Tech Savvy IRS

Posted: Apr 17, 2011 12:01 AM

WASHINGTON -- IRS Commissioner Doug Shulman sees a major technological change in the agency's future that could make it easier to deter tax cheats and immediately reject tax returns that don't match information in the agency's database.

Shulman laid out his vision for a more real-time tax system during a speech recently at the National Press Club. We later talked about his idea of an upgrade that would allow the IRS to get key documents or information returns, as they are called, such as a W-2 form long before a person's tax return is submitted.

For example, the 1099 statements that businesses submit to report, among other things, non-employee or miscellaneous income, dividends and retirement plan distributions now have to be filed by Feb. 28 or, if done electronically, by March 31. Shulman said such filing deadlines may have to be moved up so the information could be ready to compare with the tax returns. Because the information is now received at the height of the tax-filing season, it may take at least six months before the IRS can match data it receives with the information people include with their returns.

Shulman also wants taxpayers to be able to access their W-2s or other forms by way of the Internet. The information could then be downloaded into the returns using commercial tax software. Taxpayers would then add any supplemental information and, at that point, file their returns.

The advantage here is that the IRS could immediately flag any return that does not match up with the supporting documentation.

"That's right; we reject the return and ask you to fix it before we process it," Shulman said in his speech.

Shulman says streamlining the tax filing process could significantly reduce the number of notices sent out to taxpayers because of mismatched documentation. More than 4 million taxpayers were contacted under the agency's document matching program during the most recent fiscal year that ended last Sept. 30. "We could be mailing millions fewer pieces of paper," Shulman said in the interview. "We spend more time and shift resources getting it right upfront. We will still have audits but less back-end auditing."

Here's an illustration of a common situation the IRS deals with now and how it would be dealt with under a new system.

A taxpayer mistakenly (or intentionally) enters $2,500 in dividends on his tax return. But the person's 1099s, loaded early in the IRS database, actually show that dividends totaled $3,500. Under the current system, the IRS might not catch the error (or fraud) until well after the return has been filed with the underreported income.

Under the structure Shulman envisions, the mistake wouldn't happen in the first place. As the person prepares his return, he would see online that $3,500 in dividends was reported to the IRS. If the 1099s are wrong, the taxpayer can get that corrected before filing his return. If the person accidentally entered the wrong amount, this could be corrected before the return is filed and an overpayment of a refund is made, which would have to be paid back along with hefty interest and penalties. If he intentionally wanted to underreport his income, well, that would be thwarted.

By law, the IRS has up to three years to audit an individual's tax return. The agency gets additional time to probe a return if there's a 25 percent or more omission of income, or if fraud is suspected.

"This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS," Shulman said during his speech.

I can see how this would be a problem. Three years after the fact, the IRS tells a taxpayer the refund he or she got was in error. But what if the person's broke and there's nothing to give back?

What you get is taxpayer trauma.

Shulman says the system in place now can sift through millions of returns and billions of items of data to identify questionable returns, such as those fraudulently claiming refundable tax credits. As a result, he says, the agency does block billions of dollars of refund claims before they are paid.

Still, more could be done to upgrade the way returns are handled, he said. But don't look for a proposal or blueprint just yet. Shulman said he just wants to start the dialogue about his vision. He wants to hear from the stakeholders - employers, tax preparers, taxpayers.

I like the idea that a lot of tax drama could be averted with an early detection system. How about you?

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her email address is singletarym(at) Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

(c) 2011, Washington Post Writers Group

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