Some More Updates on IRS Annual Filing Season Program and Refundable Credit Errors

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Last week I discussed the IRS’s adding to the list of dirty dozen scams the claiming of credits based on fake income and IRS’s making available a searchable directory of preparers. In this post, I will discuss some more updates relating to the IRS’ Annual Filing Season Program, as well as a recent Social Security Administration internal report suggesting that SSA needs to do more to help prevent individuals from claiming phantom income to benefit from refundable credits.

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In addition to the searchable directory, IRS also has published a news release distinguishing the various parties that can represent taxpayers before IRS, as well as the differing types of tax return preparers found within the directory:

Tax professionals have varying levels of skills, education and expertise. Furthermore, not all tax professionals have the right to represent taxpayers before the IRS, such as during an audit. Taxpayers should be aware of the credentials, qualifications and extent of service each prospective professional provides before obtaining their service.

We have discussed the IRS’s efforts to incentivize unlicensed preparers to opt in to the IRS’s annual continuing education and testing requirements. The release discusses the new class of preparers who complete the annual filing season program requirements:

Annual filing season program participants do not have unlimited practice rights (unless they are also an attorney, certified public accountant or enrolled agent). Their representation rights are limited to clients whose returns they prepared and signed, but only before revenue agents, customer service representatives and similar IRS employees, including the Taxpayer Advocate Service. They cannot represent clients whose returns they did not prepare, nor can they represent clients regarding collection or appeals matters.

It also reminds the public that next year uncredentialed preparers who do not opt in to the annual continuing education program will not be permitted to have limited representation rights:

Any tax return preparer not in one of the previously mentioned categories also has limited representation rights, but only until Dec. 31, 2015. Effective Jan. 1, 2016, other tax return preparers will have no representation rights. Only return preparers who participate in the Annual Filing Season Program will have limited representation rights. Other tax return preparers may provide quality return preparation services, but choose them wisely. Inquire about their education and training.

Refundable Credits and Fake Income

Last week I discussed how the creation of phantom income to goose refundable credits made it to the list of IRS dirty dozen tax scams. Well there was attention heaped on Social Security Administration (SSA) for its role in not helping IRS clamp down on errors in EITC returns that likely reflected phantom income. The SSA Office of Inspector General released a report criticizing SSA for failing to notify IRS in many of the cases when the people disclaimed their SEI to keep their SSI payments.

We initiated this review after the Dallas Regional Commissioner informed us that field offices had reported several cases where Supplemental Security Income (SSI) recipients admitted they falsified self-employment income (SEI) to fraudulently obtain an Earned Income Tax Credit (EITC), a refundable tax credit available to low- to moderate-income individuals and couples. The recipients then disclaimed the SEI to prevent SSA from reducing their SSI payments.

According to the SSA IG,

SSA removed from [its files] about $742 million in SEI originally reported on approximately 50,000 numberholders’ Federal income tax returns for Tax Years 2008 through 2011. Most transactions likely involved improper EITC or SSA payments….

During the period reviewed, SSA deleted $343 million in SEI and notified the IRS when it deleted the earnings. However, during the same period, SSA transferred $399 million in SEI to the Earnings Suspense File (ESF) instead of deleting it. SSA did not report these transactions to the IRS.

By failing to report those taxpayers to IRS, it minimized the chances that IRS would track those taxpayers down, and TIGTA reported that the returns had a healthy amount of EITC claimed:

At our request, TIGTA reviewed tax returns associated with SEI that SSA transferred to the ESF from randomly selected numberholders’ earnings records. Based on its review, TIGTA determined that tax filers had used the SEI to claim the EITC on 77.3 percent of the tax returns reviewed. The average EITC amount paid per tax return was $4,053.

Needless to say this attracted Congressional attention, with our blogging colleagues at Accounting Today writing up a nice post summarizing the reaction of House Ways and Means Human Resources Subcommittee chairman Charles Boustany, R-La., Social Security Subcommittee chairman Sam Johnson, R-Texas, and Oversight Subcommittee chairman Peter Roskam, R-Ill.:

Boustany, Johnson and Roskam urged the SSA to take corrective action immediately and work with the IRS to eliminate EITC self-employment fraud. They said the SSA and the IRS need to develop the electronic reporting system that the SSA claimed it was developing seven years ago when the Inspector General initially reported the possibility of fraudulent self-employment income earnings.

A link to the release from the Congressmen is here.

Keith has some observations on people misstating their income, claiming the EITC and then going back to SSA:

I am troubled by SSA letting the individuals change their SS records once they have stated under penalties of perjury that they have certain income.  I feel these taxpayers should be equitably estopped from coming back to a second benefit program and stating that they lied to the IRS and really should get their social security.  Denying their social security benefits, at least to the extent of the wrongfully claimed EITC plus interest and penalties, might be the best way to stop overclaiming of income and put the parties back where they started.  The IRS will have great difficulty collecting the EITC dollars once they are out the door.  By holding back on the Social Security payments to the extent of the incorrectly claimed EITC, the taxpayers would get back to the place they would have been had they not lied to the IRS about their income.  To let them “fix” the problem by saying they lied to the IRS bothers me.  This result would be equitable and better than an EITC ban.  It is simply an EITC recovery from people who admit that they lied.  In the cases where the preparer lied without their consent the preparer fraud procedures should kick in.

Some Parting Thoughts: Back to the IRS

The prospect of fraud in federal transfer programs has generated many special anti-abuse procedures in the Internal Revenue Code (though of course not all errors are fraud and some of the errors are facilitated or actively promoted by illicit preparers), and as I have written before was a main reason why former Commissioner Shulman instituted the preparer review that led to the ill-fated mandatory education and testing regime that the DC Court of Appeals and district court struck down in Loving. Loving of course led us to the voluntary plan I wrote about initially in this post.

It remains to be seen which competing force will prevail as Congress continues to look for ways to reduce refundable credit error rates, that is some members’ disdain for IRS or those members’ disdain for abuse among EITC claimants. I can envision a day when Congress or IRS further encourages certain classes of taxpayers who seek benefits in the form of refundable credits to use only preparers who meet certain qualifications.

I also wonder if the pilot plan IRS had in place a decade or so ago to require certain taxpayers to precertify for the EITC may make sense, especially among certain taxpayers such as those filing claims for the first time using a Schedule C. That program was very controversial, and at the time I thought it was a bad idea. I am not sure on reflection if it is so bad, especially when I hear anecdotally many problems with the IRS’s current approach which relies on a heavy handed ban for reckless EITC claimants and an aggressive preparer due diligence auditing regime which is detached from the issue as to whether the return itself was accurate. Instead, that regime looks to among other things to see if the preparer kept proper documents irrespective as to whether the taxpayer qualifies for the EITC. I am a proponent of expanded due diligence, but I also think that the IRS must not lose sight of the ultimate goal of those rules, which is to facilitate compliance among taxpayers by encouraging preparers to both be competent and ask questions with the goal of ensuring that the returns that they prepare are accurate.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Bob Kamman says:

    SSI is administered by the Social Security Administration but it is not Social Security. References to Supplemental Security Income are correct; references to Social Security are inexact. From the Social Security website: “Social Security benefits are funded by a dedicated payroll tax paid by the worker and the worker’s employer and by taxes paid by a self-employed person. SSI benefits are intended to alleviate poverty and are means-tested. There is no insured status or prior-work requirement for SSI, and the program is funded from general revenues rather than from a dedicated tax.”

  2. Bob Kamman says SSI is “not Social Security.” That argument reminds me of the DOJ’s oral argument in a 9th Circuit criminal case (Dreyer) last year that turned on the application of the Posse Comitatus Act.

    In Dreyer, the DOJ lawyer argued that the NCIS (i.e. the NAVAL Criminal Investigative Service) is “not the military.” As the 9th Circuit didn’t buy that argument, I don’t buy that SSI is not Social Security.

    The Social Security Administration’s website is wrong. There is no “dedicated” payroll tax that funds Social Security benefits. How can there be? Congress may lay and collect taxes only for specified purposes, e.g. for the “general” welfare.” And so they do. See 26 U.S.C. § 3501(a)(providing that so-called Social Security taxes “shall be collected by the Secretary and shall be paid into the Treasury of the United States as internal-revenue collections.”

    Consequently, Social Security and SSI benefits are on the same footing: regardless of how they are determined, both benefit types are funded from general federal revenues. The existence of the purported “Social Security Trust Funds” do not alter this fact.

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