Could a Real-Time Tax System Become Reality?

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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. 
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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IRS Commissioner Douglas Shulman's remarks on this topic to the American Bar Association Joint Fall Meeting, September 15, 2012:
"As some of you know, I’ve launched the “Real
Time Tax” exploratory effort to move away from the “after-the-fact” business
model toward real-time upfront matching of third-party information, such as W2s
and 1099s. If the data on the return does not match our records, a taxpayer
could be given the opportunity to correct the return before it’s processed."

This is an excellent method to avoid fraudulent refunds that the IRS Is unable to recover (millions of dollars worth).