Tax Administration

Millions of Americans continue to file tax returns each year even though most have fully paid their taxes through the withholding system. Taxpayers in at least 36 other countries with tax withholding systems are not required to prepare income tax returns because these countries use alternative filing systems not currently available in the United States. This report (1) estimates how many U.S. taxpayers would not have to prepare returns under a tax agency reconciliation filing system, (2) identifies the operational characteristics of such a system, (3) discusses the pros and cons of such a system for taxpayers and the Internal Revenue Service, and (4) points out any major impediments to or costs associated with establishing this type of filing system under the current federal tax laws. GAO focuses on a tax agency reconciliation type system because it would not require any tax law changes while a final withholding type system would.

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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