IRS commissioner proposes changes to the tax preparation process

Internal Revenue Service Commissioner Douglas Shulman says "looking back" has been the business model of the IRS since its inception in 1862, but dealing with taxpayer issues up-front is where the tax agency should be headed.

For tax returns with compliance problems, an audit can take place three years later, or even longer in some cases, Shulman said in a speech at the National Press Club in Washington, D.C. earlier this month. "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 were not 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," he said. "Taxpayers ask, 'Why didn't you notify me earlier?' This hurts the IRS' image and contributes to a 'gotcha' perception."

Shulman, who oversees an agency that collects $2.4 trillion in tax revenues, said the IRS is working on spotting compliance problems earlier, and as a result billions of dollars of refund clams have been blocked before they are paid so accuracy can be verified. While progress is being made, he said, the way the IRS handles information returns - the 1099s, W-2s, mortgage interest statements and other forms taxpayers receive - can be streamlined.

He asserted that if the IRS received the information returns before individual taxpayers filed their returns, tax return preparers, or the taxpayers themselves, could access the information online and download it into the returns before filling. Now, the IRS often receives the information returns after a taxpayer files, requiring the agency to match up the documents, a lengthy process.

"We would embed this core third-party information into our pre-screening filters, and would immediately reject any return that did not match up with our records," he said. "That's right. We reject the return and ask you to fix it before we process it. 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."

Shulman acknowledged, however, that the IRS is far from putting a new system in place. Not only would a major technology overhaul be required, but also there would have to be private sector support. The February 28 deadline for 1099 returns may need to be moved up, for example. While Shulman is not ready to launch a program to change how tax returns are processed, he wants to get people talking about it. "I don't see this as a plan or blueprint with proposed structures, timelines, and deliverables. What I'm offering is a vision for a journey that's firmly grounded in reality but brims with potential."

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