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IRS Commissioner Calls for Real-Time U.S. Tax Filing System

Internal Revenue Service Commissioner Douglas Shulman called today for development of a real-time tax filing system that would enable the agency to collect 1099s, W- 2s and other documents before taxpayers file their full returns.

The early collection of documents would allow the IRS to reject returns that didn’t match records before processing, reducing burdens on the agency and on filers, Shulman said at a public meeting at IRS headquarters in Washington.

Shulman spoke at what the IRS billed as the first of a series of meetings to discuss long-term changes needed to set up a real-time system.

In addition to making filing easier, a real-time system “would significantly improve compliance,” Shulman said.

He said IRS computer operations have improved enough to allow the agency to make fundamental changes in how taxes are filed. In the upcoming filing season, Shulman said, the IRS expects to process all returns on a 24-hour cycle, instead of a weekly cycle.

Catching Up

Shulman said the IRS needs to catch up with consumers who have become used to quick transactions with banks and other financial institutions.

“I think the American people have a different kind of expectation,” he said.

The changes Shulman mentioned would have implications for the tax-preparation industry, including software makers such as Intuit Inc. (INTU) of Mountain View, California, and tax preparers including Kansas City, Missouri-based H&R Block Inc. (HRB) and Jackson Hewitt Tax Service Inc. (JTX) of Parsippany, New Jersey.

A real-time tax system “would require a significant investment in infrastructure and the ripple effect of implementing it would be far-reaching,” Kathy Pickering, executive director of H&R Block’s Tax Institute, said in remarks prepared for the meeting.

Pickering spoke on a panel of tax preparer groups that included the Washington-based American Institute of Certified Public Accountants and National Association of Enrolled Agents, and the National Association of Tax Preparers of Appleton, Wisconsin.

Other panels represented regulators such as the Government Accountability Office and consumer advocates.

‘After the Fact’

The IRS currently operates on what is known as an after- the-fact model of processing -- evaluating a tax return and supporting documents only after a return has been filed. If IRS personnel question a return, a tax filer must retrieve records two years after the activity occurred that is subject to possible taxation, Shulman said.

Many problems could be avoided if taxpayers could check information in returns against data reported to the IRS by employers and other income sources, he said.

Shulman had earlier spoken about a real-time filing program in April, during a speech at the National Press Club in Washington.

The IRS is discussing the real-time tax-filing system as it offers buyouts to 5,400 of its estimated 95,000 workers in anticipation of a budget cut by Congress.

IRS Buyouts

After the meeting today, Shulman said about 1,000 employees have accepted the buyout, which is about the level that had been expected. The Obama administration has said that as many as 4,000 IRS jobs could be cut over the next year including some that would reduce tax enforcement and collections.

Shulman declined to say if more buyouts are in the offing.

“Congress isn’t done with the budget yet,” Shulman said. “We’re quite hopeful that we’ll end up with a good budget.”

IRS officials did not offer estimates of cost or length of time needed to develop a real-time system.

Information about a real-time tax system distributed by the agency at the meeting highlighted savings for taxpayers and the government.

One handout said long-term benefits to the government would include “billions in net revenue and cost savings resulting from upfront quality checks on tax returns being filed with IRS.”

Taxpayers would save millions of dollars in penalties and interest and have millions of fewer contacts with the agency under a real-time system, according to the IRS handout.

Panelists brought up numerous practical challenges such as how to handle last-minute changes in law by Congress and how to deal with mismatches of data and corrections to information returns.

“This is going to take a while to get there,” Shulman said.

Shulman said after the meeting that a major challenge for the IRS with such a system will be to retrain many employees who are used to the time-consuming process of analyzing returns after filing. Such employees will need to be able to quickly provide “world-class customer service on the front end,” Shulman said.

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

To contact the editor responsible for this story: Mark Silva at Msilva34@bloomberg.net

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