Why haven’t real-time taxes happened yet?

Real-time taxes would aim to reduce tax fraud and erroneous tax returns. So what’s the problem?

Almost two years ago the IRS Commissioner Douglas Shulman came forward with a plan to revamp the IRS tax filing system in a way that would help prevent tax fraud and reduce costly errors. He called his vision, the real-time tax initiative.

But after consulting with numerous stakeholders involved in the U.S. tax filing system, the initiative petered out. We have not seen any more direct action to forward Mr. Shulman's dream on the surface, but politicians are still talking about it.

READ: Who does the IRS trust, and are you on the list?

Earlier this year, real-time taxes were a stipulation on the Identity Theft and Tax Fraud Prevention Act of 2013, and the bill is currently being debated in a Senate Committee. It is one of those seemingly small addendums on bills, which nonetheless change the shape of the country.

What makes taxes real-time?

The primary feature of a real-time tax system would be this: when you submit your tax return, the IRS would already have your information tax returns – the ones your employer provides – in its system. The IRS would automatically check your return against the information your employer had already provided. And if there was an appreciable difference, your return would be spit back out with a request to amend the error.

The new system would have two potentially great consequences:

1. Many tax fraud schemes would be rendered totally ineffectual by the real-time system, and tax fraud would become much harder to pull off on a grand scale.
2. The IRS sometimes requires years in order to filter through your real tax return information and recognize an error. By the time it sends notification of the error, the taxpayer has already ditched the documentation in substantiation of the filing. Correcting problems upfront would save a lot of time, paper and effort.

This is all well and good, but many organizations have pointed out a significant downside to real-time taxes, as well. The first and easiest hurdle to overcome would be a logistical one. Namely, in order to check individual taxpayer returns against the information returns provided by employers, the deadlines for tax season would need to move around a bit.

INFOGRAPHIC: Dramatic rising in e-filing taxes

The IRS thinks maybe employers could turn in their paperwork earlier.

To this the American Bankers Association responded – absolutely not. Form 1099-R and 1099-B, in particular require every day up to the March 15 deadline. If real-time taxes are to be invoked, the ABA said, tax season would need to be postponed. Not a deal-breaker.

The real gamechanger came from the least expected place. The software companies, which stood to gain one of the largest clients in the world, came down against the initiative. They questioned whether the software might end up making identity theft easier in the long run, and they questioned whether a government agency should have the kind of control an advanced tax system would bring.

READ: How identity thieves cash your tax refund

This central issue is important to keep in mind as we move forward. Identity theft and particularly tax fraud has seen double-digit increases every year since 2010. Government debt is higher than it has ever been, and real-time taxes could be seen as the solution. If the Identity Theft and Tax Fraud Prevention Act comes up for a vote in the Senate, I will be the first to write about it.

 

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