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GAO Recommends US Tax Preparer Legislation

by Mike Godfrey,, Washington

05 October 2015

The Government Accounting Office (GAO) has confirmed that addressing improper tax credit payments through legislation to regulate all paid tax return preparers would significantly improve the US Government's fiscal position.

The confirmation was made during the GAO's testimony to a Senate Finance Committee hearing on October 1. The Committee's Chairman, Orrin Hatch, (R – Utah) convened the hearing to "examine how improper payments, including overpayments and underpayments, plague the federal bureaucracy and divert scarce resources away from their proper use for vital programs."

According to the GAO, the improper payment estimate significantly increased from USD105bn in 2013 to USD124.7bn in 2014. The hearing focused on the three programs that make up this increase – the earned income tax credit (EITC), Medicare, and Medicaid, which together accounted for 76 percent of all improper payments in 2014.

In his opening statement, Hatch noted that the EITC, which provides a refundable tax credit to working taxpayers that can be as much as USD5,500, cost nearly USD18bn in improper payments in 2014. He stressed "that's more than 27 percent – more than one out of every four dollars – of what we spent on the entire program."

In its testimony, the GAO pointed out that "a root cause of EITC noncompliance is that eligibility is determined by taxpayers themselves or their tax return preparers and that the ability of the Internal Revenue Service (IRS) to verify eligibility before issuing refunds is limited."

While it acknowledged that the IRS "has initiated several programs to address EITC improper payments, such as increasing outreach and education to taxpayers and tax return preparers, legislative action … likely would be necessary to make any meaningful reduction in improper payments."

However, although in September this year the Senate Finance Committee scheduled a committee markup of a bill to introduce legislation that would regulate all paid tax return preparers, that markup was cancelled after the American Institute of Certified Public Accountants expressed its concerns at granting the IRS extensive authority to regulate tax return preparers.

The GAO also looked at strategies to reduce the estimated USD385bn US tax gap (the difference between taxes owed and those paid, as a result of taxpayers underreporting their tax liability, underpaying taxes, or not filing tax returns).

It confirmed that such a reduction would require action on multiple fronts. Key factors that contribute to the tax gap include limited third-party reporting to the IRS – "where there is little or no information reporting, such as with business income, taxpayers tend to significantly misreport their income."

The GAO reiterated the recommendations to reduce the tax gap it has made in the past. For example, in addition to legislation to accelerate tax information returns, the GAO has recommended improvements to telephone and online services to inform taxpayers who wish to comply with tax laws but do not understand their obligations; and the imposition of a requirement for partnerships and corporations to file tax returns electronically, which could help the IRS reduce return processing costs and focus its examinations more on noncompliant taxpayers.

TAGS: individuals | compliance | Finance | tax | business | tax compliance | law | tax credits | Internal Revenue Service (IRS) | tax authority | legislation | United States

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