Thursday, April 7, 2011

IRS Commissioner Douglass Shulman Disucess Major Potential Changes to Tax System

Throughout the debate surrounding the budget, there has been a lot of discussion about how many of the cuts proposed by the GOP would actually have a very negative impact on our economy. A prime example of this comes in the form of the $603 million the Republicans want to cut from the IRS budget. While this might win some immediate political points with the public since it’ll reduce the proposed budget (and because everybody loves to hate the IRS), IRS Commissioner Douglass Shulman told the House Ways and Means Committee that the cuts would result in $4 billion in taxes not being collected. In other words, this proposed cut would actually cause the deficit to increase.

What this highlights is how we shouldn’t be simply trying to cut funding to programs, but instead trying to make them more efficient and cost effective. During a speech at the National Press Club yesterday, Shulman did just that as he spoke about how he wants “to look at the horizon” and make the tax collection process more efficient. Although this wouldn’t solve all the problems with the IRS, the Commissioner claims this could be done by identifying problems at the front end of the filing process instead of long after individuals have already filed their returns.

According to Shulman, one of the major problems with the way the system is currently set up is that the process they use to enforce compliance is focused too much on looking backwards. This is because they don’t get all of the paperwork on individual filers until after people have already done their taxes and, in many cases, collected some sort of return. This leads to many problems because the IRS has up to three years to run an audit on someone. And if they do find an error during the audit process, the delays often mean that people have already spent their refund and don’t have the money to repay the refund and/or the late fees and fines associated with the errors. As a result, this process can lead to some financial costs for the country as well as frustration and money problems for individual taxpayers.

If the IRS were to work with the private sector to make sure that they had access to people’s forms like W-2 and 1099 before individuals filed their returns, many of these problems could be solved. Shulman claimed that this change in when they received the forms would allow the IRS to immediately compare the tax returns to the records on file. As a result, they could immediately reject the filings instead of conducting a potentially expensive and time intensive audit down the road. He even compared this to how if there’s something wrong with your credit card (like if you miss a payment), you immediately get a call from the company. The point of the analogy was that having information available allows the credit card companies to act quickly in order to make sure they don’t lose money. It also means the consumer doesn’t rack up big fines without realizing something was wrong. Shulman claimed collecting W-2 and other similar forms up front would do the same thing with the IRS.

While he admitted there are some investments in technology necessary in order for these changes to be made, Shulman highlighted how over 70% of people are already e-filing. This is crucial because the data collection process needed for these changes would be much more efficient if it had the data coming in a digital format. Nonetheless, the changes are still down years down the line and there will need to be some conversations with leaders of payroll companies and other fields to talk about potential changes to when they would be required to file paperwork.

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