The IRS is tackling tax compliance and identity theft, while preparing for changes in the next filing season amid budget constraints affecting its ability to serve the public, IRS Commissioner John Koskinen said.
Koskinen spoke Tuesday at the IRS Nationwide Tax Forum in San Diego, the second nationwide tax forum this year. Koskinen, who has been in his position since December, discussed challenges the IRS faces as well as the tax agency’s future initiatives.
The IRS works to maintain its tax compliance program, including its battle against refund fraud, especially fraud caused by identity theft, Koskinen said.
The IRS suspended or rejected 5.7 million suspicious returns worth nearly $18 billion in 2013, he said. This year, through the end of May, about 3.7 million suspicious returns have already been stopped and the IRS has opened about 800 new investigations into fraud schemes related to identity theft; the total number of active cases is more than 1,900.
For those who have been victimized, the time to close has been reduced to about 120 days, down from more than 300 days in previous years, Koskinen said, adding that the IRS “can and will do even better.”
A change taking effect next year aims to further reduce fraud by placing new limits on the number of refunds directly deposited into a single account, Koskinen said. Direct deposit will be limited to three refunds into one account starting in January. Subsequent refunds will be mailed to the address on the tax return.
There are legitimate reasons for refunds to be deposited into a single account — including children who are named on the bank account — but Koskinen said direct deposit is also an “easy way to for an identity thief to quickly divert funds to a bank account and cash out.”
He said he still encourages the use of direct deposit for tax refunds, and said it remains the fastest and safest way to get a refund.
The IRS completed a "smooth" filing season with more 139 million individual tax returns received through June, more than 85 percent of which were filed electronically, Koskinen said. Of those, 104 million received a refund, and of that more than 81 million refunds were directly deposited into taxpayers’ accounts.
The IRS is also working to increase international tax compliance and has made strides over the past several years to find tax evaders and to encourage people to disclose foreign accounts and pay the taxes they owe.
The IRS has changed its voluntary disclosure programs, making it easier to make those who want to come into compliance to do so, Koskinen said.
For those who continue to evade taxes by hiding assets outside the United States, Congress has given the IRS the Foreign Account Tax Compliance Act, which requires foreign financial institutions to inform the IRS about accounts owned by U.S. citizens.
The recording requirements under the tax compliance act took effect this month, Koskinen said.
“The importance of that is not just that we could be collecting more money. It’s also important because the average taxpayer has to be confident while they’re paying their taxes, the very wealthy are no longer able to hide money in foreign countries and avoid paying their fair share of taxes,” Koskinen said.
The IRS is also working to address the management problems that came to light last year over tax-exempt status under section 501(c)(4) and the use of improper criteria to select applications for review, Koskinen said.
The IRS has accepted recommendations from the inspector general to ensure that all taxpayers are treated fairly by the IRS no matter who they are, what organization they belong to or who they voted for in the last election, he said.
The IRS will perform about 1 million audits of individuals this year, Koskinen said, all of whom were contacted because of a question on the tax return — whether a clarification, math error or something seriously wrong – but the return alone is the reason for the inquiry.
The biggest challenge facing the IRS is the “substantial” decline in funding, Koskinen said. At $11.3 billion, its budget is $850 million below 2010’s level while the number of taxpayers has grown.
The IRS estimates it won’t be able to collect billions of dollars in enforcement as a result of fewer staff and reduced enforcement activities.
It takes money to make money: For every $1 invested in its budget, the IRS estimates $4 in additional revenue, Koskinen said. The reduction in funding affects the IRS and its employees, as well as taxpayers who need to interact with the IRS.
The level of phone assistance drops when there are fewer employees, Koskinen said. For all of 2014, the IRS expects the level of phone service to drop below 70 percent.
The IRS is also preparing for changes because of the Affordable Care Act. In addition to modifying forms and instructions, the agency is updating IT systems to be ready for the new provisions.
Taxpayers should be aware of changes caused by to the Affordable Care Act, Koskinen said, including the Individual Shared Responsibility requirement, which says people must maintain health coverage or qualify for an exemption.
Most people already has health insurance or are exempt, but there’s a small minority who will have to pay for any months they don’t have coverage or aren’t exempt, Koskinen said.
Those who bought insurance through the exchanges may have qualified for a premium tax credit. Those people either paid coverage themselves and will receive a tax credit in their returns, or had the marketplace estimate how much credit they qualify for and advance payments were made by the marketplace to the insurer on behalf of the taxpayer, he said.
Individuals need to reconcile the payments on the tax return with the actual credit they qualified for, and the final credit amount could be more or less than the original estimate, Koskinen said.
The IRS is working to inform taxpayers how these ACA provisions may affect them. Information is available at irs.gov/aca.
It is also likely in the next filing season that Congress will enact a package of tax extended provisions. If it does, tax forms will have to be adjusted, Koskinen said.
Koskinen also discussed the IRS’ efforts to ensure that preparers of individual tax returns meet a minimum level of competency and adhere to professional standards.
The program involves a registration for tax preparers with the IRS — 1 million individuals have registered with the IRS since 2010 and there are more than 680,000 return preparers active in the database.
The return preparer program also included a requirement that certain preparers pass a competency exam and complete annual education requirements.
The testing phase was announced in November 2011 and about 84,100 tests were given through 2012. About 62,000 preparers passed for a 74 percent passing rate, Koskinen said.
Mandatory testing and continuing education programs for return preparers ended in 2013 as a result of a lawsuit, which was upheld by appellate court earlier this year.
The fiscal year budget request includes a legislative proposal to authorize the IRS to regulate all paid tax return preparers. Until Congress acts on the administrative proposal, the IRS is considering a voluntary continuing education program for the 2015 filing season, Koskinen said.