IRS Analyzes Tax Preparer Data Looking for Fraud
Internal Revenue Service Commissioner Doug Shulman described in a speech Thursday how the agency is using information fr om its tax preparer regulation initiative to identify practitioners who are showing patterns of tax fraud. “Given the importance of paid return preparers to the integrity of our tax system, we’re now well into the process of ensuring a basic competency level for tax return preparers and focusing our enforcement efforts on rooting out unscrupulous preparers, “ Shulman said in a speech at the National Press Club. “We have registered over 840,000 return preparers and have begun administering a competency test for any preparer who is not a CPA, attorney or enrolled agent. These individuals also have to complete 15 hours of continuing education each year fr om IRS-approved providers.”
He added that the agency’s next key long-term priority is an initiative the IRS started three years ago to look at how the agency interacts with paid tax return preparers.
“One of the most important tasks millions of Americans have been tackling, and will be tackling over the next two weeks, is preparing an accurate and timely tax return,” he said. “However, over the past 20 to 30 years, the way that taxpayers go about filing their taxes has dramatically changed. Today, more than 9 out of 10 taxpayers use a paid tax preparer or tax software. Despite the fact that paying taxes is one of the largest financial transactions that the average American family has each year, when I arrived at the IRS, there were no basic competency requirements for tax return preparers. In fact, while in most states you need a license to cut someone’s hair, just a few years ago almost anyone could prepare a federal tax return for any other person for a fee, regardless of their level of experience or knowledge of the tax law.”
Shulman said that the IRS has “shifted from a retail to a wholesale approach.” Instead of dealing with taxpayers one-by-one, the IRS is now dealing with the intermediaries who deal with a hundred or a thousand taxpayers at a time. He noted that 95 million individual and business income tax returns were prepared by paid preparers in 2011, accounting for $5.7 trillion of income reported.
“Given the importance of paid return preparers to the integrity of our tax system, we’re now well into the process of ensuring a basic competency level for tax return preparers and focusing our enforcement efforts on rooting out unscrupulous preparers,” he said. “We have registered over 840,000 return preparers and have begun administering a competency test for any preparer who is not a CPA, attorney or enrolled agent. These individuals also have to complete 15 hours of continuing education each year from IRS-approved providers.”
Shulman said the IRS’ s next major priority is leveraging data analytics in order to continually improve the agency’s operations.
“The IRS has always been an information intensive enterprise,” he added. “But it’s the organization of data and ultimately the knowledge and intelligence we extract from the information we receive that really matters. It can show us the areas of greatest non-compliance, and thereby contribute to more efficient and effective compliance programs. We have built a team of people with analytical expertise and connected them with our business units to continually improve our operations. They are working on multiple fronts, and the results have been impressive.”
As an example of how the IRS is leveraging data analytics, he noted that by using better data on tax preparers that gained through the agency’s return preparer initiatives and faster processing cycles achieved through its new CADE 2 customer account data engine upgrade, the IRS has applied advanced data analytics to link tax returns that showed potentially serious compliance issues to the individuals who prepared them.
“We identified a number of preparers with apparently inaccurate returns and, depending on the type and severity of the issue, are applying different types of compliance tools,” Shulman added. “The early results of this effort are encouraging, but we’ll need to remain focused on testing different techniques to continually improve our ability to accurately assess the compliance risks and determine what types of compliance activities are most effective. Based on what we learn, we will continuously make adjustments and improve the program.”
Shulman noted that in addition to finding and stopping more fraud this filing season, the IRS has discovered other benefits to combining the expertise and knowledge of the agency’s data analytics, return preparer, audit and technology teams. “Bringing them together enables us to improve our ability to understand trends in non-compliance on a number of fronts, and be able to identify and react to emerging compliance issues faster,” he said.
Computer Systems Upgrade
The new CADE 2 software has enabled the IRS to move from a weekly batch processing schedule to a daily processing schedule this tax season, he noted. The IRS is still using some of its old legacy computer systems, including some with tape backup, but the new technology is allowing the agency to leverage its data for initiatives like tax preparer and taxpayer compliance.
“You may have seen video footage from the 1960s, wh ere very earnest-looking people load enormous tapes onto mainframe computers to perform what was then a magical feat of automated data processing,” said Shulman. “Fast forward more than 40 years, and although the tapes are much smaller, and robotic arms move them from place to place, the IRS still operates some of its core systems using the same basic technology.”
Shulman said that when he arrived at the IRS, he initiated a broad review of the IRS technology portfolio and to prune it back to focus on addressing the single most visible and complex issue that had been holding back the IRS for decades.
“Since the 1960s, the IRS had conducted its core account processing on a weekly basis. This processing included basic taxpayer information, such as your current account balance, whether you have outstanding amounts due, and whether you’ve made any recent payments,” he said. “I am pleased to report that this year the IRS successfully migrated from a weekly processing cycle to daily processing. This was a multi-year, incredibly complex undertaking that went to the heart of systems that process trillions of dollars in tax revenue. This is an incredibly important milestone for the IRS, one which we first set our sights on in the late 1980s. The payoffs from this change are quicker tax return processing for all taxpayers, up-to-date information at the fingertips of our customer account representatives, and a platform for more real-time analytics and compliance. It is already benefiting taxpayers this year, and will produce major benefits for the nation’s tax system for years to come.”
International Tax Compliance
Shulman also talked about the way the agency has ramped up its international compliance initiatives through its Offshore Voluntary Disclosure Program in recent years, convincing 33,000 individuals to come forward and disclose their foreign bank accounts, bringing $4.4 billion in back taxes and penalties to the Treasury. He noted that the IRS is now mining and analyzing that data, and planning to launch its next wave of investigations into banks, intermediaries and taxpayers.
“Over the past four years, we have significantly increased our resources and focus on offshore tax evasion, and the results have been substantial,” he said. “We upped the ante in a meaningful way with our work on Swiss financial institutions – wh ere for the first time in history, a bank secrecy jurisdiction turned over thousands of names and account numbers. As we increased our enforcement efforts and gained significant momentum, we gave taxpayers a chance to come in voluntarily and avoid going to jail. In a typical year, we used to get 100 or so taxpayers who used our voluntary disclosure program. For this program, we thought that figure would rise to maybe 1,000. So, we are very pleased that through the end of 2011, we’ve had approximately 33,000 voluntary disclosures from individuals who came in under several special programs we started in 2009. To date, these individuals have paid back taxes and stiff penalties amounting to more than $4.4 billion, and the number continues to grow. We are now mining the information we have received to date and have launched our next wave of investigations on banks, bankers, intermediaries and taxpayers.”