Objectives, Scope, and Methodology

Our objectives in describing the potential benefits and impediments of a voluntary tax agency reconciliation type filing system were to (1) estimate how many taxpayers would not have to prepare returns under this kind of system, (2) identify the operational characteristics such a system might have, (3) identify the pros and cons of such a system to taxpayers and IRS, and (4) identify any major impediments to or costs in establishing such a system under the current federal tax laws. IRS does not receive information returns on taxpayers’ costs to produce income. Taxpayers who agreed with the return information could notify IRS of their acceptance, possibly by telephone using, their personal identification number as their electronic signature. However, even if IRS could produce tax returns prior to April 15, some taxpayers may be reluctant to participate in this voluntary program because they distrust IRS to accurately prepare their returns or because they would not be able to get access to refunds early in the tax filing system. About 7 percent of the information returns are paper. Since its 1987 study, IRS has not reexamined the operational characteristics of a tax agency reconciliation filing system as a potential alternative for filing tax returns, even though technological improvements, such as electronic filing, may make it possible to speed up information returns processing. Conclusions

As many as 51 million taxpayers, primarily wage earners, would not have to prepare tax returns under a tax agency reconciliation type system. Instead, IRS could prepare their returns for them on the basis of taxpayer supplied information, such as filing status and dependents, which along with information returns would be used to produce tax returns. A major impediment to establishing a tax agency reconciliation system is the length of time it takes IRS to process information returns. American Institute of Certified Public Accountants Comments

In its written comments, the American Institute of Certified Public Accountants stated that it did not believe that IRS has the ability to implement a tax agency reconciliation system in the foreseeable future because of (1) the current uncertainty of IRS budget and staffing levels, (2) the inability of IRS to process and payers to file complete and accurate information returns on a timely basis, (3) the unknown effect on voluntary compliance that could occur if taxpayers fail to report income to IRS from sources not covered by information returns, and (4) the potential for IRS to make more errors processing taxpayers’ changes to IRS prepared returns under an alternative system than it currently makes processing tax returns.
Why GAO Did This Study

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.

What GAO Found

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.