IR-2011-108, Nov. 8, 2011
WASHINGTON—It’s great to be here with the AICPA. I
think it’s fair to say that it has been a busy time for
all of us in the tax community…and especially the IRS.
We’ve had a lot on our plate the past few months…a
number of important issues and initiatives, not to mention
a shifting but important set of discussions about fiscal
choices ahead for our nation.
It’s worth pausing to reflect on the critical role
that the IRS and practitioners, including CPAs, play in
running a fair and efficient system for collecting the
revenues that fund the government.
Whatever changes come our way, the productive working
relationship that the IRS and CPA community enjoy remains
a critical element of our tax system. You provide
education and services to your clients… and you provide
us with valuable feedback on a wide array of issues that
Today, I want to talk for a little bit about some of
our priority programs, such as the Return Preparer
Program, the evolution of our relationship with our
largest corporate taxpayers, including Schedule UTP, and
our work on what we’re calling a real time tax system.
The common thread that runs through them is points of
leverage and working smarter.
Daniel Webster once said that “mind is the great
lever of all things.” And we’re putting our collective
minds together to leverage expertise…innovative
ideas…new technology…and mutual interests. We want to
leverage them all to achieve shared goals…important
goals for taxpayers large and small.
Let’s start with the Return Preparer Program which is
one of the most important initiatives the IRS has
undertaken in recent memory…a real game changer that
leverages preparers’ expertise and commitment to quality
service and the integrity of the tax system.
Boiled down to its essence, the program will ensure a
basic level of competency for return preparers while
enabling us to focus on finding unscrupulous preparers.
And let me thank the AICPA. You have been a strong ally in
not only our efforts to boost service and compliance, but
in fine tuning the program and making it better.
Here’s a quick rundown of our efforts to date. First, we
had to identify all preparers and have them register.
Since Sept. 28 of last year, almost 740,000 individuals
have registered and obtained a Preparer Tax Identification
Number, or PTIN, and are now in our tax professional
database. And we’re already learning some interesting
facts about not only the size, but the nature of the tax
preparer community. For example, over 60 percent of PTIN
holders are not attorneys, CPAs, or enrolled agents.
PTINs have to be renewed annually and last month we
launched renewal open season. We’re encouraging those
740,000 PTIN holders to renew before the end of the year.
At the same time, we’re continuing to work to identify
those people who still haven’t gotten a PTIN. More on
that in a moment.
While PTIN registration was moving on one track, we
also issued a number of proposed guidance documents that
focused on the next phase of the program.
This phase involves the launch of a new competency test
for certain tax return preparers, as well as a new
continuing education requirement. In addition to testing,
we’ve issued a number of proposals regarding background
checks. Let me give you the state-of-play.
From the beginning, we planned to exempt CPAs,
attorneys, and enrolled agents from the testing and
continuing education requirements as you already have more
stringent testing and education requirements.
But we received valuable input from stakeholders,
including the AICPA, that helped us create what I think is
a better overall final product. Let me highlight a few
First, is the creation of a “supervised preparer”
category which makes a lot of common sense to us …and to
you. We refined the rules that we initially proposed to
provide greater flexibility for people who work in a
professional firm and prepare returns under the
supervision of an accountant, enrolled agent or attorney.
These supervised preparers must obtain a PTIN and renew
it each year, but they will be exempt from competency
testing and continuing education requirements. You’ve
been helpful to us in determining how to define the
supervised preparer category… how to program our online
system regarding it …and how we should notify the
Second, while we want to ensure a minimum level of
competency in the preparer community, we do not want
newly-registered return preparers to oversell what this
means. Therefore, we created a disclaimer statement for
individuals who will be future Registered Tax Return
Preparers. This was to ensure that registration with the
IRS is not viewed as an endorsement by the IRS.
And so, Registered Tax Return Preparers will need to
include a clear statement on any paid advertising
involving print, television or radio that “the IRS does
not endorse any particular individual tax return preparer,”
and that more information is available about this on
Third, we clarified the level of review IRS will
conduct before approving continuing education providers.
Indeed, we revised the final Circular 230 to allow for
more flexibility in recognizing and approving continuing
education programs and providers.
And fourth, we have received input on the recent
background check and fingerprinting proposals. While we
all share the same goal of ensuring that there is adequate
due diligence on people entering this field, the AICPA and
others have made a number of important points that we need
to think through regarding how best to do this.
And so we’ve decided to hold off on fingerprinting as
we consider the issues that have been raised, and have
further discussions with interested parties.
Of course, for return preparers who are not CPAs,
attorneys, or enrolled agents we’re still going ahead
with the launch of the new Registered Tax Return Preparer
testing program, which we expect to be up and running
Finally, I’ve been asked whether the IRS intends to
extend the competency tests beyond the 1040 family of tax
forms. I recognize that together we’ve taken a big step
to establish a new set of standards for the return
preparer community, and it will take time for the IRS and
practitioners to implement them. I intend to give this
process time…and I have no plans to extend the testing
requirement to other forms.
Now, as we set up the registration, testing and
continuing education components of our return preparer
initiative, it is also important that we focus on
ferreting out unscrupulous preparers who damage the good
name of honest return preparers and cause damage to the
overall tax system.
Therefore, we have a comprehensive strategy to focus on
preparer enforcement and compliance. This year, we are
focusing on two categories of preparers. First, are those
preparers whose clients’ returns send out a warning
signal of serious problems with accuracy and errors. We
are also focusing on those preparers who are not signing
returns and identifying themselves with a PTIN, also known
as “ghost preparers.”
We also intend to continue our outreach to
practitioners on compliance topics. And each year we are
getting better and better at targeting communications to
those who need it most.
Let me give you a high-level overview of our plans for the
coming year. Our efforts will be focused on places of
highest risk …places where the vast majority of
preparers who play by the rules should want us to focus.
Beginning soon, the IRS will send letters to tax return
preparers who have been identified as “high risk.” The
letters are intended to bring to these return preparers’
attention that we’ve noticed some questionable traits on
a number of their Schedules A, C, or E. We ask
preparers to review the rules in these areas and to ensure
they are meeting their due diligence requirements when
These letters will also help ensure taxpayers get the
service for which they paid and they deserve. And we want
to help provide a level playing field to the reputable tax
return preparers who abide by the rules. Let me be clear
that these letters are sent based on real data showing
historical issues with taxpayer returns.
Some additional compliance efforts will include, for
example, in-person visits focused on return preparers
we’ve identified as “egregious” with high error
rates. And we will be ratcheting up our efforts to
identify “ghost preparers.”
We will also send letters to return preparers whose
clients’ returns contain traits commonly associated with
highly questionable Earned Income Tax Credit claims. In
addition, we will conduct in-person visits with EITC
return preparers to discuss due diligence requirements,
assessing penalties against those who are found to be
While most return preparers are professionals, who provide
honest and excellent service to their clients, some make
basic errors that must be addressed. And then there are
those who engage in fraud and other illegal activities.
Our Criminal Investigation division will continue to
conduct undercover shopping visits to return preparers
suspected of engaging in fraud, and we will continue to
work closely with the Department of Justice to pursue
civil or criminal action against unscrupulous return
And finally, our Office of Professional Responsibility
will continue to ensure high standards of ethical conduct
for the practitioner community, including newly-registered
return preparers. I think that this office, which operates
independently from our enforcement activities, is vital to
fair tax administration and I intend to increase the
resources devoted to core OPR activities.
Next, I want to spend a little time talking about our
efforts to transform our relationship with our large
As I’ve said before, we need to work smarter. We need
to be more efficient. We need to create innovative
strategies for issue resolution that are less time and
resource intensive for both the IRS and you… and the
corporations you may represent. Let me bring you
up-to-date on where we stand.
First, is the CAP program, which we made permanent
earlier this year. One of the big changes in CAP is that
you no longer have to be invited to join the program. Any
corporation that meets the program’s requirements and
wants to enjoy the benefits of open, cooperative, and
transparent interactions can now apply.
The number of corporate taxpayers in the program has
already grown from 17 in the 2005 tax year – when the
pilot began – to 140 taxpayers in the 2011 tax year.
We’ve also expanded CAP by adding two new programs.
The first is a new pre-CAP program that will provide
interested taxpayers with a clear roadmap of the steps
required for gaining entry into CAP. We’ve already
accepted a number of taxpayers into pre-CAP. The second is
a new CAP maintenance phase that’s intended for LB&I
taxpayers who have been in CAP for several years and have
established a track record of working cooperatively with
CAP maintenance will allow both the IRS and the
taxpayer to minimize resources while still ensuring
compliance. It will also allow taxpayers to resolve issues
with the IRS as they arise. A small number of taxpayers
have now been moved into CAP maintenance.
In recent months I’ve been talking with CAP
taxpayers, and the feedback I’ve gotten is that the
paradigm of transparency and certainty is a welcome change
in our tax system.
Another important tool is the Quality Examination
Process which replaced the Joint Audit Planning Process.
QEP promotes focused exam plans with the core elements
being mutual communications, involvement and engagement.
It allows us to engage and involve our large corporate
taxpayers throughout the examination process…from the
earliest planning stages right through resolution of all
issues and completion of the case.
QEP conveys a number of benefits to both the IRS and
taxpayers. It streamlines processes…reduces burden and
duplication…and improves our communications and
consistency in our dealings with taxpayers.
We completed our first year of QEP in June and have
begun a review of the program. We are also continuing to
review the technical quality of our casework.
Fast Track Settlement is an additional resolution tool
we’re encouraging our agents to use. We’ve trained our
technical employees how to use Fast Track, and have
removed internal barriers that may have discouraged its
While it’s too early to say how many more taxpayers
will take advantage of Fast Track, we have witnessed an
uptick in participation which is promising. I am committed
to expanding our ability to resolve issues more quickly
with taxpayers who want to do so.
But whether it’s CAP, QEP, Fast Track or any of our
other programs, the whole point is to constantly seek
improvements…and do a better job each and every day.
We have another important tool in our toolkit that can
help us cut through the fog of uncertainty. The Industry
Issue Resolution Program – or IIR – can help the IRS
and corporate taxpayers reach administrable, common sense
solutions for uncertain tax areas.
For example, by using IIR, we resolved some
long-standing controversies that had plagued the
telecommunications, and transmission and distribution
industries for years. We see IIR as a very useful tool for
issue resolution and continue to work on a number of new
Let me now turn to our uncertain tax position reporting
requirement. It gets to the heart of information we need,
while respecting a taxpayer’s internal analysis and
deliberations. It moves us towards our shared objectives
of efficiency, certainty, and consistency.
Here’s a quick rundown of where we stand. In
September 2010, we released the Final Schedule UTP and
Instructions effective for 2010 tax years. The changes we
made to the initial proposal addressed a number of
taxpayer concerns. For example, the phased-in
implementation of the schedule for corporations with
assets under $100 million… the elimination of the
requirement to calculate and include a maximum tax
adjustment for each position…and the elimination of
administrative practice positions address important burden
and reporting concerns raised by affected taxpayers and
their representatives, while still allowing us to achieve
the proposal’s goals.
We also clarified and strengthened the policy of
restraint through three key changes:
- We provide that disclosing issues on the Schedule
UTP does not otherwise affect the protections afforded
under the policy of restraint.
- We provide that drafts of issue descriptions and
information regarding quantification or ranking of
issues are protected under the policy.
- We adopt a policy that we will not seek documents
that would otherwise be privileged, even though the
taxpayer has disclosed the document to a financial
auditor as part of an audit of the taxpayer’s
As we move forward, we’re doing outreach to industry
groups to help clarify any issues or questions with the
schedule and we established a centralized review process
in LB&I to help us to identify trends, understand gaps
in guidance and determine the proper treatment of UTPs.
In addition, we created and implemented a process for
identifying and centrally collecting returns with UTP
schedules. This will ensure that procedures are fully in
place for how the new schedules will be used by us and
that training has been provided to LB&I personnel
prior to the release of UTP schedules to the field.
Now, as with any new and innovative program, training
and education are critical for both the IRS and taxpayers.
We’ve now delivered training to our technical employees,
such as examiners and specialists. We’ve been clear in
our training that the schedule is not intended as a means
for shortcutting other parts of the audit process.
Moreover, examiners are expected to use the Schedule UTP
information in conjunction with tools, such as the QEP.
And just last week, the LB&I Commissioner issued a
memorandum to all LB&I employees that sets forth the
procedures that examiners must follow when examining any
return containing a Schedule UTP. For example, it
spells out that the presence of the Schedule UTP with a
return should not, in and of itself, be the sole factor
used to determine whether or not to proceed with an
examination. In conjunction with that guidance, all
employees must complete a training session before starting
the examination of any return with a Schedule UTP.
We expected the bulk of returns to start coming in
during September of this year… and they did. Let me give
you a quick glimpse at our first UTP filing statistics:
- We received approximately 1,500 UTP Schedules
containing approximately 3,500 UTP disclosures.
- About half of all Schedule UTP returns filed
contained only one uncertain tax position.
Not surprisingly, the top three Code sections were
Section 41, research tax credits… Section 482,
allocation of income including transfer pricing… and
Section 162, trade and business expenses.
Before leaving UTPs, let me add this. Just as this is a
learning year for taxpayers, it is also a learning year
for the IRS. And as with any process this new, there may
be some hurdles…but our entire senior leadership team is
committed to working through them. We cannot let the
perfect be the enemy of the good.
Successfully implementing UTP rests on our working
together to streamline, improve, and change the way we
carry out our responsibilities in a manner that will save
resources and achieve certainty sooner for taxpayers and
the IRS. And I want to continue to stress that you need to
raise issues when you see them: A dialogue between us and
taxpayers will be crucial as we both learn from this new
Finally, let me cast an eye toward the future and a
potential new structure that would fundamentally change
the way taxpayers and tax practitioners prepare and file
individual returns…and one that leverages technological
We’ve initially come to call this vision the
real-time tax system because it would deal in real time
and avoid audits that may take place years after a return
is filed. We’re moving away from the after-the-fact, or
“look-back” model – where we chased after taxpayers
who had to hunt for, or recreate records and documentation
– to one where we’re reducing burden.
Under the vision of a real time tax system, the IRS
could embed third-party information into its pre-screening
filters, and could provide the opportunity for taxpayers
to fix the return before we accept it, if it contains data
that does not match our records. This is a tectonic shift.
We would have more accurate returns and deal with many
more problems up-front. We could shift resources to spend
more money getting it right in the first place, and do
less back-end auditing. I’ve said all along that there
are huge compliance and service benefits associated with
such a system…not to mention burden reduction for
Now, I’ve been asked a lot whether this vision is one
of the IRS pre-filling tax returns and sending them out.
That’s not what this project is about. This is about
making fundamental improvements to the current system
where taxpayers or their tax return preparers are
responsible for completing a return and submitting it to
A little more than six months ago, I said I wanted to
start a dialogue on the vision and engage the business
community and other stakeholders. Since then, we have
started scoping the work that we would need to undertake
to help us make the next big leap in how our tax system
Technological innovations allow us to process large
amounts of information exponentially faster than just a
decade ago. We also now have information coming to us in
an electronic format, which is a prerequisite to quicker
population of our databases and systems. In other words,
the pieces are starting to come together. Both internal
and external factors make the time ripe to think big, and
broad and long-term.
I believe that this vision for a more real-time tax system
for the nation is real and doable. For the past six
months, we’ve been taking those first steps down the
path toward taking the vision to the next level.
A real time tax system is also all about stakeholders
and communities and involving them in the conversation.
I’m talking about taxpayers…preparers…software
companies… employers…financial institutions…and
other parts of government. Indeed, we’ve begun planning
for a public meeting to discuss these issues and solicit
feedback and ideas. Stay tuned for more information on
Before I take a few questions, let me say that all the
initiatives and plans that I’ve discussed today depend
on us working together. Given the enormous challenges and
opportunities we face, I believe it is a common obligation
we have to America’s taxpayers and our nation. Thank
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