S. Income Tax Administration to Other CountriesSejlaKulaglicDecember6, 2017ACC7998 Out of 55 jurisdictions surveyed by theOrganization for Economic Cooperation and Development (OECD) for their 2017 TaxAdministration Series (TAS) report, 25 reported that tax revenue exceeded morethan 50% of total government revenue in 2014, making tax administrations theprinciple government revenue collection agency in more than half of thecountries surveyed. What are the characteristics of a successful income taxadministration? Many taxpayers will agree that the main factors include complianceease, trust/security, and support services. The biggest frustration with theU.
S. tax administration is very well all three. There is little simplicity withthe current U.S. tax system and how it is administered.
The trust is low amidsta time of large tax fraud. And many failed attempts at trying to get an IRSagent on the phone. Tax administrations may look for efficiencies with as fewpeople as possible, trying to cut costs, timely processing of returns andpayments, and timely collection of taxes owed.This paper takes a look at the U.S. incometax administration and how it compares to other players in the world.
Most ofthe information is obtained from the OECD’s 2017 Tax Administration Series(TAS) that provides comparative data on OECD and other advanced and emergingeconomies. Appendix E includes a list of the 55 countries that participated inthe study.The Internal Revenue Service (IRS) is theUnited States’ tax collection agency and administers the Internal Revenue Code(IRC) enacted by Congress.1 The first mention of anInternal Revenue commissioner and the first time the U.S. saw an income tax wasin 1862 when President Lincoln and Congress enacted an income tax to pay forCivil War expenses. The income tax was shortly thereafter deemedunconstitutional and repealed. It wasn’t until 1913 with the ratification of the16th amendment that Congress was given authority to enact an incometax.
That same year, the first Form 1040 appeared (see Appendix A). 2″In the 50s, theagency was reorganized to replace a patronage system with career, professionalemployees where the IRS commissioner and chief counsel areselected by the president and confirmed by the Senate”3The IRS underwent a full reorganization under the IRS Restructuring and ReformAct of 1998 “to closely resemble the private sector model of organizing aroundcustomers with similar needs.”4 See Appendix B for a completechart of the IRS organization and its top officials.IRS Publication 594 provides a generaldescription of the IRS collection process, a series of actions the IRS can taketo collect taxes a taxpayer owes if they are not voluntarily paid. The IRScollection process starts with an assessment, a determination of how much ataxpayer owes. This normally occurs when a taxpayer files a tax return. If theyfail to file a return, the IRS will determine the liability for them.
If thetaxpayer owes money, the IRS will send at least two bills for tax due plus anypenalties and interest, which will continue to accrue until the amount owed ispaid in full. If the amount is still unpaid after receiving a final tax bill, theIRS will begin collection actions, which can range from applying previous or subsequenttax year refunds to the tax due (until paid in full) to seizing property andassets.5Taxpayers have several options for payingtheir U.S. tax liability, including electronic payments (online, by phone orfrom a mobile device), paying by debit or credit card (online or phone), payingdirectly from a checking or savings account via Direct Pay, or by mailing a checkto a local IRS office.6 The IRS also includes anindependent organization that helps taxpayers understand their rights andprotects them under the Taxpayer Bill of Rights. This organization, theTaxpayer Advocate Service (TAS), “helps taxpayers who are experiencingfinancial difficulties, facing an immediate threat of an adverse action, whohave attempted it have been unable to resolve their problems with the IRS, andthose who believe an IRS system or procedure is not working as it should.”7How do these options and TAS servicescompare to other countries? Are they enough for U.
S. taxpayers to haveconfidence in their tax administration? The OECD Tax Administration Series(TAS) 2017 provides internationally comparative data on aspects of tax systemsand their administration. This data was collected from the participation of 55advanced and emerging economies, and includes performance-related data, ratiosand trends up to the end of the 2015 fiscal year.The taxpayer base is becoming more globaland digital every year. This realization is forcing tax administrations to considerhow they can best support this growing group of taxpayers and to make changes accordingly.Specifically, they are looking at how they can “provide easier approaches tocompliance, providing greater tax certainty and reducing costs, with anincrease in co-operating across borders, sharing information and rulings,updating tax treaties and joining forces to tackle the threats arising frombase erosion and profit shifting tax evasion”8.The OECD 2017 TAS reports that there is aneed for tax administrations to work with third parties in order to meet taxpayerexpectations.
In the past, many countries, including the U.S., have relied ondata supplied by taxpayers in the form of a tax return. This requiredadministrations “to focus on what information to keep, how to keep it and howto access it.” The focus is now shifting to how that data can be used moreeffectively.
By using third parties more, tax administrations are seeing lowerstorage costs and more time and resources available for analytics. There hasalso been increased reliance on tax intermediaries (bookkeepers, accountants,advisory professionals and tax agents) to provide or confirm the informationprocessed by tax administrations. The OECD report points out that the number ofstaff employed by tax administrations has been reducing all across the world.
Itis not surprising that the U.S. is included in this trend.
The jurisdictions surveyed in the OECDstudy report that a tax administration should be able to achieve and providethe following services; “integrated registration process for taxpayers;effective and low cost processing (assessment) of tax return and tax payments;effective and timely support and services to help taxpayers fulfil theirobligations; effective and timely verification interventions that confirm theaccuracy of reported information; effective and efficient interventions tocollect overdue payments and returns; and access to timely and cost effectivetax disputes processes.” Appendix C provides a high-level overview of the majorfunctions reported by the tax administrations participating in the survey. Thefour functions below are explored in more detail:”Assessment:there is not consistent growth in using electronic method to file or pay taxes.Many jurisdictions still report managing large paper-driven processes.
Services:telephone remains the major means of taxpayer inquiry and many administrationsreport high volumes of in-person inquiry. Verification:electronic audit methods and the use of third party data are changing howadministration representatives perform the work. Collection:there was an upward trend in collectable tax debt reported in the 2015 editionof the OECD report, which has slowed, with more than half the administrationsthat provided information reporting decreases in the level of their collectabletax debt between 2014 and 2015.”As part of the administration function,jurisdictions are looking to implement electronic filing and payment to reducecosts and improve the services they provide to taxpayers. The OECD reports thatthe use of “e-channels” for filing and paying is higher for business taxpayers(4 out of 5) than personal income tax return files (2 out of 3). The IRSrequires electronic filing with limited circumstances for paper filing.
The useof e-filing and electronic payments seems to be higher for businesses as well.This may be due to the fact that many business returns are prepared and filedby tax return prepares, who are required to file electronically, whereas the simplerindividual income tax returns are filed by the taxpayers themselves, some whoprefer paper filing.According to the OECD’s 2017 TAS report, oneof the more significant innovations in tax return process design over the lasttwo decades has been the development of pre-filled tax returns, primarily forpersonal income taxpayers. The pre-filled approach involves administration “pre-populating”the taxpayer’s return or on-line account with information it has collected fromthird parties. As the extent of pre-population is generally determined by therange of electronic data sources available to the administration, it iscritical to this approach that the legislative framework provides extensive andtimely third-party reporting covering all relevant taxpayer information.
Advocates of pre-filling initially encourage its use by tax regimes thatallowed relatively few deductions and credits, and these only where they couldbe verified with third party data sources. Out of the 55 countries surveyed, 37reported using pre-filled returns in 2015. Advances in rules based technologiesand analytics now mean that the approach can now be considered more widely. Dueto the complexity of various deductions and credits afforded to individual U.
S.taxpayers and the exclusions upon exclusions under the IRC, it is nearlyimpossible to implement a pre-populated tax return system. Although there issome interplay with third parties and the IRS, it does not account for themultiple deductions and credits available and used by taxpayers. There eitherneeds to be a significant tax reform to simplify the IRC, which is currently inthe works, or the third-party information reporting to the IRS needs to beincreased. Timely and efficient service is a criticalpart of tax systems that are based on voluntary compliance. This includesresponding to taxpayer inquiries on the application of tax laws, and providingpublic and private rulings as well as statutory determinations on theadministration’s view of the law. Administrations working “with” the taxpayerto develop systems and processes report increased levels of participation,taxpayer trust and confidence in the tax system as a whole. The 50administrations that reported having a taxpayer service and assistance sector indicatedthe following as high priority: “better managing service demand; supportingtaxpayers by providing more self-service options that also reduce the taxcompliance burden; providing an improved tax rulings service; increasingtaxpayer satisfaction; and compliance by design.
Aside from the complex taxlaw, U.S. taxpayers complain about the IRS’s response time. This is due to thedecrease in IRS employees, which results in a bigger call backlog. To remediatethis, the IRS has improved and added information and services available online,and has clarified to taxpayers and tax return preparers the inquiries that willbe addressed over the phone.
The verification function in taxadministration measures the accuracy and completeness of the informationreported by the taxpayer. According to the OECD report, this function employeeson average one-third of tax administration staff through conducting desk orfield based “tax audits.” Appendix D depicts the most common case selectioncriteria by the 53 administrations that provided information on theirverification function. Focusing in on the U.S.
, IRS examinations can occureither via mail or in person (taxpayer’s home, place of business, or an IRSoffice.9 One method used to selecta return for examination is matching amounts reported on the tax return toinformation returns filed by third parties to identify incorrect amounts. TheIRS may also rely on “studies of past examinations or on certain issuesidentified by other special projects.” 10The collections function involves thegovernment taking action against those who do not file a return on-time and/ormake a payment when it is due.
Even with evidence of the “pre-filled or noreturn” system being utilized, the filing of a tax return still remains themain method by which a taxpayer’s liability is declared in a majority ofjurisdictions participating in the OECD study. Because the pre-filled returnsare not an option in the U.S., the IRS relies on the taxpayer to file a timelyand accurate return and timely pay any tax due. If a return is not filed afterreceiving ample notice from the IRS, the IRS may file a Substitute for Return(SFR) with any information it has. The OECD tax administrations are puttinginnovation at the forefront to come up with better ways to collect taxes.Examples of methods utilized in the past include seizing bank accounts,increasing penalties or court procedures, and insolvency proceedings. There hasbeen more focus on the development of policy or administrative approaches thathelp avoid tax debt or to increase taxpayer intervention.
“To meet the expectations of governmentand taxpayers for an efficient and effective tax system, tax administrationshave long focused on business improvement and innovation.”11 The 2017 OECD TSA studypoints out that the Forum on Tax Administration (FTA) has done many studies toassist administrations in improving the cost-effectiveness of their operations.Examples of strategies provided that support this include: “measures toincrease the use of electronic services, delivery of new identity approaches,new uses of advance analytics to manage risk and personalize service, as wellas the introduction to new technologies, digital services and businesstransformations initiatives”.
The U.S. tax administration has manyinefficiencies that are costly to a taxpayer and the government as a whole.Aside from the complex IRC, the assessment process can use some sprucing up.The IRS should look for ways to making filing returns easier, maybe even goingto a “pre-filled return” system for individuals. This will lead to lesspaper-filed returns and more accurate filings.
The verification and collectionprocesses are similar to other tax administrations, which isn’t a good thing.There should be more collaboration with other countries to implement moreefficient processes and procedures so U.S. taxpayers can restore their confidencein the U.
S. tax system and not dread April 15th. 1IRS, “About IRS,” page last updated September 6, 2017, accessed November 27,2017.www.irs.gov/about-irs2IRS, “Brief History of IRS,” page last updated August 6, 2017, accessedNovember 27, 2017.www.irs.gov/about-irs/brief-history-of-irs3IRS, “Brief History of IRS,” page last updated August 6, 2017, accessedNovember 27, 2017.www.irs.gov/about-irs/brief-history-of-irs4IRS, “Brief History of IRS,” page last updated August 6, 2017, accessedNovember 27, 2017.www.irs.gov/about-irs/brief-history-of-irs5IRS, Publication 594, “The IRS Collection Process,” accessed November 27, 2017.www.irs.gov/pub/irs-pdf/p594.pdf6IRS, Publication 594, “The IRS Collection Process,” accessed November 27, 2017.www.irs.gov/pub/irs-pdf/p594.pdf7IRS, Publication 594, “The IRS Collection Process,” accessed November 27, 2017.www.irs.gov/pub/irs-pdf/p594.pdf8OECD (2017), Tax Administration 2017:Comparative Information on OECD and Other Advanced and Emerging Economies,OECD Publishing, Paris.9IRS, Publication 3498, “The IRS Collection Process,” accessed November 27,2017.https://www.irs.gov/pub/irs-pdf/p3498.pdf10IRS, Publication 3498, “The IRS Collection Process,” accessed November 27,2017.https://www.irs.gov/pub/irs-pdf/p3498.pdf11OECD (2017), Tax Administration 2017:Comparative Information on OECD and Other Advanced and Emerging Economies,OECD Publishing, Paris.http://dx.doi.org/10.1787/tax_admin-2017-en