Could a Real-Time Tax System Become Reality?
By Ken Berry
IRS Commissioner Doug Shulman has been gearing up the computers to accommodate the "real-time tax system" he has been envisioning for years. Now he just needs Congress to pull the trigger on new legislation that would authorize this approach.
Under our current system, the IRS isn't able to match up 1099s and other information returns until the tax year is over and the forms have been issued to taxpayers. It often takes months or even years before the IRS can catch up with any inconsistencies or inaccuracies and initiate audit proceedings. Not only are taxpayers flummoxed by having to go back in time, the IRS is losing out on valuable revenue that's sorely needed to close an estimated $385 billion "tax gap."
It's a troubling situation that Shulman wants to rectify. Speaking before the National Press Club last year, the commissioner said, "This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS. It can be a real dilemma for taxpayers, who may no longer have the money that was refunded to them, but it turns out, they weren't entitled to. There's also possible sticker shock because interest and perhaps penalties may have been accruing on any tax due for up to three years. Taxpayers ask, 'Why didn't you notify me earlier?' This hurts the IRS' image and contributes to a 'gotcha' perception."
In Shulman's vision of a real-time tax system, all third-party information returns - including 1099s and W-2s - would be made available to the IRS via electronic means before taxpayers file their income tax returns. This would enable the IRS to identify discrepancies and reject returns right away. "We would then 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," said Shulman.
ETAAC Report on Real-Time Tax System
An independent advisory group to the IRS, the Electronic Tax Administration Advisory Committee (ETAAC), recently released its "Annual Report to Congress" with recommendations that may help propel a real-time tax system. The ETAAC report includes the following:
- Currently, the IRS offers a free TIN matching program that provides real-time results on name/TIN combination requests. The ETAAC says that expanding and improving this program should increase accuracy and speed up filings
- The penalty for a name/TIN mismatch is $100 per form with a maximum at $1.5 million per legal entity. Because manually filed returns require considerably more effort for the IRS to process, the ETAAC suggests increasing the penalties for manual filing to $150 with a $2.25 million limit for each entity.
- It's clear that the IRS prefers returns to be filed electronically. To encourage more e-filing, the ETAAC recommends that the IRS decrease its threshold for mandatory electronic filing from 250 forms to 75.
- The ETAAC also says that the IRS can work harder at understanding the obstacles to a real-time system. Specific recommendations include designating a liaison for providing information return assistance to the business community, appointing a sponsor to help identify barriers and raise awareness of electronic filing options, and authorizing a survey of information return filers.
Both taxpayers and their professional preparers would have online access to the information. They could tap into the IRS' system, download the data into their returns, add any additional information that's required, and then file their returns.
The concept of a real-time tax system sounds good in theory to many, but handling the logistics is another matter. It would likely require due dates for information returns to be moved up. During hearings held earlier this year, the American Payroll Association advocated this action, but the Small Business Legislative Council voiced concerns that it would result in greater administrative burdens and higher costs with little positive impact.
Meanwhile, efforts to enact the changes requested by Shulman seem to have stalled in Congress. Once the election is over, you can expect the nation's lawmakers to revisit the issue.
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