In prepared remarks before the National Press Club on April 6, IRS Commissioner Doug Shulman unveiled a bold new proposal that he said would simplify the preparation of income tax returns, make them more accurate, and cut down on the need for IRS to contact taxpayers well after returns are filed to address discrepancies.
“Pre-match” of most income entries. Shulman's simplification initiative would take the following form:
1. IRS would get all information returns from third parties (W2s, 1099s, etc.) before individual taxpayers filed their returns.
2. Taxpayers or their professional return preparers could then access that information, via the Web, and download it into their returns using commercial tax software.
3. Taxpayers would then add any self-reported and supplemental information to their returns and file the returns with IRS.
4. IRS would embed the core third-party information into its pre-screening filters, and immediately reject any return that did not match up with IRS records. The taxpayer would be asked to fix the discrepancy before IRS processed the return.
The goal of this initiative, according to Shulman, would be for IRS to process more accurate returns and deal with many more problems up-front. It could then shift resources to spend more money “getting it right in the first place,” and do less back-end (i.e., after the taxpayer has filed) auditing. The example Shulman gave was of a taxpayer who under the current system under-reports dividend income, requiring IRS to follow up with him well after his return is filed. Under Shulman's approach, the taxpayer would see the discrepancy between his information and IRS's before he filed his return and “get it right the first time.”
Observation: Shulman's idea would be one step removed from the simplified return used by states such as California, where the taxpayer can access a state tax return that is already filled out with information from the taxpayer's W-2 and his last tax return, review and make needed changes to it, and then e-file it directly to the taxing authority.
Shulman acknowledged that his initiative wouldn't be in place any time soon. IRS would have to make a large technology investment to make it work, and due dates for filing information returns would likely need to be revised.