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Senate Finance Committee Discusses Progress on Three "Hot" Tax Season Issues: Tax Scams, Paid Preparers and Vehicle Donations "This hearing is going to deal with three issues: first, the schemes and scams that were raised by this committee several years ago. Next, we bring the public's attention to paid preparers and donations of cars to charities," Senate Finance Committee (SFC) Chairman Charles E. Grassley, R-Iowa, said at an April 1 committee hearing. As tax season approaches, Grassley stressed the significance of these issues and how they directly impact many taxpayers. He urged taxpayers to educate themselves about abusive tax schemes and dishonest paid tax preparers.
Tax Schemes and Scams
"We've made great progress in combating abusive tax schemes and scams," said Dale Hart, Deputy Commissioner of the IRS's Small Business/Self Employed (SB/SE) Division. The most common scams in current circulation, according to Hart, involve the use of offshore trusts, slavery reparations claims and frivolous constitutional arguments.
Hart noted that IRS enforcement efforts have been stepped up in recent years. "In the last year alone, we have more than doubled the number of criminal investigations involving federal tax returns from 116 in 2001 to 254 in 2002," he reported. Tax preparers convicted of tax crimes now receive an average sentence of 27 months as of 2002, as opposed to 20 months as of 2001. Hart also noted that IRS is working more closely with the Department of Justice in pursuing abusive tax-schemes and in enjoining such scams before they become too wide-spread. "Though the tide has turned, there is still an enormous amount of work to do," said Hart. "Combatting schemes is our top priority and we are taking clear and aggressive actions."
Paid Tax Preparers
"With over half of all individual taxpayers relying on preparers, it is important that Americans be careful in choosing a tax preparer," said Grassley. He added that, while the vast majority of tax preparers serve taxpayers well, abuses do occur. "It only takes a few bad apples to cause real problems for many Americans," said Grassley. According to General Accounting Office (GAO) Director of Tax Issues James White, 77 percent of taxpayers in a recent poll were confident in their tax return preparer.
Currently, roughly 1.2 million tax preparers will prepare over half of the approximately 132 million returns to be filed in tax year 2002. Yet, according to National Taxpayer Advocate Nina Olson, only half of the tax preparers receive any form of training. She noted that the complexity of the tax laws drives many taxpayers to seek return preparation assistance, even though many of them have no training and are otherwise unqualified to render assistance. Taxpayers who utilize paid, but unskilled, tax preparers are often left to pay the tax bill--including penalties--for following bad advice, observed Olson.
Olson recommended that Congress act quickly to require that all paid tax preparers meet minimum competency tests. She argued that, given the ever- changing complexity of the tax code, the tax preparation industry is prime for regulation. Indeed, as Olson was quick to note, the tax world already "regulates attorneys, certified public accountants and enrolled agents, who represent the taxpayer before the IRS in collection, examination, appeals and other matters." Olson's recommendations include the registration, examination, certification and annual retesting of tax preparers.
At least one SFC member expressed an interest in following up on Olson's recommendations. "We need to help taxpayers get it right the first time in order to avoid headaches down the road," said ranking committee member Max Baucus, D-Mont. He went on to recognize the important role tax preparers play in the tax system, but added that there "are no laws or regulations that limit who can sell tax-preparation services. The types and training of paid preparers vary widely. Most taxpayers do not realize that there is such a lack or monitoring tax practitioners. "Buyer beware" is just as relevant with tax preparation and planning as it is with buying a stereo."
A final issue discussed by the SFC in connection with some tax-preparation operations involved refund anticipation loans (RALs). Through an RAL, a taxpayer may obtain an advance on their refund by getting a high-interest loan from the return preparer. "At first blush, RALs might look like an attractive way for tax filers to get a quick turnaround on their refunds. But, in the hands on unscrupulous lenders, RALs turn out to be nothing more than a scheme that prevents low-income Americans from getting the full benefit of their tax refund," said Sen. Jeff Bingaman, D-N.M.
Tax preparers charge high interest rates and exorbitant fees to cover administration expenses, as well as the cost of the return preparation for taxpayers that seek to avail themselves of RALs. An even worse-case scenario occurs when the refund is denied in whole or in part. In such instances, the taxpayer loses the refund and is stuck with paying off the loan. Bingaman has recently introduced legislation to end this practice in the Low Income Taxpayer Protection Bill of 2003 (Sen 685).
Charitable Donations of Vehicles
A growing trend in the charitable donations realm is the gifting of vehicles to charities. In tax year 2000, 733,000 taxpayers filed returns claiming a deduction for vehicle donations which totaled $2.5 billion, saving these taxpayers $654 million in reduced tax liability. Although Grassley expressed his pleasure with American generosity, he noted, "There are two concerns: one, whether the charity is seeing the lion's share of the benefits of the donated cars; and, two, whether taxpayers are claiming an accurate amount for the value of their donation."
The most notorious example was set out in testimony given by Cathleen Berrick, GAO Acting Director of Homeland Security and Justice. In the example, a donor donated a truck to a charity claiming a $2,400 deduction. The charity, using a fund-raiser to operate the vehicle donation program, sold the truck at an auction for $375. After the fund-raiser deducted its fees and expenses, the charity was left with $31.50.
At first blush, this appears to be a massive abuse of the tax system. However, according to Berrick, the discrepancy between the estimated value and the actual sales price can be explained by the charity's immediate need for cash and inability to pay for storing the vehicle. To accommodate the need for cash and to avoid storage expenses, vehicles are often sold at auto auctions, not to private parties, which reduces the amount the vehicle is sold for, but facilitates a much faster sale.