Income Tax Filing Reform Plan
Objective
To eliminate the need for traditional tax return filing for W2 employees and other taxpayers with simple financial situations. This reform would leverage IRS-collected data to automatically generate tax returns, allowing taxpayers to easily review, modify, or dispute returns through an online portal. The goal is to minimize taxpayer burden, streamline IRS processes, and reduce staffing needs, making the IRS smaller and more efficient.
- Data Sources Used in Automatic Filing
The IRS already collects detailed information on taxpayers’ income, interest, investments, and other financial activity through employer and financial institution reports. The new system will use this data to automatically generate accurate tax returns for most citizens with simple financial profiles.
A. Employment Income and Wages
• W-2 Forms (Wage and Tax Statement): Employers submit W-2s to the IRS for each employee, detailing wages, taxes withheld, Social Security, and Medicare contributions. This data can directly populate income sections of the return.
• 1099-MISC and 1099-NEC (Non-Employee Compensation): Income reported for freelancers or self-employed individuals via 1099s can also be included for taxpayers with straightforward non-employee income.
B. Investment and Interest Income
• 1099-INT (Interest Income): Financial institutions report interest from savings accounts, CDs, and bonds, allowing automatic entry of interest income.
• 1099-DIV (Dividends): Reports on dividends received from stocks or mutual funds can be added directly.
• 1099-B (Brokerage Transactions): Brokerage firms send 1099-Bs reporting stock, bond, and other securities sales, including capital gains or losses.
• 1099-R (Retirement Income): Distributions from retirement accounts, pensions, and annuities are reported to the IRS and can be integrated into automatic returns.
C. Other Income Types
• SSA-1099 (Social Security Benefits): Reported by the Social Security Administration, ensuring seamless inclusion for retirees or other recipients.
• 1099-G (Government Payments): Unemployment benefits and certain state/local tax refunds, allowing for quick processing for recipients.
D. Mortgage Interest and Real Estate Transactions
• 1098 (Mortgage Interest): Mortgage lenders report mortgage interest paid, which can be applied as an itemized deduction.
• 1099-S (Real Estate Transactions): Real estate sale proceeds are reported to the IRS, streamlining property-related tax processes for taxpayers with straightforward property sales.
E. Tuition and Education Credits
• 1098-T (Tuition Payments): Education institutions provide details on tuition paid, allowing the IRS to include eligible education credits.
• 1098-E (Student Loan Interest): Loan servicers report student loan interest payments, which the system can apply as a deduction for qualified taxpayers.
- Automation and AI-Driven Processes
To reduce the need for additional IRS staff, AI will play a central role in data aggregation, validation, and processing, ensuring accuracy and efficiency.
A. Data Aggregation and Pre-Filling
• Data Matching and Validation: AI will cross-reference taxpayer data from multiple sources (W-2s, 1099s, etc.) to create pre-filled returns with minimal errors.
• Automated Form Entry: AI will read and categorize standard forms, entering data directly into relevant fields without manual handling.
B. Error Detection and Compliance Verification
• Error and Anomaly Detection: AI algorithms will detect inconsistencies or missing data, prompting taxpayers to resolve these issues before filing.
• Compliance Monitoring: AI will automatically flag returns with significant discrepancies or errors for follow-up review or limited audit.
C. Notifications and Requests for Additional Information
• Proactive Alerts: Taxpayers can receive alerts if their pre-filled return is missing information or if certain credits or deductions require additional data.
• Automated Support: AI-driven support will assist taxpayers in understanding how to correct or supplement their return.
- Streamlined Taxpayer Engagement via Online Portal
A user-friendly online portal will provide taxpayers with transparency and options for interaction, enabling efficient review, modification, and dispute processes.
• Data Transparency: Taxpayers can access a summary of all IRS-collected data used in their automatic return, offering full visibility into the information driving their tax liability or refund.
• Modifications and Documentation Upload: Taxpayers can make adjustments to include additional deductions, upload missing documentation, or correct pre-filled information.
• Automated Assistance: The portal will feature an AI chatbot for common questions and guided help on tax credits, deductions, and specific reporting issues.
- Dispute and Amendment Process
For taxpayers who disagree with their automatically generated return, a streamlined dispute and amendment system will be available.
Pre-Filing Modifications and Dispute Mechanism
• Pre-Filing Submission: Taxpayers can submit documentation (e.g., receipts for eligible deductions) directly through the portal, enabling corrections before their return is finalized.
• Dispute Process: If a taxpayer disagrees post-filing, they can initiate a dispute through the portal. For more complex disputes, a formal process will allow detailed submission of documents and assistance from IRS specialists as needed.
Resolution Tracking and Professional Support
• Real-Time Updates: Taxpayers can track the status of disputes or modifications in real-time.
• CPA Integration: Certified tax professionals and CPAs will have limited access to assist clients directly through the portal, helping taxpayers with complex cases or providing dispute support.
- Transition for CPAs and Tax Professionals
This reform will reshape the role of tax professionals, shifting the industry from tax preparation to advisory and support services.
• Focus on Tax Planning: CPAs will focus on tax strategy and planning, helping clients maximize deductions, credits, and overall financial outcomes under current tax law.
• Tax Education and Literacy: Tax professionals will assist with taxpayer education on financial strategies and literacy, empowering average citizens with the knowledge typically available to high-income taxpayers.
• Dispute Resolution Assistance: CPAs can assist taxpayers with disputes or documentation requirements, supporting more complex or formal cases through the online portal.
Industry Support and Training: The IRS will provide guidance to help tax professionals transition to advisory roles, ensuring minimal disruption and maximizing taxpayer support.
- Phased Rollout and Implementation
To ensure a smooth transition, this reform will be implemented in phases:
• Pilot Programs: The IRS will test the system with specific income brackets or states, gathering feedback and data on usability, accuracy, and taxpayer satisfaction.
• National Expansion: Once the pilot proves successful, the system will be expanded nationwide, with public resources available to guide taxpayers through the new process.
• Continued Improvements: The IRS will use feedback and data from the pilot and full rollout phases to refine AI models, update dispute handling processes, and further simplify taxpayer engagement.
- Enhanced Data Security and Privacy
Protecting taxpayer data and maintaining confidentiality will be central to this system’s design.
• Enhanced Data Security Protocols: The IRS will employ state-of-the-art encryption and security measures, mirroring or exceeding current protections for taxpayer information.
• AI-Driven Compliance Monitoring: AI will continuously monitor for potential security risks or anomalies, ensuring prompt identification and resolution of any issues.
• Transparency in Data Use: The IRS will clearly communicate how taxpayer data is collected, used, and stored, fostering public trust.
- Long-Term Benefits and Efficiency Gains
By automating tax processing, the IRS can achieve substantial efficiency gains, reducing the need for manual processing and allowing the agency to become leaner and more responsive to taxpayer needs.
• Cost Savings: Automation reduces the need for manual data handling and paper-based processes, decreasing overall operating costs.
• Faster Processing and Refund Issuance: Taxpayers can expect faster refunds and dispute resolution due to streamlined AI-powered processes.
• Increased Capacity for Compliance: With a smaller workforce focused on high-complexity audits and compliance efforts, the IRS can address complex cases and tax fraud more effectively.
Conclusion
This tax filing reform will allow the IRS to simplify tax filing, reduce taxpayer burden, and promote efficiency. By leveraging existing data sources and AI technology, the IRS can achieve substantial cost savings, faster processing times, and a more secure, transparent system. This shift will also allow tax professionals to focus on higher-level tax planning, delivering the benefits of strategic tax knowledge to everyday taxpayers.