Officially, the tax season is underway. As of January 23, the Internal Revenue Service and the State of Michigan both began accepting returns via their electronic filing systems. However, it definitely is not business as usual in the tax business. Several changes have been implemented that directly affect the processing time of taxpayer refunds. My definition of “processing time” is the span of time that elapses from the date that we submit the return to the IRS and have the return accepted until the taxpayer receives the refund in his/her hands. In past years, the goal was to entice more taxpayers to use the electronic filing system. The “carrot” used was speed in processing. Returns filed electronically were processed as fast as the computers could work. Returns filed via the post office were processed, let’s just say, more slowly. The carrot has worked very effectively as the over-whelming number of the 153 million tax returns filed in 2016 were processed electronically. Now, however, speed in processing has been determined to be a major factor in allowing thieves to file false returns and get the false returns processed before the IRS can determine the return is false. This might be an example of the theory of unintended consequences. The IRS and MI were doing a good thing by getting those refunds back out to the taxpayers in record times but thieves were taking advantage of this good thing with the result being that billions of dollars of refunds were being issued to thieves. Almost all of us know of someone who attempted to file their return but were not allowed to electronically file that return because a thief had already filed a false return using the social security number of the taxpayer. What a mess that creates. So, what is the IRS doing to combat the thieves?
First, returns with an Earned Income Tax Credit (EITC), an American Opportunity Tax Credit (AOTC), or a Child Tax Credit (CTC) will not be processed until at least February 20 and taxpayers should not expect to see those refunds perhaps before February 27. False returns claiming these three credits have determined to be the area of biggest concern. The maximum EITC claimed this year can result in a refund of up to $6,269. The maximum AOTC can be up to $2,500 and the maximum CTC can be up to $1,000 per dependent claimed under the age of 17 years old. Unless it is caught, a false return claiming a false amount of income with false children could easily result in thousands of dollars of false refund. This additional time will allow returns to be vetted for accuracy, to some extent, and will allow the “real” taxpayers, in many instances, to get their real return to the IRS for processing.
Second, W-2s and 1099-MISCs reporting Non-employee Compensation must be submitted to the Social Security Administration (SSA), the Internal Revenue Service, and the taxpayers by January 31. In past years, the forms were required to be in the taxpayer’s hands by January 31 but the SSA and IRS didn’t get their copy until February 28. This left at least one full month the thieves could file false returns using false 1099s and false W2s. The IRS would have no real idea the return was using false documents until the real W2s and 1099s were processed sometime in March. In addition to filing the forms earlier, up to 50 million W-2s will have an authentication code printed on the form. This will help the IRS match up the real form submitted by the company and the form submitted with the tax return. Requiring these documents to be filed by January 31 and not processing returns involving tax credits until February 20 will allow the IRS to do some matching. This move will result in refunds being delayed but it should also result in stopping many false refunds from being issued. Let me also mention that the penalty for not meeting the W-2 and 1099-MISC deadline of January 31 is from $50 up to $260 for each return not given to the taxpayer and an additional equivalent fine for not providing the form to the SSA/IRS. That’s quite an incentive to make sure the deadline is met.
Third, in the instance of EITC, AOTC, and CTC credits, tax preparers in the system, like Action Tax Service, will be subject to enhanced Due Diligence requirements. Tax preparers are being viewed as the third party that can ensure the rules are being followed for the returns they are filing. If, at a later time, the IRS determines that the rules were not being followed, a penalty of $510 for each credit can be imposed on the tax preparer and a separate penalty of $510 for each credit can be imposed on the tax preparation company for not properly supervising the tax preparer. For example, say a preparer completes a return for a client that has an EITC, an AOTC, and a CTC. Subsequently, the IRS determines the return was not prepared properly due to the tax preparer not making sufficient inquiries into the income and dependents claimed on the return. The taxpayer can be forced to pay back the credit amounts and stopped from claiming the credits for up to 10 years. The tax preparer can then be fined $510 per each credit for a total of $1,530 and the company can also be fined an additional $1,530. The net result is all taxpayers claiming any of the three credits can expect to be asked multiple Due Diligence questions before the applicable credit is computed.
All in all, this will be a tax season like no other. However, like each of the seasons that I have been involved in since I started in 1978, it is guaranteed to end on a set date in April. That date this year is April 18. In the meantime, we have a tremendous amount of work to do and tax returns to prepare. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Dr in Rockford.
Contact Jerry at www.actiontaxservice.com