Issues Covered in this Section:
The IRPAC Modernization Subgroup continued to focus on Electronic Tax Administration, including items carried forward from the 2007 IRPAC Final Report and new initiatives identified by both IRS and IRPAC.
Several years ago IRS looked into the advisability of folding a number of electronic capabilities (with recommended enhancements) into a conceptual clearinghouse. The Service commissioned an outside consulting firm to explore this concept in depth and develop cost figures for various configurations and scenarios, one of which was enhancing the FIRE System’s capabilities and making it part of the clearinghouse concept. After consideration of the consultants’ cost findings, no action was taken by the Service.
In April, the IRPAC Modernization Subgroup met with Jim Weaver and Arleen Rogers, both of ETA, for an update on the clearinghouse concept. At that briefing, the subgroup learned that there was little if any ETA attention being given to the clearinghouse concept, that there was no internal “champion” to support the proposal and, most significantly, there was no business proposal in the modernization budget to support these efforts over the next several years. A required first step for the budget process would be a business proposal; the subgroup was encouraged to draft a business proposal.
In August the subgroup had two teleconferences, the first with ETA Director David Williams and members of his staff and the second with Melanie Mose of the
As a result of these meetings, the Modernization Subgroup believes the current FIRE System requires enhancements to maintain effectiveness in supporting users in the near term.
IRPAC is encouraged by the attention given to Electronic Tax Administration. We support the “four pillars” strategy covered by Mr. Williams in his briefing. We believe that the Customer Account Data Engine (CADE), Account Management System (AMS), Modernized Efile (MeF) and Data Strategy will benefit IRS and all of the key stakeholders. We appreciate the attention despite the reduction in resources and the retirement of some key individuals.
Following are the key enhancements we recommend; the FIRE System should:
1) Support Two-way Communications. The current FIRE System only supports one-way delivery of information reports, from filers to IRS. The current system lets the payer community transmit reports but provides minimal acknowledgement information confirming receipt of the filing. The filing community strongly urges IRS to deliver other notices and correspondence electronically. Examples of other correspondence are B (CP2100) and C (penalty) notices.
The filing community strongly supports two-way electronic communication of information. By eliminating paper notices, the payer community reduces the cost of processing them. The electronic transmission of these notices will improve compliance and improve service to their customers (taxpayers). Compliance will be improved by the ability to resolve issues earlier in the error resolution process. Customer service will be improved by eliminating delays in paper notice processing and potential penalty avoidance.
Providing two-way electronic communication of notices will reduce costs for B and C notices produced on paper and the costs of creating notices via CD and mailing them to payers, as is done now for larger organizations. Two-way communications will also eliminate the cost of recreating lost paper notices. Additionally, two-way communication would help eliminate delayed processing from lost or misdirected notices that go to the current corporate address on file as a result of the Service’s single address on file for a taxpayer system. This issue occurs primarily in large corporations where tax or payroll processing may be in a different location than accounts payable or securities processing.
Often, closed businesses and loss of information hamper IRS collection activity. IRS will be able to deliver B and C notices much earlier electronically than by using the current process. By delivering and resolving issues earlier, IRS will be able to resolve and collect more effectively thereby increasing collection.
2) Enhance Transmission Validation. Filers currently transmit information reports and only receive an acknowledgement that the filing was received with a status saying that it was acceptable or unacceptable. The ability for IRS to perform upfront validation would eliminate the need for many downstream error correction processes.
Providing upfront validation of reports allows payers to resolve issues prior to back-end processing. The timeliness of error resolution will reduce costs associated with later error resolution processes.
Providing upfront validation of information reporting filings will reduce IRS error resolution costs associated with simple validations that currently require human intervention.
3) Support Unattended Transmission. The current FIRE System uses a web interface that allows for a simple transfer of a single filing. This interface requires a human to interact to perform filing functions. This is an effective method for filers with few transactions. This interface is not effective for large transmitters filing on behalf of many payers. Current technology allows software programs to perform direct communication without requiring direct user interaction with a given system. Those updated methods also provide a higher degree of security based on the availability of tools.
Providing automated computer-to-computer transmissions and supporting the current data strategy will reduce IRS costs incurred based on the support of varying standards and subsequently with supporting the large transmitters.
4) Replace the current file format to support the Service-wide Data Strategy. The current system relies on an outdated file format understood only by IRS legacy systems. More modern formats such as XML provide for extensibility (ability to use and understand the data beyond the current year). State taxing agencies are also in the process of adopting XML as a filing format. Those agencies will begin to expect these updates as IRS’s data strategy is implemented.
By supporting widely-accepted modern formats and processes that are used by other tax agencies, payers will reduce the cost of development related to supporting outdated formats. The extensibility of more modern formats also will reduce the cost of management and retrieval of data in the future. Extensibility provides more effective use of data by clearly defining the information that is included in the filing.
The IRPAC Modernization Subgroup continued to focus on the concept of masking the Taxpayer Identification Number (TIN) on information returns, carrying forward this issue from the 2007 IRPAC Final Report. Filers are required to send statements to payees showing name, address and Social Security Number (SSN). The payee statements are mailed in an envelope with the legend “Important Tax Document Enclosed.” This combination is an invitation to identity theft, an issue of great concern to the Service and both payers and payees. Last year IRPAC recommended that IRS continue to study the concept of masking TINs on information returns. Based on additional discussions with the Service during 2008, IRPAC is recommending the Service permit filers to mask the TIN in a format to be determined by the Service.
In an effort to combat the rising problem of identity theft, masking the recipient’s TIN on all information returns sent to payees would be a pro-active measure toward enhancing taxpayer privacy and thwarting identity theft. We continue to believe this proposal will satisfy all purposes of information reporting with no harm to IRS processing or the filing of tax returns, and will greatly benefit both taxpayers and the Service by reducing the likelihood of identity theft.
IRPAC met with Director Deborah Wolf and Deputy Director Rich Phillips from the Privacy, Information Protection and Data Security (PIPDS) Office this year and learned that PIPDS has taken the lead on several projects that identify the use of TINs as part of efforts to reduce the overall use of these numbers on IRS correspondence. Rich Phillips has been reviewing all uses of SSNs with the goal of reducing such use Service-wide and assessing downstream effects of doing so. Deborah Wolf said the IRPAC recommendation would be a project among many in PIPDS and would welcome prioritization help from IRPAC. IRPAC also learned that the Service has started masking TINs (by using only the last four TIN digits) on several types of correspondence. The recommendation to allow payers to mask TINs on information returns mailed to recipients would complement current PIPDS efforts in this direction. Implementation of this measure is fully supported by Director Wolf who agreed to take ownership of this recommendation and implementation measures.
IRC Section 6109 (a) (1) requires provision of identifying numbers when required by the Secretary (emphasis added). For this purpose, for individuals the identifying number is the individual’s SSN. Subsection (d) further states that the SSN shall be used “except as shall otherwise be specified under regulations.” The consensus of the IRPAC Modernization Subgroup is that since the use of an identifying number is left to the Secretary, IRS could deem use of the last four digits to meet the requirement in Section 6109 through issuance of guidance by IRS and, further, that no legislative changes are needed. (Forms sent to the IRS in the form of electronic filings, will have the complete TIN). Rich Phillips added that Submission Processing (W&I) and the Social Security Administration should be consulted on this item. Mr. Phillips also indicated the need to identify who in the Office of Chief Counsel would have the lead on this in an effort to confirm whether a regulation change by the Treasury is required. Additionally, Mr. Phillips thought that Chief Counsel may want to solicit public input through a Federal Register announcement of a comment period. Lastly, Mr. Phillips again confirmed that all federal agencies are under an OMB directive to reduce, to the degree possible, use of personal identifying information such as SSNs and this recommendation would go a long way toward the goal for the IRS.
Our recommendation is that the IRS develops guidance to allow filers to not display the entire 9 digit TIN on Forms 1099, 1098, 5498 and W-2 sent to the recipient. In order to move forward with this recommendation, IRPAC suggests the Service take the following actions:
- Work with the Social Security Administration, tax filers, state agencies and practitioners to come to agreed upon masking criteria.
- Involve state agencies to understand the impact to their processes if the employee’s SSN is masked on information reporting tax returns.
- Start to formulate outreach programs and media materials to fully inform the public of their responsibilities with respect to their SSNs and ensuring its accuracy in their tax filings.
- Continue to look at other additional and alternative ways to assist with ramifications of identity theft and how the Service may be able to be more effective in combating the issue.
- Work with IRPAC in a consultative role with PIPDI to help prioritize any other forms that could be placed under this guidance.