IRS Panel Recommends Major Tax Changes That Would Impact Millions

Filing your taxes each year provides an important checkup on your financial health, and new proposals might make filing your taxes easier. The Electronic Tax Administration Advisory Committee (ETAAC) has released its annual report with 18 recommendations for Congress and the IRS. Those recommendations focus on modernizing and improving the tax system through key elements like the use of AI and digital services, changing how Americans file and pay taxes each year.

While the proposals are not yet law, they could affect millions of Americans if they're implemented. Here are some of the proposals most likely to affect you and how you could prepare yourself financially.

Electronic W-2 delivery

The report recommends that Congress and the IRS allow the default electronic delivery of W-2 forms to employees. Currently, paper W-2s may be mailed to outdated addresses, which may increase the risk of identity theft and tax refund fraud. In contrast, employees tend to keep their email addresses regardless of physical relocations.

The ETAAC recommends that the IRS expand the default electronic delivery of W-2 forms while allowing employees to opt out and choose a paper form delivery. The report emphasizes the importance of implementing strong identity verification requirements with this move to default electronic W-2 delivery. The default delivery might help save you time, avoid your W-2 being sent to an incorrect address, and help protect you against fraud.

Improved IRS online accounts

The report calls for improved IRS online accounts, which may reduce your need to call or mail a letter to the IRS. The report notes that some online accounts still lack certain functionalities and consistent reliability, and it calls on the IRS to consider improvements to its online systems.

This recommendation suggests that the IRS publish guides and create a technical support line to help taxfilers learn how to navigate its online systems, including how to access technical support and resolve issues they may encounter.

Other suggestions include encouraging the IRS to perform user research to determine how online bottlenecks may be addressed, and to streamline its communication about the online accounts, allowing for more efficient use of these tools' full potential. Such improvements to the online accounts might make it easier for you to find the information you need online, avoiding a phone call to the IRS.

Faster and clearer e-file error codes

The ETAAC also recommends that the IRS review and update its list of e-file error codes to make those codes clearer for taxfilers. Understanding why a tax return was rejected may be difficult using the current reject codes, since they're sometimes unclear and might lack information on how to fix the errors to resubmit the return. Taxfilers may have to call the IRS to get extra information on how to fix the issue.

Revising the codes so they're clearer and provide more information might make it easier to identify and fix an error on your own, saving you the time and hassle of calling the IRS.

AI-assisted fraud detection and identity theft protection

According to the report, the current fraud detection systems often have false positives and long backlogs. Since low-income individuals are disproportionately affected by identity theft, they're more likely to be flagged by the system for potential identity theft. These individuals may be relying on their tax refunds to cover essential purchases, making the issue a pressing one.

To solve the issue, the report encourages the use of AI to develop enhanced fraud detection and identity theft protection protocols. For example, using reinforcement learning might reduce the number of false positives identified by the IRS fraud filters, which may reduce the burden on both IRS staff and taxpayers.

Stronger oversight of paid tax preparers

The ETAAC's report also calls for increased regulation of non-credentialed tax return preparers, many of whom have no formal training or experience. Since there aren't requirements to be competent at tax preparation or to follow industry best practices, they might take advantage of or harm taxpayers.

The report recommends that the IRS establish minimum standards for paid tax return preparers, such as passing a background check, passing a tax compliance check, and completing required education. Such requirements might better help protect taxpayers who rely on tax preparers to be well-informed and knowledgeable.

A push for funding

The recommendations also strongly emphasize the importance of sustained funding for the IRS. "Recent workforce reductions and budget uncertainty have strained the IRS's ability to meet expanding responsibilities, including implementation of major legislative changes," the report reads.

The report encourages Congress to provide stable funding to support key needs, like technology modernization and service to taxpayers. "Without sustained investment, the IRS will be unable to complete critical system upgrades, retain technical talent, or meet growing service expectations," the report warns.

Stable, multi-year funding might help reduce backlogs and delays, making the process of filing your taxes and receiving your tax return smoother.

Bottom line

The ETAAC report is advisory, meaning the IRS may decide whether to implement any operational changes, and Congress may address the legislative recommendations. It could take some time for any accepted recommendations to be implemented, but the report emphasizes the importance of modernizing the IRS and delivering a better, more streamlined experience for taxpayers.

Changes like faster filing tools and better fraud protection might eventually take some of the frustration out of filing your taxes, making it easier to get your return and put extra cash in your pocket.

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