AICPA Supports Goal of Real-Time Tax Processing; Offers Cautions on Potential Impact

January 9, 2012

Under the Internal Revenue System’s proposed “real-time tax system,” if the IRS found discrepancies between a tax return and data in IRS records, such as a W-2 or 1099,  the taxpayer would be given an opportunity to fix the problem before the IRS accepts the return.  The proposal is in very preliminary stages – no regulations have been developed yet.

Under the current system, the IRS often matches the data as much as a year or more after the tax return has been filed and processed. At a meeting last fall, IRS Commissioner Douglas Shulman remarked, “This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS.” He noted that the IRS has up to three years to audit individuals’ returns, and that by the time issues are resolved, the taxpayer “may no longer have the money that was refunded to them” and may also owe penalties and interest.

Patricia Thompson, CPA, chair of the American Institute of CPA’s Tax Executive Committee, testified at an IRS hearing that the AICPA supports the overall objective of the proposed system, as it could help reduce identity theft and curb noncompliance.

However, she recommended that RTTS be phased in and that the first stage focus on the simplest returns: Forms 1040A and 1040EZ. Thompson pointed out that even some of the simplest information returns could cause mismatching issues. She urged the IRS to provide more information about how the system will be designed so that stakeholders can assess how it will affect tax practitioners and taxpayers.

One of the leading concerns raised by the AICPA and other organizations, including the National Association of Enrolled Agents (NAEA) and a national tax preparation chain, was the prospect of mandated rejection of filed returns where there are discrepancies. The IRS does not currently reject returns for this reason. Thompson said rejection should not be a mandated result when the IRS and the taxpayer cannot resolve disagreements about mismatched information. 

Another issue that would need to be resolved is the impact of a real-time system on the filing season.  Lonnie Gary, a representative of NAEA, questioned how the IRS would acquire the third-party information from employers and others in time to match it with returns.  One option he mentioned would be starting the filing season later while keeping the April 15 deadline, but he noted that would be “tremendously challenging for an industry already operating at full tilt.”

The IRS plans to hold another public hearing early in 2012.

Additional information is available in the Dec. 8, 2011 Journal of Accountancy article.