The process of filing tax returns, dealing with the Internal Revenue Service, and making sure that the right amount of tax has been paid is an enormous challenge that all Americans go through each year. Currently the tax administration process works like this: taxpayers receive documents about the income and deductions, they use these documents to fill out various tax forms, and submit the forms to the IRS. The IRS compiles these forms, and then cross-checks them against the same documents filled directly with the IRS from third-parties. Any discrepancies can result in an audit.
This entire tax reporting process can be vastly simplified. Data about income and certain deductions are already reported to the I.R.S. The agency could make this data available to taxpayers through a sort of "My I.R.S. account". The data is required to be submitted to the I.R.S. in XML format, so the data is already well-formed. This data could made available to be downloaded into a tax software program, or used to pre-populate the required tax forms. Even better, the entire process could be handled on the I.R.S. Web site, whereby missing information is flagged so the taxpayer will know what additional information needs to be found and added so that their tax returns will be complete.
Making the data flow from the IRS to the taxpayer will unleash all sorts of efficiencies in the administration of our tax laws. First, the taxpayer would be presented with a complete set of data that the IRS already knows about, thereby eliminating the possibility that the taxpayer might inadvertently overlook a document or two. Second, having Web-based account management would enable taxpayers to make correction (amendments) to specific information, and could interact with the IRS about account-specific issues such as setting up payment plans or asking for additional time. Audits would then become much more intelligent, as the IRS would not have to waste time verifying routine mismatches.
Web-enabled filing and account management would have enormous implications for privacy, the possibility of hacking, and accessibility issues for Americans who aren't comfortable with or have access to technology. This technology however could be deployed through existing networks of tax professionals and publicly funded tax clinics.
Why Is This Idea Important?
The cost of complying with the tax laws, including filing out forms and hiring professional help, was roughly $244 billion in 2004 according to research conducted by the Tax Foundation. By comparison, President Obama hopes to raise taxes by $61 billion over the next ten years through the proposals outlined in his budget. If America can reduce the cost of complying with the tax laws, we can use that cost savings in more economically productive pursuits.
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