Intergovernmental Tax Filing, Reporting, and Payments

Provide Intergovernmental Tax Filing, Reporting, and Payments Processing

How to Get to Bed Early on April 14

Imagine this:  On April 15, a citizen receives a notice in the mail from
her state tax office. It contains a bill for her annual state and
federal taxes, and was calculated from records submitted electronically
by her employer and her bank. She verifies the bill, dials an 800
number, and pays her taxes by credit card. Her state and federal taxes
have now been completed in a matter of moments--with no annoying forms
to fill out.

U.S. taxpayers use and prepare financial data separately in reporting
tax information to federal, state, and local governments.  Although in
some cases, the base level information required by the Internal Revenue
Service (IRS) is used by the states, the filing form or information
input follow separate and distinct paths.

Efficient business practices require that a framework for a "single
information flow" be developed based on the premise that once data is
entered, it serves the needs of the entire enterprise. This enterprise
could be defined as all federal, state, and local government agencies
that require the same data from a reporting source. For example,
corporations or small businesses would report employee wages and
withholdings to a single government access point. Upon receipt by the
agency, the data could be used to update appropriate records held by the
IRS, Social Security Administration, Department of Labor, Department of
Veterans Affairs, state agencies, etc. This approach is but one of a
series of steps toward a virtual agency and one-stop access for
intergovernment transactions.

There are enormous costs associated with tax data processing. The IRS
annual operating budget for fiscal year 1992 was $6.7 billion to collect
$1.12 trillion in revenues. To collect these revenues, the IRS processed
1 billion tax information documents and 204 million tax returns.1 The
federal, state, and local aggregated collection costs are unknown due to
the many types of taxes levied and the circuitous filing paths for the
various sales, real estate, property, income, and payroll taxes.
Innovative approaches to tax collection could lower overhead costs
significantly and simultaneously improve customer service by reducing
the burdensome, redundant filing techniques used today.

Need for Change

Federal, state, and local government policies need to foster close,
cooperative intergovernmental and interagency relationships that
eliminate unnecessary duplication of effort and promote enhanced citizen
access to information and services.  Joint electronic filing of wage and
tax data is perhaps one of the best examples of an application that
embodies these policies.

The IRS, Social Security Administration (with support from the Office of
Management and Budget), and Department of Labor are conducting a Wage
Reporting Simplification Project (WRSP).  Cross-agency approaches like
WRSP should help ensure that "reporting once" pilot programs will be in
place in less than 2 years. Reporting once should include providing
financial data required to other agencies such as the Department of
Health and Human Services for entitlement purposes and the Department of
Labor for unemployment considerations. The phase 1 feasibility study for
WRSP identifies potential life cycle savings of $1.7 billion to
participating government agencies and $13.5 billion in reduced burden
to private sector employers.2

An intergovernmental, single information flow concept for tax filings,
reporting, and payments processing will provide a seamless government
for the benefit of the taxpayer. Technology is present that will enable
this to happen.

The IRS is embarking on a comprehensive Tax Systems Modernization
program. Although the IRS automation effort will significantly lower the
cost of filing, auditing, and processing annual income tax data,
reengineering must be a vital part of the overall modernization
strategy.

This reengineering should include a broader intergovernmental
perspective and address new ways to conduct business with taxpayers,
business, financial institutions, and state and local governments. For
example, tax information for a large number of taxpayers is already
available to the IRS prior to taxpayers" annual filing. Financial
institutions, employers, and others report comprehensive financial
information about individuals to the IRS electronically or on paper.
Reported information includes wages, earnings on investments, and
certain financial transactions. The IRS thus has in hand all the
information it needs to compute taxes for 60 million filers. Yet it
still sends out enough forms to fill over five boxcars and requires
taxpayers to compute what the agency already knows.  This practice
continues because, in most cases, these data are not converted to
electronic format for easy use until after taxpayers have filed their
tax returns. IRS could calculate returns and send a statement. So could
a state government, based on the same file. If IRS did this and if
electronic filing were used for all other individual income tax filings,
the IRS and state agencies would no longer need to mail the equivalent
of over 75 boxcars of forms.

Cross References to Other NPR Accompanying Reports

Department of the Treasury, TRE04: Foster Federal-State Cooperative
Initiatives by the IRS; TRE05: Simplify Employer Wage Reporting; and
TRE09: Modernize the IRS.

Endnotes

1. U.S. Department of the Treasury, Internal Revenue Service, Internal
Revenue Service 1992 Annual Report (Washington, D.C., 1993), pp. 3-4,
12.

2. See The Mitre Corporation, Wage Reporting Simplification Project:
Overview of the Phase I Feasibility Study (Washington, D.C., May 1993).