IRS Tries to Pre-Verify Tax Refunds

[taxmandan]

Oh boy, now it's going to get fun!

http://tinyurl.com/lfzu7pc

Excerpts:

"Moving the matching of third-party information during the pre-refund screening process could have significant impacts on taxpayers, third parties, and IRS processes and systems."

Ya'all think so? Like six month delays in issuing refunds maybe?

"IRS officials stated that managing risk is a high priority, but they have not developed an overall risk management framework, as they are still in the early stages of the exploratory effort, according to the GAO."

Except for them pesky tea drinkers, we're all over that risk.

[Bees Knees]

Take your pick, match all income with information returns before issuing refunds, which will delay refunds at a minimum by 6 months (more likely a year or more), or issue the refunds now and deal with unreported income later....like we have always done.

I don't know how real time tax compliance can be done without a major revision to the tax code by Congress. For example, instead of an annual tax return, impose income tax at the source, like State sales taxes are imposed. You go to the store and buy something subject to sales tax, the tax is paid at the same time the item is purchased. Someone earns income, the tax is paid through withholding by the payer at the same time the payer pays the one earning the money. Anyone paying someone money that is subject to income tax would be required to withhold the tax and remit to the government, regardless of what or who the payer is.

Of course, that could only be done if a flat tax on income were imposed with no deductions. Or, repeal the income tax and replace it with a National Sales tax. I don't see any other way real time tax can work.

[Gary2]

Take your pick, match all income with information returns before issuing refunds, which will delay refunds at a minimum by 6 months (more likely a year or more), or issue the refunds now and deal with unreported income later....like we have always done.

This assumes the current reporting deadlines, processes and computer systems are unchanged. While changing that would be a significant undertaking, and would certainly have growing pains, it's certainly theoretically possible and politically feasible (at least more politically feasible than radical tax restructuring). If we can require W-2s to be issued to the employee by Jan. 31, there's no reason they can't also be e-filed with the IRS by then - other than the cost of software upgrades and computing resources.

[Nashville]

Wonderful World of IT

In addition to tax preparation, I have had a career in accounting for various corporate entities. Over and over again, IT solutions have been touted as the solution to all accounting problems -- in fact various hardware and software salesman have convinced managements that with their product, their accounting staffs can be cut in half. A good deal of my time has been spent dealing with the fallout which occurs after these solutions don't work.

With all due respect to Gary2 who works with software, most of these solutions DO work eventually, sometimes after they have become obsolete, and almost always too long after the migration from older, workable methods. But the topic is not my career, but whether the IRS is up to speed on this refund verification.

I suppose at the heart of the problem are refunds which are issued before the IRS can screen them for concomitant collection and audit dollars, and then are in danger of becoming uncollectible. In spite of collection processes that no one else has, such as levies, attachments, liens, the bad economy and people unemployed and underemployed are causing these uncollectible numbers to rise over the years.

Can they do it? Do they have the talent to pull it off? Do they have the resources to employ software gurus to pull it off? Not in a network of systems that are badly out-of-date already, and a workforce that is, in general, unaccountable to any performance standards other than collecting money. I think their choice is to (i)forget about this for the time being, or (ii)hold refunds for 6 months to 1 year. Politically, Congress will not allow them (ii) because of the whopping impact tax refunds have on the economy.

[Nashville]

Jail - A short-sighted solution

Of the extreme collection methods the IRS has at its disposal is one which is never used except for fraud - throw 'em in jail.

The threat of going to jail does scare some people, but the bottom-line effect is this means they'll NEVER collect their money. And then someone, usually the state, has to pay incarceration costs and this is never collected from the subjects either.

For example, most of the people I know that receive large amounts of EITC have the money spent in 48 hours, and it is GONE. If they are tax cheaters, it doesn't do the IRS any good to collect $4000 from these folks. They'll never have this much money until they cheat again NEXT year. That's why they're trying to penalize tax preparers instead of going after the real problem.

[taxmandan]

Of the extreme collection methods the IRS has at its disposal is one which is never used except for fraud - throw 'em in jail.

The threat of going to jail does scare some people, but the bottom-line effect is this means they'll NEVER collect their money. And then someone, usually the state, has to pay incarceration costs and this is never collected from the subjects either.

Unfortunately many of the fraudulent tax returns are filed by people already behind bars.

[Gary2]

Of the extreme collection methods the IRS has at its disposal is one which is never used except for fraud - throw 'em in jail.

The threat of going to jail does scare some people, but the bottom-line effect is this means they'll NEVER collect their money. And then someone, usually the state, has to pay incarceration costs and this is never collected from the subjects either.

For example, most of the people I know that receive large amounts of EITC have the money spent in 48 hours, and it is GONE. If they are tax cheaters, it doesn't do the IRS any good to collect $4000 from these folks. They'll never have this much money until they cheat again NEXT year. That's why they're trying to penalize tax preparers instead of going after the real problem.

I don't think it's really at the IRS's disposal; I thought criminal complaints had to be brought by the Justice Department.

In any event, a recent thread over at Quatloos points out that it's much more expensive to do criminal trials than civil trials. Something about "reasonable doubt" vs. "preponderance of evidence", the right to an attorney, etc., etc.

[taxea]

1. that's what they get for issuing refunds so quickly...now TP's will be in an uproar with the extended delay
2. they would need to extend the filing date to mid June
3. they need to penalize the third party reporters into compliance before even attempting "real-time" program

[joanmcq]

Canada pre-screens returns before issuing refunds.

Any refundable credits should be prescreened, but when you saw the uproar from practitioners and clients this year when many EITC refunds were delayed....it will be hard to get that crowd used to being patient. And yes, the money is gone and there's no hope for a payback any time soon. But at least then someone would only be able to try EITC fraud once, before being shut off for good. Once it's not so easy to get, attempts a fraud might, we hope, decrease. MigHt see a decrease in extreme over withholding too.

The issue is that on one hand we have Congress decrying refunds should be paid quickly, and then turning around and decrying fraud on the other.

[Burke]

Refundable credits should not even be called "refunds" after tax liability is satisfied. They are not. They are grants from the government. Refunds should be paid timely when the taxpayer's own withholding/est payments/excess soc sec, etc are involved. Otherwise, when that threshold is reached, additional "refundable" credits should be pre-screened before sending out, especially EITC. IRS computers could be configured to handle this without a lot of difficulty.

[David1980]

Refundable credits should not even be called "refunds" after tax liability is satisfied. They are not. They are grants from the government. Refunds should be paid timely when the taxpayer's own withholding/est payments/excess soc sec, etc are involved. Otherwise, when that threshold is reached, additional "refundable" credits should be pre-screened before sending out, especially EITC. IRS computers could be configured to handle this without a lot of difficulty.

This makes sense to me. Do two payments in the case of refundable credits. One for the actual "refund" and one for the free government money. Preferably with the refund of withholding and so forth verified (query a database to see if the withholding actually exists for the SSN) or fraud would just shift more to claiming non-existent withholding instead of refundable credits. Probably congress would need to give IRS authority to do it. And the government doesn't really have a proven track record with implementing technology (seems I keep seeing news articles time to time on a VA claims system) so ... it won't happen. But it should.

[Edward]

The only way to repair all the fraud and erroneous refunds would be to ELIMINATE the free filiing - look at the millions free filing - and the millions of errors that are being made by these filers - I know many of my previous clients are using this method (cause they have called me for tax advice - but I have not provided them with such). Some of these returns are complicated and I know they don't have the tax knowledge to prepare such returns. Too, many preparers are advertising they DO TAXES and too, are going the Free File route for the client and leaving no evidence as to who did the return as they are not retaining a file copy, nor reporting any of the income collected. I recall reading somewhere years ago that this free filing could result in problems later on. Admitedly I lost alot of clients thru this program,and IRS is going to have many, many more problems also.

[Golden Rocket]

Politically Unworkable

This makes sense to me. Do two payments in the case of refundable credits. One for the actual "refund" and one for the free government money.

This would be wonderful if Congress would stand for it. But they won't. They want money rushed into the economy as fast as it could get there. As you well know, many taxpayers (the number has been said to be 47%) don't even have income taxes at all.

In other words, if it weren't for refundable credits there would be no refund at all for these folks. In fact, half of the people who get these refundable credits might not even file. That adds even more problems for the IRS.

As perfunctorily appealing as this concept of "two refunds" might be, there is more downside according to the way politicians think. In too many cases, instead of "two refunds" there might be "no refunds."

[JohnH]

They could also get money "back" into the economy faster by lowering tax rates.
By not "removing" it in the first place, they would eliminate all time delay.

But we all know THAT isn't going to happen since it keeps it in the hands of the wrong people.

[veritas]

I would take it a step farther.

Refundable credits should not even be called "refunds" after tax liability is satisfied. They are not. They are grants from the government. Refunds should be paid timely when the taxpayer's own withholding/est payments/excess soc sec, etc are involved. Otherwise, when that threshold is reached, additional "refundable" credits should be pre-screened before sending out, especially EITC. IRS computers could be configured to handle this without a lot of difficulty.

After the taxes are prepared they should go down to the welfare agency and apply for the refundable credits. If the case worker makes a mistake they get a 500 fine and if the in case of gross negligence the penalty could be $5,000. If multiple infractions loss of the case workers livelyhood and possible jail time.

In order to prepare the case workers they can all fly to a resort area for "training". They can consult with the IRS for the finer points in celebrity sketching, line dancing and science fiction parody short films and most importantly the nuances of taking the 5th when asked to appear before those pesky congressional panels.