Treasury Inspector General for Tax Administration
July 21, 2009
Contact: Li-Yun Chien
Good afternoon. Thank you for that introduction, and as stated, I am Russell George, the Treasury Inspector General for Tax Administration. I appreciate the opportunity to address this important gathering.
I would like to begin by telling you a story. It's a story about Randy Nowak, a Florida businessman and owner of R.J. Nowak Enterprises.
In 2008, Mr. Nowak was being audited by the Internal Revenue Service. At the time, he had an outstanding personal income tax liability of approximately $300,000. In addition, based on his own statements, he had approximately $4,000,000 hidden offshore in a Jamaican bank account that he was concerned the IRS would discover. He also had four years of outstanding corporate tax returns for his business that he had not filed.
Many of you would agree that a taxpayer faced with a similar dilemma should probably hire an Enrolled Agent or a CPA or tax attorney to help the taxpayer negotiate a settlement in order to close the audit. Mr. Nowak . . . decided to hire a hit man . . . in order to murder the IRS agent auditing him. Nowak told an associate that the IRS agent had all of Nowak's paperwork, and if Nowak had the agent "bumped off," that would be the end of the paper trail.
In July 2008, Mr. Nowak met with a hit man in a Home Depot parking lot. Nowak handed the hit man an envelope containing ten thousand dollars in cash, which was a deposit for the twenty thousand dollars that Mr. Nowak intended to pay for the murder of the IRS agent. After identifying the IRS agent in a photograph and providing the hit man with the agent's home address, Nowak asked how much more it would cost him to have the local IRS building, "severely damaged." The two men agreed that the hit man would first take care of Nowak's original request - killing the IRS agent - and then they would talk about burning down the IRS office.
Unbeknownst to Mr. Nowak, the hit man was an undercover agent, and in March 2009, Mr. Nowak was sentenced to thirty years in Federal prison for attempting to murder a government employee.
While this story has a happy ending - though not for Mr. Nowak but certainly for the IRS agent and the rest of us in general - it is just one of the many cases investigated each year by our Office of Investigations, which is an integral part of the Treasury Inspector General for Tax Administration, or TIGTA. Our Office of Investigations, along with our Office of Audit and our Office of Inspections and Evaluations, allow TIGTA to carry out its mission of safeguarding the integrity, and promoting the efficiency, of America's tax system.
Today, I will address TIGTA's role in the government's oversight of the tax preparer community - including recent audit reports and investigations that affect tax return preparers - and the critical role that tax return preparers have in ensuring the continued success of Federal tax administration. I will next address the topic that I am sure is on everyone's mind. I am, of course, referring to the Commissioner of Internal Revenue Douglas Shulman's recent announcement regarding plans to issue recommendations by the end of the year for increasing taxpayer compliance and ensuring high ethical standards of conduct for paid tax return preparers. But first, for those of you who may not be familiar with TIGTA, allow me to provide you with a brief overview.
TIGTA was created by Congress as part of the IRS Restructuring and Reform Act of 1998 in order to provide independent oversight of the Internal Revenue Service. We are a successor organization to the IRS Inspection Service, which had been formed in 1952 in response to widespread allegations of corruption within the IRS.
TIGTA is a multifaceted organization that includes three primary operating divisions.
First, our Office of Investigations consists of Federal agents who protect the IRS from external attempts to harm or corrupt IRS employees, facilities and infrastructure. TIGTA agents investigate attempts by taxpayers or others to bribe or threaten IRS employees. They investigate tax return preparers who engage in schemes to defraud their clients and the government. And they also investigate misconduct by IRS employees, including IRS employees who solicit bribes or who improperly access confidential taxpayer information.
Second, TIGTA's Office of Audit consists of auditors who conduct comprehensive reviews of IRS programs, systems and policies and provide recommendations for improving all aspects of the IRS's administration of the Federal tax system. For example, they have recently issued reports addressing the increasing number of fraudulent refund claims processed by the IRS. They also have determined that the IRS has insufficient controls in place to monitor the accuracy of the direct deposit of refunds into taxpayer bank accounts. And they have called for improvements in the IRS's processing of carryback loss claims in order to ensure that taxpayers receive accurate refunds.
Their audit reports, which are available on our Web site, often result in substantial cost savings by identifying and recommending material improvements to IRS programs and procedures. As a result, our Office of Audit provides an excellent return on investment to the American taxpayer. During Fiscal Year 2008, the Office of Audit issued one hundred seventy nine audit reports identifying more than $2.4 billion in potential cost savings, thereby providing taxpayers with $67 in benefits for each dollar invested in the Office of Audit.
Lastly, our newest component is our Office of Inspections and Evaluations. Their inspections monitor the IRS's compliance with various programs and policies and assess the effectiveness and efficiency of IRS operations. Recent reports have addressed the need for legislative actions to reduce the multi-billion dollar U.S. international tax gap and examined the IRS's ability to protect personally identifiable information when such information is transported from one IRS office to another.
TIGTA's oversight responsibilities extend not only to the IRS, but, in addition, to the IRS Office of Chief Counsel and the IRS Oversight Board. As an independent office within the Department of the Treasury, I report directly to the Treasury Secretary and to Congress.
Oversight of the IRS is not an easy task. The IRS is one of the largest governmental organizations in the world, with approximately one-hundred thousand employees. Each year the IRS collects almost $3 trillion in taxes and issues approximately $430 billion in tax refunds. As IRS Commissioner Douglas Shulman has said, the IRS is the "face of government." Each year, it interacts with practically every American adult and business. Few, if any, government agencies can make the same claim.
Monitoring IRS activities is a formidable challenge, but it is one that the men and women of TIGTA are committed to carry out with the highest level of professionalism, quality and service. After all, the IRS's performance - from how efficiently and effectively it collects taxes to how well it helps taxpayers and tax return preparers comply with filing obligations - is critical to our nation's economic well-being.
As we will further discuss, we are reaching out to you, the tax preparer community, to ask for your help in carrying out our mission. We look forward to continuing to work with all of you in making sure that the integrity of the American tax system is preserved no matter what challenges our country may face in the years ahead.
Let's spend a few minutes discussing the very specific and also the very critical role that TIGTA's Office of Audit and Office of Investigations play in the government's oversight of the tax preparer community. I will begin with our Office of Audit.
This year, as well as in prior years, TIGTA's Office of Audit issued several reports identifying weaknesses in IRS programs and policies affecting tax return preparers.
In a report issued in February, TIGTA found that the process that taxpayers must use to report complaints against tax return preparers is ineffective. The IRS processed approximately eighty three million individual Federal income tax returns in calendar year 2007 that were prepared by paid tax return preparers. However, the IRS cannot determine how many complaints against tax return preparers it receives, how many complaints are investigated, and the total number of multiple complaints filed against a specific preparer or firm. As a result, the IRS is not able to evaluate such data in order to understand the root causes of taxpayer problems, identify areas of noncompliance and address procedures that need improvement.
TIGTA recommended that the IRS should clarify the guidance that it issues to taxpayers regarding the preparer complaint process. In addition, it should develop a standard form for tax return preparer complaints that includes items necessary for the IRS to appropriately evaluate the legitimacy of such complaints. Once the form is developed, a database or tracking system should be implemented to monitor such complaints. In response to our report, the IRS agreed to update its guidance regarding tax return preparer complaints and address the other recommendations made in the report.
In another report, also issued in February of this year, TIGTA found that tax practitioners who promoted abusive tax shelters continue to be able to represent taxpayers before the IRS. The IRS Office of Professional Responsibility, or OPR, regulates the conduct of licensed tax professionals who act as power of attorneys for taxpayers that might be involved in an audit, collection proceeding or an appeal of an IRS determination. TIGTA found that OPR was unaware of a significant number of licensed tax practitioners who were assessed penalties, sentenced in a criminal proceeding or otherwise ordered by a court to stop practicing due to tax shelter violations. As a result, these tax practitioners were still eligible to represent taxpayers before the IRS.
The report noted that misconduct by such practitioners can erode public confidence in the tax system and create unfortunate consequences for taxpayers. We recommended that, among other things, the Office of Professional Responsibility determine whether additional disciplinary actions are warranted for tax practitioners who were punished for abusive tax shelter violations. We also recommended that OPR establish written procedures for controlling and reviewing referrals of such practitioners from other IRS operating divisions. IRS management agreed with all of our recommendations.
Two additional audit reports, both issued in 2006, highlighted other weaknesses with respect to the Office of Professional Responsibility's oversight of tax practitioners. In one report, TIGTA found that the Office of Professional Responsibility does not always ensure that enrolled agents are qualified to represent taxpayers. The report found that OPR does not have consistent criteria for issuing enrolled agent licenses, verifying tax compliance and criminal backgrounds of enrolled agents, or identifying enrolled agents who are no longer eligible to represent taxpayers. As a result, taxpayers cannot be assured that enrolled agents are eligible to represent them before the IRS and have the requisite technical skills to provide such representation.
TIGTA recommended, among other things, that OPR implement processes for conducting criminal background checks on persons who apply to become enrolled agents and identify enrolled agents who are not compliant with their own Federal tax obligations. IRS management agreed with our recommendations.
In the second report issued that same year, TIGTA found that the Office of Professional Responsibility needs to improve its ability to identify and take action against incompetent and disreputable tax practitioners. The study found that there are a significant number of tax practitioners whose conduct appears to warrant disciplinary action by the IRS but who have not been identified by OPR. In particular, some tax practitioners who have been convicted of tax-related crimes or whose licenses have been suspended or revoked by State authorities have not been suspended from practice before the IRS.
TIGTA recommended that, among other things, OPR should develop a process to obtain relevant information on State disciplinary actions by coordinating with State licensing authorities such as State bar associations and boards of accountancy. IRS management agreed with this recommendation.
TIGTA's Office of Investigations also has a role to play with respect to oversight of the tax preparer community. As I mentioned earlier, our Office of Investigations investigates tax return preparers who engage in schemes to defraud their clients and the government.
We routinely investigate the following three types of allegations involving tax return preparers. First, TIGTA investigates preparers who overstate their qualifications - for example, those who falsely claim to be licensed attorneys, certified public accountants or enrolled agents. Second, We investigate preparers who steal clients' tax payments or tax refunds. And third, TIGTA investigates preparers who impersonate IRS employees or misuse the IRS seal or logo. These are all activities that damage the reputation of the tax preparation industry as well as the overall integrity of tax administration.
Allow me to elaborate by providing you with examples of several actual pleas and convictions of tax return preparers that resulted from TIGTA investigations.
In January of 2009, Abdul Wahid pleaded guilty in California to mail fraud, theft of government property and aggravated identity theft and was sentenced to one hundred and thirty-two months in prison. According to court documents, Wahid owned and operated a tax return business in Los Angeles called Global Accounting and Tax Service where he would prepare personal and corporate tax returns for his clients. Those returns would show significant amounts of tax due to various taxing authorities.
Wahid would direct his clients to give him checks in the amounts of the taxes due, as reflected on the return, by falsely representing that he had already paid the tax owed to the relevant taxing authority and that the client needed to reimburse him. He would then deposit the checks into his own accounts and not pay his clients' taxes. In order to avoid detection, Wahid would prepare different returns showing little or no tax due and submit those returns to the taxing authorities.
Another example is James Richards, a tax preparer, who in July of 2008 was sentenced in a Missouri Federal court for embezzling payments intended for the IRS. As the owner of Holliday and Associates, Richards was hired by his clients to prepare and file their tax returns as well as make their Federal tax deposits in a timely manner.
Richards routinely asked clients to make payments toward their anticipated tax liability to him or his company but would then fail to make the clients' required tax deposits, pay over their estimated tax payments or even file the required forms with the IRS. He also falsely represented himself as a CPA in documents submitted to the IRS. Richards was sentenced to almost seven years in prison without parole and ordered to pay restitution of over $380,000 dollars.
In April of 2008, Morgan Taylor Mayfaire was indicted in U.S. District Court on thirty-five counts of preparing fraudulent tax returns and eight counts of falsely pretending to be an IRS employee. According to court documents, she prepared tax returns for her clients, and in return, her clients paid her fees in the amount of ten percent of the refund claimed on their returns. Mayfaire caused approximately $475,000 to be fraudulently refunded by the IRS to her clients. She did so by willfully aiding and assisting in the preparation of Forms 1040 and 1040X with fictitious or inflated deductions that she knew the taxpayers were not entitled to claim.
In furtherance of this scheme, she also pretended to be an IRS employee by falsely representing to taxpayers that, as an IRS employee, she had ways of increasing taxpayer deductions on tax returns that no other person would know. She thereby induced taxpayers to hire her to prepare their taxes, file false tax returns, collect improper tax refunds, and to pay her fees.
In March of 2008, Angelo Principio was indicted in U.S. District Court for theft of public money. According to court documents, Principio was the principal owner and operator of Jersey Tax and Financial Services located in Middlesex, New Jersey. Jersey Tax and Financial Services provided a variety of services to its clients, including the preparation and filing of electronic Federal income tax returns.
From January 2005, through December 2006, Principio and other individuals knowingly converted to their own use approximately $225,000 dollars through a tax refund scheme. As part of their scheme, Principio and others signed accurate Federal tax returns for their clients and provided them with hard copies of these returns. Without the knowledge or consent of the taxpayers, Principio and others then created, substituted, and signed inaccurate tax returns which inflated the tax refund amounts. These fraudulent tax returns were filed electronically with the IRS. The fraudulently procured tax refund checks were then forwarded to Principio, who used the improperly obtained funds for his own personal benefit.
A final illustration dates to March of this year when a Federal grand jury returned a seventeen count indictment charging Keith Thayer Towns, of Fairfield, California, with sixteen felony charges of false statements to the IRS and one misdemeanor charge for misusing the name of the IRS. The indictment alleges that from March 2004 to March 2009, Towns submitted Power of Attorney forms to the IRS in which he falsely represented that he was an Enrolled Agent certified by the IRS. The indictment further alleges that Towns advertised that he was an Enrolled Agent on his Web site.
All of us can agree that we cannot allow this type of misconduct by tax return preparers to continue. Not only are these actions illegal and unethical, but they also severely damage the credibility and reputation of the entire tax preparation community. Our investigators ask for your help in identifying such unscrupulous preparers.
TIGTA periodically receives allegations about preparers who have stolen tax payments intended for the IRS or tax refunds intended for their clients. These often come from preparers who are working with new clients. These clients may come to you because they did not get their refund in a timely manner or they received an inquiry from the IRS about a missed payment or have had a lien placed on their property.
If you suspect that a preparer has misrepresented his or her qualifications or is engaging in a scheme to defraud clients or the government, we ask you to call our hotline.
Similarly, if you suspect that your client intends to bribe or harm an IRS employee, or if you learn of an IRS employee soliciting a bribe from you or your client, we ask you to call our hotline. Our investigators routinely receive calls from tax practitioners, and they are specifically trained to deal with these types of situations.
TIGTA's Office of Audit also works with tax return preparers. Our auditors are interested in hearing about your experiences with the IRS. They are interested in hearing what you think works and what doesn't, and what is overly burdensome to you and your clients. Your feedback, based on your experience, is welcomed and appreciated. In addition, our auditors are interested in hearing from you about any areas of Federal tax administration that you believe can be streamlined, made more efficient or otherwise made more user-friendly.
More than half of all taxpayers come to you as tax return preparers to have their taxes prepared and filed. You know what questions they are asking, and you know where the difficulties lie. Your first-hand knowledge and interaction with taxpayers and their concerns provides invaluable insight that is welcomed by our audit teams when it comes to reviewing and making recommendations to the IRS. As a valuable part of tax administration, your input is greatly appreciated.
Now let's turn to the topic that is probably on everyone's mind - the IRS Commissioner's recent announcement regarding recommendations that he plans to issue by the end of the year for increasing taxpayer compliance and ensuring high ethical standards of conduct for paid tax return preparers.
As all of you know, tax return preparers are an important part of the Federal tax system and provide a highly valuable service to their clients. They not only ensure that their clients are able to successfully navigate an increasingly complex tax code and satisfy filing obligations, but they also play a key role in educating clients about the tax code and the importance of tax compliance.
On the other hand, unqualified or unethical tax return preparers can cause enormous damage to the Federal tax system, to taxpayers and to the tax preparer community as a whole. Currently, there are no national standards that preparers are required to satisfy before selling tax preparation services to the public. In most States, anyone - regardless of training, experience, skill or knowledge - is allowed to prepare Federal income tax returns for others for a fee.
Recently, IRS Commissioner Douglas Shulman announced that, by the end of the year, he will make recommendations to the Treasury Secretary and the President on how to better leverage the tax preparer community for the overall benefit of the tax system. The Commissioner will issue his recommendations after conducting numerous meetings throughout the summer with taxpayers, tax return preparers and other constituents. TIGTA, along with the National Taxpayer Advocate, support the Commissioner's efforts to address these matters.
TIGTA has been at the forefront of recommending that the IRS require the use of a single Federal identification number for each paid preparer as part of its oversight of tax preparers.
We have called for the use of a single identification number since 2006. More recently, in a September 2008 audit report, TIGTA found that a majority of tax returns prepared by a sample of unenrolled preparers contained substantial errors. During the 2008 filing season, TIGTA auditors posed as clients in a large metropolitan area and paid to have tax returns prepared at twelve commercial chains and sixteen small, independently owned tax return preparation offices. The preparers in the sample were unlicensed and un-enrolled.
TIGTA found that these preparers made substantial errors when completing tax returns and correctly prepared only thirty-nine percent of the returns. Of the sixty-one percent of the returns that were prepared incorrectly, sixty-five percent contained mistakes and omissions that were considered to have been caused by human error or misinterpretation of the tax laws. The remaining thirty-five percent contained misstatements and omissions that were considered to have been caused by willful or reckless conduct.
To help alleviate these problems, we recommended that the IRS develop and require identification numbers for all paid preparers, which would enable the IRS to better identify and evaluate problems with compliance.
Just yesterday, TIGTA reiterated its call for the use of unique Federal identification numbers in an audit report which found that inadequate data on paid preparers impedes effective oversight of tax return preparers by the IRS. The report found that while more than half of all tax returns filed with the IRS are prepared by tax preparers, the IRS cannot determine the population of preparers or whether the preparers are compliant with their own tax obligations, or with other tax laws and regulations.
The IRS maintains significant data on paid preparers, but it is not feasible to use such data to track or monitor preparers' activities and compliance because preparers use multiple identifying numbers when dealing with the IRS.
Under current law, preparers are not required to use a single identifying number on returns that they prepare for a fee. While the IRS requires paid preparers to sign the tax returns they prepare, preparers may identify themselves using either a Social Security Number or a Preparer Tax Identification Numbers, or PTIN. If a preparer is self-employed or a member of a firm, he or she is also asked to provide an Employer Identification Number, or EIN.
The IRS, however, does not validate preparers' identifying numbers - EINs, PTINs or Social Security Numbers - when processing returns. Furthermore, tax returns filed without identifying numbers are not rejected because processing returns is a priority for the IRS. In fact, hundreds of thousands of tax returns filed by preparers in calendar year 2008 contained no identifying numbers.
Data on preparers are decentralized among more than twenty different IRS systems that are not integrated, and there currently are no data standards among these systems to easily match preparer information.
Test results from a statistical sample of one hundred thirty-nine preparers demonstrated many of the challenges the IRS would face in attempting to identify the population of preparers. For example, multiple identifying numbers were used by sixty-three percent of the preparers in the sample - that is, preparers would use one identifying number, such as their Social Security Number, on certain returns they prepared for a fee and a different identifying number, such as their PTIN, on others returns prepared that same year.
Certain preparers were found to have used their Employer Identification Numbers instead of their Social Security Numbers or PTINs when identifying themselves on returns. And six percent of the preparers in the sample could not be identified at all because the identifying numbers they provided were invalid.
The names of the one hundred thirty-nine preparers in various IRS systems were inconsistent forty-five percent of the time. And five percent of the preparers in the sample were found not to be compliant with their own tax obligations.
A unique identifying number for each preparer along with an effective management information system are necessary in order for the IRS to facilitate tax administration and provide effective oversight of preparers. Requiring that all preparers use a unique identifying number would allow the IRS, for example, to use the PTIN application process to identify the population of preparers.
Since Fiscal Year 2005, the IRS's strategic plans have included an objective to ensure that accountants, attorneys and other tax practitioners adhere to professional standards and follow the law. Since Fiscal Year 2006, TIGTA has identified concerns that could prevent the IRS from effectively identifying all preparers or enforce the requirement for preparers to sign tax returns and/or provide identifying numbers. Requiring a PTIN for all preparers would help provide the standardization that the IRS needs to identify the preparer population and enforce the Internal Revenue Code.
Our report recommended that the IRS complete its study on requiring preparers to use a single identification number when filing returns in time for the 2011 filing season. The IRS also should develop a method to enforce Internal Revenue Code Section 6695(c) that imposes a penalty on preparers who do not provide an identification number on tax returns they prepare. TIGTA also recommended legislative changes to require paid preparers to be compliant with their own Federal tax filing requirements in order to be allowed to prepare tax returns for others for a fee.
In response to our audit report, the IRS agreed in principle that preparers should use a single identification number when filing tax returns. The IRS further stated that the tax return preparer review currently underway is expected to encompass this issue as part of the IRS Commissioner's comprehensive recommendations to be issued by the end of the year.
Several other agencies and organizations have commented in the past about proposed changes to the IRS's oversight of tax return preparers.
For example, the National Taxpayer Advocate made three specific recommendations in her recent 2009 report to Congress. First, she stated that the IRS should work with the Treasury Department to recommend enactment of legislation to regulate Federal tax return preparers, including registration of unenrolled preparers, a basic examination to ensure a minimum level of competency among paid preparers and continuing professional education requirements.
Second, the Advocate called for additional IRS enforcement actions directed at return preparers who fail to perform due diligence or consciously facilitate noncompliance. Third, she recommended the mandatory use of PTINs by preparers in order to enable the IRS to identify return preparers who submit unreasonably high rates of inaccurate returns.
In 2008, the General Accountability Office, or GAO, also recommended the use of single identification numbers for paid preparers. And more recently - in fact, just last week - the Director of the IRS Office of Professional Responsibility commented on the use of preparer identification numbers. It remains to be seen, however, whether licensure, certification and continuing education requirements - as well as single identifying numbers - will be part of the Commissioner's final recommendations regarding preparer oversight.
Several bills have been introduced over the years containing proposals to regulate tax return preparers, and, in 2005, the House Committee on Ways and Means, Subcommittee on Oversight, held a hearing at which representatives of five organizations testified with respect to the regulation of return preparers. One of the groups was the National Association of Tax Professionals.
As many of you know, in 2005, the NATP issued recommendations for legislation to register paid income tax preparers. NATP's recommendations included registration or licensure of paid preparers - possibly through the existing PTIN system - in order to enable taxing authorities to determine the number of people that prepare tax returns and the quality of the work that they do. NATP also called for minimum standards testing and education requirements.
While the Commissioner's recommendations with respect to the tax preparation industry will not be presented until at least the end of the year, I encourage all of you to participate in the comment process by attending the various town hall meetings that the IRS will hold throughout the country. In fact, the IRS has already scheduled its first forum in Washington, D.C., on July 30th. I understand that the National Association of Tax Professionals is scheduled to be one of the groups represented at the forum, and I encourage you to continue to participate in the process throughout the rest of the year.
I close this session by reiterating the fact that we all must work together to ensure the integrity of the Nation's tax system. Throughout this presentation, I called for your participation and involvement in our activities, including visiting our Web site at www.tigta.gov, emailing our TIGTA Hotline Complaints Unit at Complaints@tigta.treas.gov and/or calling our TIGTA Hotline at 1-800-366-4484.
The work we do affects you and your clients, and it is in the best interest of your clients - as well as all taxpayers - that we do our best to ensure that their taxes are collected effectively and efficiently and that the integrity of our Nation's tax system is preserved.
Thank you again for the opportunity to speak with you today, and I hope you enjoy the rest of the conference.
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