Recommendations and Actions
How to Get to Bed Early on April 14
Imagine this: On April 15, a citizen receives a notice in the mail from her state tax office. It contains a bill for her annual state and federal taxes, and was calculated from records submitted electronically by her employer and her bank. She verifies the bill, dials an 800 number, and pays her taxes by credit card. Her state and federal taxes have now been completed in a matter of moments--with no annoying forms to fill out.
U.S. taxpayers use and prepare financial data separately in reporting tax information to federal, state, and local governments. Although in some cases, the base level information required by the Internal Revenue Service (IRS) is used by the states, the filing form or information input follow separate and distinct paths.
Efficient business practices require that a framework for a "single information flow" be developed based on the premise that once data is entered, it serves the needs of the entire enterprise. This enterprise could be defined as all federal, state, and local government agencies that require the same data from a reporting source. For example, corporations or small businesses would report employee wages and withholdings to a single government access point. Upon receipt by the agency, the data could be used to update appropriate records held by the IRS, Social Security Administration, Department of Labor, Department of Veterans Affairs, state agencies, etc. This approach is but one of a series of steps toward a virtual agency and one-stop access for intergovernment transactions.
There are enormous costs associated with tax data processing. The IRS annual operating budget for fiscal year 1992 was $6.7 billion to collect $1.12 trillion in revenues. To collect these revenues, the IRS processed 1 billion tax information documents and 204 million tax returns.1 The federal, state, and local aggregated collection costs are unknown due to the many types of taxes levied and the circuitous filing paths for the various sales, real estate, property, income, and payroll taxes. Innovative approaches to tax collection could lower overhead costs significantly and simultaneously improve customer service by reducing the burdensome, redundant filing techniques used today.
Need for Change
Federal, state, and local government policies need to foster close, cooperative intergovernmental and interagency relationships that eliminate unnecessary duplication of effort and promote enhanced citizen access to information and services. Joint electronic filing of wage and tax data is perhaps one of the best examples of an application that embodies these policies.
The IRS, Social Security Administration (with support from the Office of Management and Budget), and Department of Labor are conducting a Wage Reporting Simplification Project (WRSP). Cross-agency approaches like WRSP should help ensure that "reporting once" pilot programs will be in place in less than 2 years. Reporting once should include providing financial data required to other agencies such as the Department of Health and Human Services for entitlement purposes and the Department of Labor for unemployment considerations. The phase 1 feasibility study for WRSP identifies potential life cycle savings of $1.7 billion to participating government agencies and $13.5 billion in reduced burden to private sector employers.2
An intergovernmental, single information flow concept for tax filings, reporting, and payments processing will provide a seamless government for the benefit of the taxpayer. Technology is present that will enable this to happen.
The IRS is embarking on a comprehensive Tax Systems Modernization program. Although the IRS automation effort will significantly lower the cost of filing, auditing, and processing annual income tax data, reengineering must be a vital part of the overall modernization strategy.
This reengineering should include a broader intergovernmental perspective and address new ways to conduct business with taxpayers, business, financial institutions, and state and local governments. For example, tax information for a large number of taxpayers is already available to the IRS prior to taxpayers" annual filing. Financial institutions, employers, and others report comprehensive financial information about individuals to the IRS electronically or on paper. Reported information includes wages, earnings on investments, and certain financial transactions. The IRS thus has in hand all the information it needs to compute taxes for 60 million filers. Yet it still sends out enough forms to fill over five boxcars and requires taxpayers to compute what the agency already knows. This practice continues because, in most cases, these data are not converted to electronic format for easy use until after taxpayers have filed their tax returns. IRS could calculate returns and send a statement. So could a state government, based on the same file. If IRS did this and if electronic filing were used for all other individual income tax filings, the IRS and state agencies would no longer need to mail the equivalent of over 75 boxcars of forms.
Actions 1. Integrate government financial filings, reporting, and payments processing. (2)
The Secretary of the Treasury should implement integrated financial filings, reporting, and payments processing by January 1997.
This integration should address such areas as individual tax filing and account settlement; business reporting, including wage and withholding information; data from financial institutions; and other employer and employee financial data required by federal, state, and local government agencies.
The integrated filing, reporting, and payment processing program should be piloted by the IRS to prove the concepts and quantify the benefits--not only to citizens in terms of enhanced governmental services, but to the governmental process at large. A network such as the Treasury 's Consolidated Data Network and its successor, the Treasury Communications System, could provide an evolutionary migration path to full implementation minimizing the incremental costs.
To fully implement joint electronic filing of federal, state, and local tax returns, all states and localities that levy income taxes should agree on an uniform wage code that would enable the use of electronic data interchange. Separate federal and state tax filings defeat the purpose of trying to eliminate duplication and make government more efficient. State and local information would similarly flow to a federal access point for data interchange of financial and employment information when required by any federal agency.
In order to make electronic filing more efficient, a digital signature standard that can stand on its technical merits in a judicial court challenge must be adopted.3 Presently, when citizens file returns electronically, they are typically required to sign and mail a paper certificate to the IRS to be matched with the electronic return.
To protect the privacy and confidentiality of individuals and corporations, a method of electronic verification, coupled with a privacy system that has the public's trust, must be employed. Without these safeguards, public fears concerning disclosure of information and governmental concern for data integrity would remain a problem.4
One possible scenario might be that a citizen uses an electronic government services kiosk or home personal computer to file tax return information with the IRS, including appropriate data the state and local governments may require. The data would be transmitted to an IRS service center to be processed, verified for accuracy, and then forwarded to the state, thus meeting the filing requirements of both entities in one step. This approach could be expanded to include the joint auditing of financial data and the joint collection of taxes--the genesis of a virtual tax financial data agency for business and individuals.
Both small and large business alike could benefit from the reduction in the number of reports that have to be submitted to numerous federal agencies and state and local governments. Simplified filing of business financial and employment data could benefit small business operators as desktop computers with communications capabilities are now in widespread use. Until the infrastructure is in place, state and local governments (or the Postal Service) could provide access service for small business reporting and taxpayer financial information filing.
2. Determine ways to eliminate the need for filing routine income tax returns. (2)
The Secretary of the Treasury should eliminate or reduce the need for filing routine income tax returns by January 1998.
The entire IRS filing process must be reengineered to be less paper-intensive. Most of the required financial information is already reported by business and financial institutions to the IRS. The IRS, not the taxpayer, should prepare or process the tax information. Taxpayers should only be required to file exceptions to the norm, e.g., unreported income or transactions, unusual deductions, etc. An annual closing statement could then be prepared and provided electronically to the taxpayer for review, validation, and acceptance or reconciliation. The primary emphasis would be on reconciliation before the fact rather than enforcement and penalties after the fact.
Taxpayers could access the IRS data files by kiosk or by home personal computer to confirm that tax computations are accurate. They could then settle their accounts electronically by either paying taxes due by a credit card or automated teller machine card or by directing the refund to a designated account using electronic funds transfer. At any time during the year, the taxpayer would have the ability to determine if withholdings track with projected year-end tax obligations.
Cross References to Other NPR Accompanying Reports
Department of the Treasury, TRE04: Foster Federal-State Cooperative Initiatives by the IRS; TRE05: Simplify Employer Wage Reporting; and TRE09: Modernize the IRS.
1. U.S. Department of the Treasury, Internal Revenue Service, Internal Revenue Service 1992 Annual Report (Washington, D.C., 1993), pp. 3-4, 12.
2. See The Mitre Corporation, Wage Reporting Simplification Project: Overview of the Phase I Feasibility Study (Washington, D.C., May 1993).
3. For further information see IT10: Develop Systems and Mechanisms to Ensure Privacy and Security.
5. Enabling legislation for federal agencies to accept electronic payments via credit or debit cards is included in H.R. 13, which was introduced January 5, 1993.
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