Senate Finance Committee Chairman Max Baucus proposed enacting tougher penalties against identity theft committed through the tax system, expanding electronic tax filing and giving the U.S. Internal Revenue Service clear authority to regulate tax preparers.
The plan is the second of three drafts the Montana Democrat is releasing this week as he tries to build momentum for the biggest tax-code changes since 1986. A proposal released yesterday would modify the international tax system and a plan set for tomorrow would change depreciation rules.
“Our tax code today is inefficient and incomprehensible to the overwhelming majority of Americans,” Baucus said in a statement today. “This complexity is eroding confidence in our economy and creating uncertainty for America’s families and businesses.”
The prospects for Baucus’s legislation are far from clear. While many of the proposals in today’s draft draw from legislation written by senators of both parties, his broader effort has been stymied by a partisan divide over whether tax changes should collect more revenue for the government.
Baucus’s plan would provide legal authority to reinstate a suspended IRS program that regulates tax preparers.
A federal judge stopped the program earlier this year after ruling that the 19th century statute cited by the IRS didn’t let it require preparers to pass competency tests or pay fees. A panel of the D.C. Circuit Court of Appeals heard arguments Sept. 24 and is still considering the case.
H&R Block Inc., the country’s largest tax-preparation company, supports the regulation. Smaller and solo practitioners have opposed the rules.
“It drives small tax preparers out of the market, it benefits the big tax-prep firms and consolidates the market,” said Dan Alban, an attorney at the Institute for Justice in Arlington, Virginia, which is challenging the regulations.
On identity theft, a fast-growing problem, Baucus would make filing a tax return using another person’s identity a felony with a maximum punishment of five years in prison and a $250,000 fine.
He would temporarily limit access to the Social Security Administration’s Death Master File, which criminals have used to create fake tax returns. The IRS could also require truncated Social Security numbers on W-2 wage-reporting forms.
Baucus would also expand IRS assistance for identity theft victims, require that the agency give victims a single point of contact and notify taxpayers when suspects have been charged.
According to the independent National Taxpayer Advocate, the identity theft unit at the IRS saw its caseload increase by 78 percent to 450,000 in fiscal 2012.
“Identity theft and refund fraud is the most significant compliance enforcement issue that the IRS has to deal with now,” said Lawrence Gibbs, a former IRS commissioner.
Gibbs, now a lawyer at Miller & Chevalier in Washington, said the growth in refundable tax credits -- essentially spending programs run through the tax code -- made the tax system more vulnerable than it used to be.
“You’re basically dealing with hard-core crooks,” he said.
Baucus’s proposal would place new requirements on banks. They would have to report all deposit accounts, not just those that received at least $10 in interest.
Banks and other companies holding or servicing mortgages would have to provide more information annually to the IRS along with the amount of interest paid, including the outstanding balance of the mortgage and the property address.
The State Department would get the authority to revoke passports of people with “seriously delinquent” tax debts exceeding $50,000.
The IRS return preparer case is Loving v. Internal Revenue Service, 13-05061, U.S. Court of Appeals, District of Columbia (Washington).