You Want Me To E-File Your Tax Return? Then Show Me Your ID.

There are times I wonder why I do what I do.

It is difficult enough to keep up with the barrage of tax developments, pronouncements, law changes, court decisions and what not. I do not practice in all areas, so there is some fence around this field, but it is still a fairly large field.

Then you have the IRS bureaucracy, which is becoming more unwieldy every year. It used to be that I could contact a local IRS person to help with a tax problem. After a while, one got to know the local IRS employees, and they got to know me. The IRS restructuring took away our local contacts. Practitioners now contact regional offices using an 866-telephone number. Wait times have been noticeably increasing over the last two or three years.  I gave up on a call this past Thursday as it approached an hour and a half.

Folks, this is a “back door” line for CPAs and attorneys. I can only imagine what the wait time is for the general line.

This past week I was reading Publication 1345 titled “Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns.” I would not recommend it unless you are a serious insomniac.  I came across the following pearl:

In-Person Transaction

The ERO must inspect a valid government picture identification; compare picture to applicant; and record the name, social security number, address and date of birth. Verify that the name, social security number, address, date of birth and other personal information on record are consistent with the information provided through record checks with the applicable agency or institution or through credit bureaus or similar databases. For in-person transactions, the record checks with the applicable agency or institution or through credit bureaus or similar databases are optional.

Examples of government picture identification (ID) include a driver’s license, employer ID, school ID, state ID, military ID, national ID, voter ID, visa or passport. 

If there is a multi-year business relationship, you should identify and authenticate the taxpayer."

Huh?

Let’s translate. An ERO is an electronic return originator. That is fancy language for someone who is authorized to file returns electronically with the IRS. My firm for example is an ERO. That makes me an ERO.

The IRS is talking about me inspecting a “valid picture identification” and so on. And when am I supposed to do this?

The IRS starts off talking about electronic signatures on a tax return. Obviously if I file your return electronically, I cannot send your fresh-ink signature at the bottom of the form. I do require from you a release authorizing me to e-file your return. That release may have your fresh-ink signature, but that release stays with me. The IRS does not get a copy.

Is the IRS talking about the e-signature on the return I file for you? Or is the IRS talking about an electronic signature on the release I obtain from you before e-filing your return? There is a big difference, and I cannot tell what the IRS meant. I suspect the IRS is talking about electronic signatures on the release. For the most part most of my clients sign their release in ink, although many clients will either fax or PDF their release to me. I am presuming the fax or PDF does not constitute an electronic signature, but I do need the IRS to be more precise in its use of the language.

Then there are the few clients. You know the ones: the computer hyper-literate. These guys can write a ditty, put music and video to it and publish the whole thing on You Tube in the time you or I would draft an e-mail. These guys are going to cause me a problem, because they know enough to sign that release with an "electronic signature.”

Let’s say they do.

The IRS now wants me to:

(1)  Inspect a valid government picture identification.

I presume we are talking about a driver’s license. It is inconvenient, but it follows what the stockbrokers have done for years.

What am I supposed to do with the kids, though, if the kids are too young to drive? 

What if mom and/or dad live with the client? Where does this end?

(2)  Record the name, social security number, address and date of birth.

No problem. We already do that.

(3)  Verify that information through record checks with the applicable agency or institution or through credit bureaus or similar databases.

Are you kidding me?

That one angers me. There is a superstructure of self-serving – and obviously incompetent - government bureaucrats and they have to recruit a tax CPA in Cincinnati to do THEIR JOB? I tell you what I want in return: I want a government salary; government benefits; all the holidays, including the make-believe ones; 6 weeks of vacation; a retirement plan; union protection so that I cannot be fired, no matter how incompetent I am.

What if I have known you for years?

If there is a multi-year business relationship, you should identify and authenticate the taxpayer."

Seriously? And what does “authenticate” mean?

Good grief. It would be less work to let these people vote. Hire me to do your taxes, however, and I have to go all Kojak on you.

How have we gotten to this point?

It has to do with identity theft. It has become a top-tier issue for the IRS. They responded in turn with Publication 1345. I am trying to be fair, I truly am, but I see a few things the IRS could immediately do before making me their Barney Fife:

(1)  Review refunds to taxpayers with a different address from last year.

(2)  Review refunds to taxpayers with a different employer from last year.

(3)  Stop issuing multiple refund checks to the same address. For example, the IRS sent 655 refund checks to the same address in Lithuania.

And what tax crook in his/her right mind is going to hire a tax CPA to do their dirty work anyway? Somebody clue the IRS that is not how those people work.

Publication 1345 addresses only individual tax returns. Is the IRS going to extend this to business returns? Will I need to confirm corporate minutes to be certain that Tom N. Jerry is in fact the CEO of that corporation and authorized to sign the corporate return? Will I need in turn to background check Tom N. Jerry himself?

And where will the time come from to do all this? I am already swamped during busy season. Even if the above takes only 5 minutes per return, multiply the 5 minutes by hundreds of clients. The IRS could easily add at least another 40 or 50 hours to my individual tax practice, time that I do not have. How will I respond? I will extend more returns. I would have to. I will charge you more. I would have to.  I would not accept electronic signatures on tax forms.

That last one is obvious.

The IRS and Identity Theft

One of the downsides of increased electronic tax filing is increased identity theft. We had one of our e-filings intercepted this year by the IRS for identity mismatch. The IRS did not accept the e-file and instead required a paper return with Form 14039, Identity Theft Affidavit, attached.

I was looking at (OK, I was skimming) a report from the Treasury Inspector General for Tax Administration issued May 3rd. Imagine my surprise to learn that the IRS has no special procedures for our return with Form 14039 attached.

The IRS considers the paper filing to be a duplicate return and does not immediately process it. An employee enters a transaction code into the taxpayer file to memorialize receipt. The return then goes to a separate queue to be worked on, possibly after April 15 when the filing season has ended. The IRS transfers the file to Duplicate function for initial review. If Duplicate considers it an identity theft case, the file is again transferred, quite likely to the Accounts Management function. It is there assigned an assistor, who requests copies of the original tax returns and begins the process, including correspondence, of determining who the legitimate taxpayer is.

This process is slow and the refund can be delayed until late in the year or even the following year. The average case resolution is 414 days.

The assistor very likely works in Accounts Management. The problem is that these employees also answer the toll-free telephone lines during busy season. According to TIGTA, 87% of assistors working identity fraud also answered the phones, and 60% stated that they worked the toll-free line exclusively. TIGTA considers the optimal assistor inventory (that is, caseload) to be 100 to 125 per assistor, but the average assistor had an inventory exceeding 300 cases.

The identity problem is new enough that IRS guidelines are spread out over almost 40 sections in the Internal Revenue Manual. Sometimes the guidelines are inconsistent. The IRS in addition does not have procedures to spot trends which could be useful in detecting or preventing future fraud. One problem, for example, is sending notices to the last address of record, which could just be the person perpetrating the fraud.

Training has also been an issue. TIGTA’s survey showed that almost half of the assistors believed that their training was not sufficient. In one office, 13% of assistors had received no identity theft training.

To be fair, the IRS has agreed with TIGTA’s findings and has begun implementation of many recommendations. For example, there will be specialized units in Accounts Management to work only identity fraud cases.

Then we have Congress. Three representatives this week introduced the “Fighting Fraud Act,” which would double the current penalties for tax preparers who are involved with identity theft. The intent is to give the IRS greater incentive to prosecute this type of theft, presumably because the potential payoff is greater.

Really? This is the best the mandarin class can dream up? Here is an idea: the IRS assigns a PIN to every preparer. Require every professionally-prepared return to require the preparer’s PIN. If a preparer is involved with this type of nonsense, the IRS revokes the PIN and bans the preparer from working before the IRS.

Will this stop the completely unscrupulous? Here is a question in return: in human history, has it ever been possible to stop the completely unscrupulous?

The IRS Is Now Accepting E-Files for the 2012 Tax Season

Tax season officially started yesterday, when the IRS started accepting e-filed returns. Electronic filing is expanding: approximately 100 million returns were e-filed for 2011. The IRS is certainly encouraging this momentum. Professional tax preparers – such as Kruse & Crawford – have to submit individual income tax returns electronically if they expect to prepare more than 10 returns in 2012. One does not have much of a tax practice if one does not prepare more than 10 individual tax returns in a year. The percentage of e-filed individual returns has increased from 58% in 2008 to 77% last year.

The Free File has also started, which allows one to e-file federal individual tax returns for free if one’s income is less than $57,000.

One last note: tax returns will be due Tuesday, April 17th this tear. That is because the 15th is on a weekend and the next business day (Monday) is a holiday in Washington, D.C.