In October 2006, the Senate Finance Committee released a set of discussion options for closing the approximately $345 billion gross annual tax gap.  The tax gap discussion options were prepared by the Joint Committee on Taxation (JCT), which is a non-partisan congressional organization.  Senate Finance Committee Chairman Chuck Grassley and Ranking Member Max Baucus solicited public comment on the proposals.  NAEA’s comments, which are below, should help the senators reach a conclusion on the JCT proposals.

The JCT report, in full, is available by clicking here.

December 1, 2006

Chairman Charles Grassley
Ranking Member Max Baucus
Senate Finance Committee
219 Dirksen Senate Office Building
Washington, DC  20510

Re:  Additional JCT Options to Close the Tax Gap

Dear Chairman Grassley and Ranking Member Baucus,

The National Association of Enrolled Agents (NAEA) appreciates the opportunity to comment on the Additional Options to Improve Tax Compliance, prepared by the Joint Committee on Taxation (JCT).  As the organization representing the interests of 46,000 Enrolled Agents – the only tax practitioners whose competency and ethical behavior are attested to by the IRS – NAEA is committed to increasing industry professionalism, improving the integrity of the nation’s tax administration system, and protecting taxpayers’ rights to representation. Further, we believe that NAEA is well positioned to offer an informed perspective about the practical impact the JCT proposals could have on taxpayers, paid income tax return preparers, and the tax gap. 

We respectfully offer the following comments on the tax gap options submitted by JCT that are relevant to the practice of enrolled agents: 

• Reporting Requirements for Basis of Publicly-Traded Securities.  NAEA generally supports this option, as it would likely result in more accurate reporting of capital gains income and/or loss.  For a variety of reasons, many of our clients struggle when asked to provide cost basis for securities they sold.  In most cases, brokerage firms are well-placed to provide this information.  At the same time, we acknowledge there are probably administrative challenges to transferring some of the responsibility of basis calculation from the taxpayer to the broker, both for the broker and for the taxpayer.  To that end, we believe the taxpayer has the right to an explanation of how a basis was calculated, as well as the right to appeal the calculation, so long as the taxpayer presents a lawful method of alternate calculation.  
  
  Other issues (wash sales, stepped-up basis, recordkeeping) that may lead to difficulty in basis calculating fall under the purview of “special circumstances” as discussed on page nine of Additional Options to Improve Tax Compliance (JCT, August 2006), and could be addressed by “special rules” formulated by the Treasury or IRS. 
  
• Reporting Requirements for Real Estate Taxes.  NAEA believes third-party reporting of real estate taxes paid would lead to more accurate deducted amounts.  Many taxpayers do not differentiate between taxes and assessments when calculating their deduction.  Further, this proposal would provide for more oversight of such deductions by the IRS.  We caution, however, that a taxpayer’s home sale at any point in the calendar year may cause both inaccurate reporting and difficulty for IRS document matching programs.
  
• Reporting Requirements for Proceeds of Auction Sales.  NAEA supports additional reporting requirements for auctions and especially encourages including online auction sales.  We believe this proposal would increase compliance among a fast-growing group of taxpayers (or people who should be taxpayers).  A 2005¹ study  found that 724,000 eBay sellers rely on eBay sales as their primary or secondary source of income – an increase of 68 percent over two years.  Another 1.5 million individuals supplement their income with eBay sales.  In 2005, eBay users sold $44.3 billion of merchandise, none of which was directly reported to the IRS on behalf of the individual sellers.  (N.B. We use eBay for illustrative purposes only as the firm provides a high profile example of the extent to which online auction commerce has increased in recent years.)
  
• Reporting Requirements for Mortgage Interest.  NAEA does not oppose the option expanding third-party reporting by mortgage lenders.  The inclusion of whether interest was paid in connection with a refinancing should help practitioners (and taxpayers) determine which portions of interest are deductible and non-deductible.  The new information would also help by making apparent when a refinancing results in home equity debt in excess of the $100,000 limit.
  
• Reporting Requirements for Individuals with an Interest in Offshore Bank Accounts and Offshore Trusts.  NAEA is somewhat troubled by the proposed Form TD F 90-22.1 (FBAR) or Form 3520 due diligence requirement for income tax preparers.  The JCT indicates that perhaps one million U.S. persons hold funds in foreign bank accounts – out of a total filing population of approximately 130 million (roughly eight-tenths of one percent).  Two of the three categories of taxpayers who fail to file (those who are concealing income and those who structure transactions in a manner that avoids the filing requirements) would not be addressed by the due diligence requirement.
  
  Further, enrolled practitioners are already required to exercise due diligence. Specifically, section 10.22 of Circular 230 requires enrolled agents (as well as certified public accountants and attorneys) to exercise due diligence in the preparation of tax returns.  However, the §6695(g) earned income credit (EIC) due diligence requirement (referred to on page 24 of Additional Options to Improve Tax Compliance) is not analogous because an EIC taxpayer’s financial circumstances present obvious triggers for the due diligence requirement, whereas practitioners have little or no basis for deciding whether to perform due diligence required for taxpayers with foreign bank accounts. Determining whether a taxpayer must file the FBAR or Form 3520 is far more arduous than determining whether a taxpayer is eligible for the EIC.  Practitioners are necessarily going to burden taxpayers not subject to the FBAR filing requirement with a lengthy – and in all likelihood intimidating – explanatory statement. If the Finance Committee insists on a due diligence requirement, we believe an income threshold well above the threshold for filing Forms 1040EZ and 1040A would need to be set.
  
  Finally, we believe a simple and painless way to increase FBAR compliance is to include the check box – which is currently located on Schedule B – on Form 1040 and allow the FBAR form to be sent to the IRS along with the Form 1040.

The proposals compiled by JCT mostly aim to increase either accurate reporting of income or compliance with existing law.  Some of the options would assist tax practitioners (and self-preparing taxpayers) in more efficiently preparing an accurate tax return, while others would not significantly affect practitioners.  The amount of additional burden on taxpayers and practitioners varies among the proposals, not necessarily in proportion to the amount of revenues likely to be recovered as a result of their enactment.  We believe it is important to balance burden with proportionate gains in compliance.  Perhaps this could be achieved by including burden estimates and revenue scores with descriptions of the proposals.

While we realize there is no single “silver bullet” solution, NAEA encourages the Finance Committee to consider other causes that contribute to the tax gap.  A recent GAO study (Paid Tax Return Preparers: In a Limited Study Chain Preparers Make Serious Errors) estimates that more than half of individual income tax returns filed are prepared by a paid tax preparer.²   In the same study, GAO found several instances of incompetent preparation by chain preparers, often resulting in large refund overclaims.³   Congress could act to improve competence and ethical standards in the tax preparation industry by enacting S. 832, the Taxpayer Protection and Assistance Act.  NAEA believes that by requiring a competence examination and continuing education for all paid tax preparers, Congress could bring more taxpayers into compliance by improving the accuracy of tax return preparation.

NAEA appreciates the opportunity to submit comments on the Joint Committee on Taxation’s recommendations for closing the tax gap.  Should you seek further clarification or explanation of our positions, please contact NAEA at 202-822-6232.

Sincerely,
 
Lois Manning, EA
President

cc: Commissioner Everson
 National Taxpayer Advocate

¹ ACNielsen International Research (July 2005).
² Government Accountability Office, Testimony Before the Committee on Finance, U.S. Senate: Paid Tax Return Preparers (April 2006), p. 4.
³ Ibid, p. 5.