Doug Schulman opens the aperture wide on the future of the tax system.
IRS commissioner Doug Schulman’s annual speech at the National Press Club a week ago was substantively bolder than last year’s somewhat defensive plea on behalf of the IRS’s commitment to service as opposed to mere enforcement. This time around, he proposed no less than to, in his words, “open the aperture wide” and offer a view of our quickly evolving tax system that “takes us to its very horizon”.
The commissioner was quick to point out that he did not intend to peddle in the kind of science fiction that would befit a Worlds of Tomorrow anthology but instead to present a vision of the future grounded in the recent developments in tax processing that modern technology has made possible. It was an engaging performance, bolstered by a challenging proposal that, we suspect, will not escape controversy.
The goal of the IRS in Schulman’s take is to move beyond what he calls the “looking back” business model which, according to the commissioner, has governed the agency’s operations since its creation during the Civil War, above all when it deals with matters of tax compliance.
In this model, a taxpayer first completes her tax document using “information returns” such as a W-2 and 1099 forms provided by third parties, private companies and suchlike. She then dispatches it to the IRS where the return is processed and simultaneously evaluated for compliance problems. In most cases, there are none and either a refund for overpayment of taxes is issued or a payment is collected for tax owed.
But in some instances, as when a return is flagged for a possible audit, the IRS is compelled to “look-back” at a taxpayer’s return, an after-the-fact process that is time intensive despite the agency’s increasingly sophisticated filters. A full blown audit by the IRS is typically initiated years after receiving the return and is potentially loaded with frustrations for taxman and, above all, the filer who is tabbed with significant interest on top of any penalties he might incur. All of which contributes, in Schulman’s opinion, to the erroneous perception that the IRS is out to get you.
In the commissioner’s vision, which he stresses is neither an actual blueprint nor just a pipe dream, the look-back is largely done away with, retained only for egregious cases and to maintain a high level of voluntary compliance. This is effected by having all information resources from the private sector go directly to the IRS where it would be integrated into the agency’s pre-screening filters before the taxpayer filed her return. In fact, the individual or her tax preparer would access the W-2 and 1099 information from the IRS site itself.
Once downloaded to the tax return along with any self-reported information such as business expenses and the return filed with the IRS, the W-2 and 1099 data would immediately be evaluated for accuracy. Any return that did not match the records filed with the IRS, for instance if interest or dividend income went unreported, would be rejected and required to be fixed in real-time before being processed.
The IRS would thus have the ability to address discrepancies from the outset and reduce the incidence of back-end auditing. As for the taxpayer, she would be in a position to solve issues with her records at a point when these would be clearest in her mind. The problem addressed, she would forestall receiving the notorious audit letter and minimize the risk of accrued penalties and interest.
Commissioner Schulman is well aware of the difficulties in implementing such an audacious, preventive, and doubtless costly approach. He is especially keen to the political realities upon which the resources needed to even begin to engage with such a project are contingent. And beyond the fundamental developments needed in technology, the private sector would have to be roped in to provide information returns at an earlier date, a thing more easily conceived that put into place.
Still, Mr. Schulman is right in stating that his proactive vision would represent a “potential win-win for honest taxpayers” who “play by the rules” and most commentators in the tax industry agree, even those whose livelihood depend in part on the frequency with which taxpayers are audited. It would certainly benefit the smoother running of government. But if this vision effectively “brims with potential” some will surely argue that it also brims with troubling questions.
For one, it is not clear how it will play with the politically vocal contingent of the electorate that is prone to equate government with waste, taxation with thievery, and the Internal Revenue Service with the biggest brother of all. Issues of privacy and fundamental trust in the institution may come to the fore and derail a project whose basic outline shows it to be quite worthwhile.
For the full details of Schulman’s case for the future of tax return filing, the interested reader may consult the full transcript of the speech on the IRS website.
