pump redistribution of wealth into the economy, and they care little whether the refunds are justified or not.

[taxmandan]

Well, for all the W-2's being transmitted electronically which seems to be almost all of them anymore is there any reason they can't process them earlier than May 1st? Seems to me the problem is in their processes. It ought to be almost entirely automated and since it's coming to them in digital format noone should have to do anything. It should just work.

Then, when they get the HOH return with 2 kids and $13,000 of wages they can actually check when that return is transmitted whether the W-2 info matches their records and just reject the return, instead of pay thousands in EIC that will never get paid back.

You'd think. TheIRS should streamline the process but we all know how that works with them! RE: the CADE that was supposed to be rolled out by '09, now on hold due to glitches. Or the new software so attachments could be included on efiled returns, still working on it. The announcement about licensing preparers says it's a go for 2011, yeah right. Figure at least 5 years out+.

[outwest]

Some light on processing.

When I worked for a large payroll operation, I found out part of the problem. The W2s go to the SSA. The SSA then processes and validates the file and later sends the information to the IRS.

At one time this was by reel to reel tape! And it wasn't a daily transfer either.

Don't know if that is still the case, but it's a problem of information in two legally distinct agencies.

Found this out when the SSA sent partial information on our file to the IRS which left a mismatch of several million dollars. Took three runs by the SSA to get a complete file to the IRS which finally matched to the penny. What a fiasco.