Considering the Future of Online Tax Filing

8/14/2019 Considering the Future of Online Tax Filing

1/12

Important Enough To Be Historic:Considering the Future o Online Tax Filing

In the United States and the United Kingdom

A S trAtegy g uide from the C enter for d igitAl g overnment

A ProCeedingS doCument of the AmeriCAn legiSlAtive eXChAnge CounCil (AleC)internAtionAl relAtionS PoliCy Summit rome oCtoBer 2007


2/12

Important Enough To Be Historic:

2

History matters. Try as individuals and institutionsmay or a resh start, it is impossible to make a cleanand complete break rom their pasts. Nor is it advis-able, inso ar as our histories remind us o ormativemoments and oundational principles that were truethen and are true now.

History matters in the un olding o human events ranging rom issues o war, peace, and terrorism, andthe relationships among church, state and the ourthestatei to arcane models o the role o governmentin an open economy. Such a spectrum was on display during a gathering by a group o conservative Ameri-can legislators in Rome in early October, 2007.

The history-laden Italian capitol was the backdropor a policy summit convened by the InternationalRelations Committee o the American LegislativeExchange Council (ALEC). In addition to govern-ment-to-government meetings with Italian o cials,delegates also: explored recent history leading to the

Good Friday Agreement with His Excellency DaithiOCeallaigh, Irish ambassador to the United King-domii; reviewed U.S. diplomacy in the Mediterranean with the Honorable Frederick Vreeland, ambassadoro the United States to Morocco (retired); and werebrie ed on the Vaticans work with worldwide mediaon ethical standards by Most Rev. Archbishop JohnPatrick Foley, just days be ore the announcement o his elevation to Cardinal.

In the shadow o these encounters with historic ar-chitecture and arti acts not to mention these andother men and women o history is the matter o tax collection, as practiced in the United States andthe United Kingdom. The Policy Summit turned its

attention to this arcane but important subject duringa session hosted by John Cabot University iii eaturingBaroness Angela Billingham o the British House o Lords, also a member o the U.K. All Party Parlia-mentary Taxation Group.

Moments of history and a word on context


3/12

ConSidering the future of online tAX filing in the united StAteS And the united Kingdom

33

The United Kingdom and United States have notalways seen taxation the same way. Even a casualreview o history reminds us that taxation withoutrepresentation helped oment the American Revo-lution, and that the Boston Tea Party o 1773 wasa catalytic event toward independence.

Some 235 years later, taxation remains a politi-cal issue with important economic and societalimpacts. More recent history is instructive in un-derstanding the current dilemma aced by taxingauthorities in both countries.

Their respective tax administration systems intheir current orm date back at least a hal cen-tury; both were born o deliberate policy choices,not historic accidents. In 1944, the United King-dom introduced its Pay as You Earn (PAYE) pro-gram under which:1. Employers deduct tax rom their employees

pay according to PAYE codes which refect theemployees personal circumstances.

2. The amount withheld by employers and passedon to HM [Her Majestys] Revenue and Cus-toms (HMRC) is designed to match exactly thetax liability or each employee.iv

In 1953, the United States Congress rechristenedthe countrys ederal taxation authority as the

Internal Revenue Service (IRS). With the namechange came the decision to stop the practice o preparing individual tax returns, refecting, inpart, recognition o the confict between prepar-ing returns on behal o taxpayers and en orcingtax rules against taxpayers. In the years since,employers withhold ederal income tax based onthe employees own estimate o his or her liability paying the di erence, or having it re undedat years end while the sel -employed estimate what they owe and pay quarterly.

Some 65 years a ter PAYEs introduction, Lady Bill-ingham laments that the U.K. system remains moreabacus than (a) computer,v perpetuating a systemin which employers bear the burden o being thetax collector while taxpayers, or their part, do notknow how much tax they are paying. That blindspot notwithstanding, PAYE works great i you areon payroll, says Billingham, because tax calcula-tion and payment is out o sight and out o mind.Those Britons not on payroll all into the category o sel assessment and are le t to gure out the va-garies o the system or themselves. To redress theseshortcomings, the Parliamentary Tax Group set asits goal, a U.K. tax system (that) must approach thetax system in the USA where the citizen plays the

central role in their tax a airs, rather than the stateor the employer.vi

Historic tipping points in taxadministration: here and there


4/12


4

Over there: trans-Atlantic yearnings, or just envy?Indeed, both countries have demonstrated a ten-dency to look abroad or tax policy alternatives,seeking to possibly adopt something that is work-ing somewhere else. In the United States, the IRSNational Taxpayer Advocate, Nina E. Olson, con-tended that the country needed to adopt the U.K.tax system because it costs nothing and worksper ectly. Back in London, the chair o the Parlia-mentary Tax Group expressed bemused surpriseat the American perception that the U.K.s taxsystem was working per ectly at a minimum cost

to government and taxpayer alike. Whilst fatter-ing it does not match the reality we ace.vii

The reality in both countries is two- old. Tax au-thorities have administered tax rules that grow ever more complex with each change in tax law or administrative code. Taxpayers have turned tobookkeepers, accountants and others or help attempting to minimize the total tax bill and es-cape the anxiety o running a oul o the tax man.

A disruptive moment births an industry The need or pro essional tax help has spawneda new industry; private tax bureaus have four-ished in the United Kingdom and store ront taxpreparers in the United States. On January 25,1955, Henry and Richard Bloch scrapped theirKansas City, Mo., based bookkeeping company (United Business) in avor o a new rm that spe-cialized exclusively in income tax return prepa-ration: H&R Block Inc. Its growth, and that o their competitors, corresponded with the grow-

ing complexity o the tax code itsel . Consider,or example, that IRS Form 1040 came with 16pages o instructions in 1955 and ballooned to191 pages by 2005.

Store ront tax preparation was the rst o two in-dustries spawned by the U.S. ederal governmentsdeliberate decision to stop lling out tax orms onbehal o its taxpayers. The origin o the secondnew industry ollowed the introduction o thepersonal computer and created the opportunity to have so tware help manage the relationship be-tween taxpayers and their government.


5/12


6/12


6

Revisionist mandates:seizing failure from the jaws of victory The 70-30 percent income split and related thresh-olds were consistent with the Alliances purposeand origins. Through the Alliance, the industry hasprovided more than 15 million ree lings to eli-gible taxpayers since the programs inception.xi TheIRS estimates that approximately 93 million tax-payers are eligible to e- le each year. In 2006, theIRS e- le program handled 77 million returns,xii 3.9 million o which were through Free File.xiii

Here again, history matters. Measured against itsoriginal purpose, Free File can reasonably be consid-ered a success particularly given the daunting chal-lenges related to governing and keeping together the Alliance which involves 20 competing so tware com-

panies, the ederal government and 21 states. It hasalso materially contributed to meeting the goal set by Congress in 1998 to have 80 percent o all tax returnsled electronically by 2007. One IRS estimate sug-gested that the e- le tally approximated 72 percent o all returns led. xiv It is also worth noting the intrinsiccost and accuracy bene ts o online ling. xv

But the Alliance is not being measured againstits original purposes. It is now being measuredagainst a new goal: universal service, a policy ob- jective that was not in view in 2003 and, in act,runs counter to the ounding idea behind the Alli-

ance. To be clear, universal service itsel has a longand proud history, particularly with re erence torural electri cation and the extension o phoneservice to underserved, remote communities.

Some in Congress, together with some consumeractivists and state tax authorities, are pushing to

extend the model to online tax ling by advocat-ing a government-provided end-to-end tax lingand payment service.

The Consumer Federation o America, Direc-tor o Consumer Protection Jean Ann Fox asked,You dont have to pay a commercial company tomail in your paper tax returns, so why should youhave to pay them to electronically send them?

In Congress, U.S. Senator Daniel Kahikina Aka-ka (D-Hawaii) introduced the Free Internet Fil-ing Act in which he calls or the IRS to provideuniversal access to individual taxpayers ling theirtax returns directly through the IRS Web site.

Akaka recharacterizes Free Files original constitu-ency the poor and underserved as a selectgroup,xvi stating that they should not be the only taxpayers to have ree ling privileges.

Sen. Charles Grassley (R-Iowa) views universal reeling as an entitlement under which the govern-ment has an obligation to taxpayers to make sure ree really means ree. Sen. Max Baucus (D-Mont.) calls on the IRS to build a direct portalon the agencys Web site to allow taxpayers to ledirectly and truly or ree, regardless o income,xvii despite the agencys sustained problems with mod-

ernizing its core technology systems.xviii

Having studied the technology practices o taxauthorities in both countries, Lady Billinghamcautions against overlooking the risks o the re-spective approaches, In the U.S., the IRS haschosen to stay out o the so tware market and has


7/12


8/12


8

The ALEC delegates also explored the cascadinge ects: The move would deny taxpayers the advantages

and e ciencies that come with the Web and thatthey have come to expect in all other parts o their lives.

The move puts the Alliance at risk. Should the Alliance be orced out, it will have a torrentiale ect on the 21 Free File states.

States would have to replace, at their cost, some-thing that had been provided at no cost to stategovernment.

For government, it would mean assuming therisk o so tware updates to refect a constantly changing tax code. I there were no Alliance,

each legislative change would be an un undedmandate to the respective tax agencies to makeprogramming changes. With the Alliance, taxso tware companies want to be rst, ast andseamless in incorporating changes to retain cus-tomer loyalty.

As competitors, the Alliance members mustcompete to serve taxpayers each year. That com-petitive aspect is important in that it relies on themarket or sel correction.

At the risk o oversimpli cation, policymakers inboth countries have choices that stand in bold relie

repeating history, or good or or ill, or buildinga digital plat orm or governing responsibly, securely and sustainably into the uture.

The important policy discussions that necessarily attend the uture o e- ling should take place inthe context o contemporary understandings o government modernization: It is not about the portal, it is about transactions,

such that the o cial portal is a non-exclusiveroute into the applications and Web services thatstand behind it.

Free Filing is really an architectural componententirely consistent with where technology itsel isheading service-oriented architecture (SOA),shared services, Web services and Web 2.0.

In this context, remember that the Free File Alli-ance was prototypical o a Web 2.0 environment.The architecture changes in the general technol-

ogy sector will cause government to reconsiderthe common understanding o what the World Wide Web is, retaining everything o value asmedia (the collection o Web sites) but transi-tioning to a ull-fedged computing plat ormserving Web applications to end users.

In many ways, these contemporary architecturespair the disruptive moments that come throughpolicy and economic developments with disruptivetechnologies that allow organizations to seize onthe game change.

Downwind of failure:implications for the states


9/12

ConSidering the future of online tAX filing in the united StAteS And the united Kingdom

9

For the 2006 scal year, the IRS processed133,917,068 individual income tax returns andcollected $1,236,259,000,000 in related revenue, which accounted or 44 percent o its total $2.2trillion in tax receipt net o re unds. Even at that,the agency estimates that $300 billion o taxesowed are not collected each year, a short all thatin orms its current policy slogan,Service Plus En- forcement Equals Compliance.xx

Contrast that with the long-held motto o publicservice in the U.K., Public services exist or thepatient, the pupil, and the people who are to beserved.xxiThe distinct mottos may refect di erentpositions on the same continuum. In good times,tax authorities tend to emphasize customer ser-vice but, during periods o economic downturn,they turn their attention to en orcement issues topreserve und balances in the public treasury.

In the discussion with Lady Billingham, there were a number o hard-learned lessons that shouldin orm policy decisions on both sides o the At-lantic. Her verbatim observations are categorizedin three areas as ollows:

1. Serving Mobile and Transient Populations. Centralized tax administration crumbles amid chang-

ing economic, labor and technology landscapes Administrative and compliance costs rise pro-oundly as work orce becomes more mobile.

The economy in the United Kingdom has be-come ar more dynamic. At the same time, the

HRMCs own estimate says that 5.7 million o about 35 million taxpayers in the U.K. are payingthe wrong amount o tax. Compliance costs arerising disproportionately aster or smaller busi-nesses than larger businesses, making them lesscompetitive and there ore less likely to take onmore sta .

As changes to the U.K. labor market continueapace, the need or greater decentralization o the tax process and relie or employers and smallbusinesses arises. The greater empowerment o the individual or his own nancial a airs may well be the direction we have to take.

1. No Fear. Trust is sacred in the relationship betweenthe tax agency and the taxpayer.

Law abiding citizens should not have to be a raido their government or departments. Not only is it plainly wrong, but it can lead to intimida-tion and a reluctance to challenge tax authorities which results in increased tax errors. Un ortu-nately, all too o ten, taxpayers eel that it is bet-ter just to accept what the HMRC says than toattract attention and urther examination. Thesta o HMRC must stop treating all taxpayers asi they are trying to de raud the state and accept

that the majority o us want to pay the tax that wegenuinely owe.

The (tax) groups work pointed towards revelationsmade by the national audit conducted earlier thisyear or sel -assessment taxpayers. The HMRCmade estimates or people who had underpaid

Fresh start or old mistakes: public service in the balance


10/12


10

due to unintended errors but did (also) providethe same assistance to those who had overpaid.These gures are vital to understanding the extento the problem and as a result the HRMC has re-sponded accordingly. Clearly, when acting as thenations calculator and tax collector, in order tomaintain the taxpayers trust, the HMRC needsto be seen as ocused equally on overpayment asthey are on underpayment or else people willquestion whether their roles are compatible.

Unintentional errors where taxpayers completedtheir returns wrongly but had done so in goodaith led to at least 300M worth o tax errors.Clearly, the service currently o ered by HRMCis not meeting taxpayers needs and the potentialto simpli y the process through technology is cer-tainly not being utilized.

3. Seizing the Inevitable. Toward citizen self-assessment and online self-service

The tax group compared the progress made inthe United States and in the United Kingdomin getting taxpayers to le online and reviewedthe strategies that were used in the two countries.They ound that while very similar targets wereset, over a comparative time scale, the percentage

o taxpayers ling online in the states was almostdouble the rate in the U.K. In act, in the U.K., in2005 when it was envisaged that the majority o taxpayers would be ling online, only 17 percent were actually doing so. (O 10 million sel -assess-ment lers in the U.K., 2.9 million le online.)

The report argues that this disparity was due tothe di erent approaches taken by the two gov-ernments in particular around the involvement o the private and non- or-pro t sectors. The U.K.needs to look abroad or solutions where govern-ment creates incentives or ling online and, in-deed, to the United States, where the private sec-tor has been involved with great success.

The move toward compelling rather persuad-ing taxpayers to le online also appears to missa undamental point concerning moving taxpay-ers online in the rst place. The targets that wereput in place to increase the availability and uptakeo government e-service were not put in place ortheir own sake; they were there to drive the inno-vation and e ciency that would result in betterservice to the public. And one more suited to theindividual needs as a citizen and a consumer. Thegroup also argued considerable progress neededto be made in order to deliver service suited tocitizens needs.

Clearly, there are contextual di erences betweenthe United Kingdom and the United States, in-ormed by their respective histories, cultures andpublic policy priorities. But in much o the ore-going, the letters IRS could be substituted or

HMRC and the observations would hold true.


11/12


12/12

The Center or Digital Government, a division o e.Republic, Inc., is a national research and advisory institute on in ormation technology policies and best practicesin state and local government. Through its diverse and dynamic programs and services, the Center provides public and private sector leaders with decision support,knowledge and opportunities to help them e ectively incorporate new technologies in the 21st century.

The Centers special reports and papers provide two decades o experience and insight into the most important policy and management issues acing governments,and o er strategic approaches or planning and implementing technology, unding sources, and case studies rom jurisdictions.

2008 e.Republic, Inc. All rights reserved.100 Blue Ravine Road

Folsom, CA 95630916.932.1300 phone

916.932.1470 ax

www.centerdigitalgov.com

Intuit Inc. is a leading provider o business and nancial management solutions or small and mid-sized businesses, consumers and accounting pro essionals. Its fagshipproducts and services, including QuickBooks, Quicken and TurboTax so tware, simpli y small business management and payroll processing, personal nance, and taxpreparation and ling.

Acknowledgements:Paul W. Taylor, Ph.D., Chie Strategy O cer or the Center or Digital Government and the Center or Digital Education

Considering the Future of Online Tax Filing

Documents

Transcript of Considering the Future of Online Tax Filing