Tax Administration:

Alternative Filing Systems

GGD-97-6: Published: Oct 16, 1996. Publicly Released: Oct 16, 1996.

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GAO reviewed the possible benefits, impediments, and costs of establishing a tax agency reconciliation filing system, focusing on: (1) the estimated number of taxpayers that would not have to prepare returns in such a system; (2) the system's operational characteristics; (3) potential advantages and disadvantages to taxpayers and the Internal Revenue Service (IRS); and (4) major impediments to and costs in establishing this type of system under existing federal tax laws.

GAO found that: (1) as many as 51 million taxpayers, or 45 percent of all taxpayers who filed 1992 tax returns, would not have to prepare returns if IRS established a voluntary tax agency reconciliation system; (2) the general operational concept for such a system would be for IRS to produce and mail tax returns based on taxpayer-supplied information about income, filing status, and dependents, and then have taxpayers review the returns and notify IRS if they agreed with the information; (3) the reconciliation system could reduce taxpayers' time and cost to prepare returns and reduce IRS processing and compliance costs, but could adversely affect such parties as tax preparers; (4) a major operational impediment to a reconciliation system is that IRS does not currently process information returns in sufficient time to send taxpayers their tax returns before the return filing due date; (5) IRS has two initiatives under way to speed up information returns processing; (6) a 1987 IRS study found that a tax agency reconciliation system was not then feasible, but indicated that such technological advances as electronic filing of tax data may make such a system feasible in the future; and (7) taxpayers may be reluctant to rely on IRS to prepare their tax returns, may not trust IRS to accurately calculate their taxes, and may not get their refunds as early in the tax filing system as they currently do.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS rejected the recommendation because it stated that the costs of a tax agency reconciliation system would be more than the costs to process electronically filed returns. Contrary to IRS position, the Internal Revenue Service Restructuring and Reform Act of 1998 requires IRS to develop procedures for implementing a return-free filing system for taxable years beginning after 2007. IRS is to report to Congress each year, beginning in 1999, on its progress.

    Recommendation: A tax agency reconciliation type filing system could make it easier and cheaper for taxpayers to fulfill their tax return filing responsibilities. Because of these factors and the technological advances made since the 1987 IRS return-free filing study, the Commissioner of Internal Revenue should reexamine the feasibility and desirability of designing and implementing a tax agency reconciliation system. The reexamination should include a determination of methods to increase trust among taxpayers in IRS ability to administer such a system fairly and accurately. It should also assess the added burdens and costs that such a system would have on employers, affected financial institutions, and other stakeholders and develop ways of mitigating these burdens and costs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: This recommendation is no longer applicable since the IRS Restructuring and Reform Act of 1998 requires IRS to implement a return-free system. However, to fulfill the requirement in the act, IRS would have to test any return-free filing system it develops.

    Recommendation: Because of the uncertainty about stakeholder receptivity to such a system, if the reexamination results in IRS initially determining that an agency reconciliation system may be feasible and desirable, the Commissioner of Internal Revenue should expand the reexamination to include a limited pilot test. Such a test would provide IRS with useful data for addressing stakeholder concerns and demonstrating its ability to administer such a system fairly and accurately. If all of the improvements necessary to fully implement a tax agency reconciliation system are not feasible in the short term, it may still be possible to test the concept in one or more states that have no income tax.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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