Tax Analysts Blog

Can We Have Frictionless Tax Compliance?

Posted on Mar 10, 2017

When I open a browser on my computer, or start my Facebook, Twitter, or LinkedIn app, I am often greeted by familiar sights. And even though I am writing this post on a Thursday, I am not referring to the 30-year-old photos of friends who believe that “throwback Thursday” is a real thing.

No – the familiar sights we all see when we #hitthenet (a good hashtag for hockey, but not a good thing in volleyball) are news stories and advertisements tailored to our interests. But this leads to the question of how the internet knows what we are interested in.

The answer is simple. Google may seem free to users, but it actually comes at a significant cost. For users, that cost involves giving up large chunks of privacy (by allowing innocuous-sounding, but intrusive, cookies to be placed on our computers to track internet use) in return for the ability to access the world’s store of information from anywhere in seconds. For advertisers and content providers, the cost involves paying for the right to present messages or content tailored to individual users.

Many business people are familiar with this system, sometimes called “frictionless retailing.” Frictionless retailing connects businesses and customers quickly, while seamlessly handling every element of the interaction from search to research, purchase, payment, and delivery. Businesses that make the most effective use of this paradigm are the ones most adept at applying the emerging fields of behavioral economics and artificial intelligence, particularly by analyzing and using big data gathered in the cloud. They have learned to leverage technology to create enormous business opportunities without growing the workforce.

What does this have to do with taxation? After all, governments don’t need to hunt for taxpayers any more than taxpayers need to use the internet to know that they have to pay taxes.

It does not require much imagination to figure out that the concept of frictionless transactions – essential to the success of e-commerce – lends itself well to tax administration. The problem is that tax administrators are using decades-old, obsolete technology that adds friction, requiring greater – not less – dependence on people to make the system work.     

It doesn’t have to work this way. The IRS could, for example, develop and deploy technology to improve taxpayer service by allowing taxpayers to engage in secure online chats, rather than having to use the telephone and wait hours (if they are fortunate) to pose their questions to a real person. The agency could use information it has already gathered from taxpayers – such as through filed returns – to direct those inquiries to personnel who have the requisite expertise to answer the particular taxpayer’s questions. For taxes that are simple to compute and collect, such as payroll taxes, the IRS could adopt technology that would enable employers to instantaneously report and pay those taxes when the wages are paid (no more Forms 941).

But to move toward a frictionless system, tax administrators must understand that they can achieve their goals by using the same tools that help businesses increase revenue, decrease costs, and improve their customers’ experience. There is a wealth of expertise in the private sector to help administrators begin to design a frictionless tax system – all they need to do is ask.

Read Comments (4)

Mike55Mar 10, 2017

This must be a good idea if we are both in agreement!

The hard part is of course getting people to buy-in. For example, I'm not if you could get the sort of person who still regularly shops at the mall to participate in a frictionless tax filing program. And while we can allow malls to simply die out over the next decade, we presumably cannot force people to file their taxes electronically.

Either way though great idea, and I'm sure someone could think of a way get over the participation hurdle.

Barry ShottMar 11, 2017

I think our tax administrators know there is a world of opportunity in technology and would jump at the chance to move in that direction. The problem is one of funding. Long term improvements require a long view of budgets and our legislators can't agree on a one year plan which suggests long term commitments are unattainable. Sadly the IRS, and many state tax administrators, are fast approaching the condition of our infrastructure.

Edmund DantesMar 13, 2017

This is long overdue. Didn't we have an IRS Commissioner recruited from IBM some years ago so as to be able to supervise modernization? Whatever happened to that project? Why does it always seem to take government so long to adopt modern technologies?

I'd like to be able to go online right now to see the inventory of 1099s that IRS has for my account. I want to see that before I file my return, to be certain I don't overlook something. Why can't I do that yet?

That would be a good step toward removing the friction.

Edmund DantesMar 16, 2017

It was Charles Rossotti, from 1997 to 2002. He was supposed to bring the IRS into the 21st century with technology overhaul. I realize that legacy systems present a big hurdle, but still.

I believe that the new technology was generously funded, but we got very little to show for it. That failure has contributed to the ongoing contraction of the IRS budget. Plus, of course, the odd sense of priorities at the IRS, their inability to have backups, and their mysteriously unreliable hard drives.

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