Regardless of the ongoing tax legislative discussions outcome, one thing is certain – we will continue to pay taxes. All of the digital capabilities required to make our lives easier are available today. While it is too late to impact 2017 taxes, 2018 and beyond is open for improvements. Let’s start applying data and technology to create a better tax game.
Imagine this scenario: You
walk into your doctor’s office and are asked for your current blood pressure,
temperature, and weight. After a short pause, you are asked what your blood
pressure was the last time you were at the doctor’s office. If this scenario
seems wildly absurd and would never happen, I agree. So why then, do we
tolerate the equivalent of that behavior with tax preparation?
Every year looks about the
same, with similar scenarios playing out:
- You launch
TurboTax or similar software which you used last year to prepare your taxes.
Luckily it stored most of your information. However, you still must enter your
W-2 information, charitable donations information, and the name of your new
receive a paper-based information-gathering packet from your friendly tax
accountant with the fax number of the accounting firm prominently printed on
the first page so that you can promptly return the engagement letter before
they will consider working on your returns.
- You put
a slew of random papers in to a folder and head to your local H&R Block
branch. You spend most of a weekend or two there sorting through receipts and
trying to guess the right answers to the series of questions you are asked.
Regardless of which one you
participate in, there is bound to be pain. Banks only provide 12 months of
rolling raw data, subjecting anyone who didn’t download the data in time to
hunt through monthly statements. If you own a small business, work from a home
office part of the time, or do anything other than clock 9 to 5, the process
can be even more convoluted. For each utility you pay, you need to login to a
unique portal and gather the data. Given
that we all have to bring our own data to the game, is it so surprising that:
- The Tax
Foundation estimates that 8.9 billion hours are needed for everyone – individuals and
companies – to comply with the tax code every year.
- The same
study shows that about 64% of those hours are put in by citizens filing individual
- If you participate
in an Individual Retirement Account, you contribute to the 48,731,780 hours
required to file the necessary paperwork just for those alone.
- Bloomberg reported last year that despite the rise in availability of tax preparations
software, such as TurboTax and H&R Block’s online filling, human preparers
– including tax accountants – have steadily raised their fees.
It might seem like there is
no escape from the excruciating pain of tax season, but could there be another
way? What if we could break away from our negative pattern and use existing big
data and artificial intelligence to give us those hours back?
Easier taxes might seem like
a pipe dream but other countries have proven that it is an achievable goal.
Estonia, tax filing takes about 5 minutes of online work. The country has a tax
filling compliance rate above 90 percent.
Tax payers receive pre-filled tax forms.
If everything is correct, they just press “send” and are finished.
Sweden, citizens receive a document from the government with all relevant
information already filled out so that submission is easy. If their taxes are
straight forward, individuals can simplify further by agreeing to their tax
filling by texting “yes” regarding their prepared statement.
Netherlands, Japan, and Singapore are also models for making taxes easy, but not because of their
tax code. Rather it is through the collection, pre-filing of tax-related data,
and use of digital that makes these tax systems more efficient and the taxation
Don’t think this is possible
in the United States? The reality is that most individual taxpayers have a
single employer (and thus a single W-2 income reporting form) and bank with a
single institution. Because employers and banks must already submit this
information to the government, it ought to be as simple as an individual
confirming the data is accurate in order for the tax returns to be processed.
The same is true for
businesses. Not only does the IRS understand how much money was spent by an
organization in a given year, they receive quarterly reports and payments from
businesses based on accounting principles. The government already has a sense of
what the business will earn throughout the year and can reconcile that
information with bank statements and payment transfer reports.
the change or changing the resistance?
the tax preparation world has been slow to embrace change and adopt digital
solutions to make tax filing easier. The culture is mostly characterized by the
phrase ‘knowledge is king’ and made up of individuals who enjoy reading and
interpreting the tax code in all of its possible variations. Don’t look to the
tax preparation industry to disrupt itself any time soon.
Internal Revenue Service (IRS) with big data at its fingertips can make this
process a reality. It seemed like it might be heading in that direction last
year, as the Agency set out on a path to upgrade it 25-year modernization
overhaul but the effort may have
stalled. If the agency were to alter digital policy to allow for additional
data sharing, take on artificial intelligence applied to its data set, we could
- AI processing structured data, like how much has a citizen made at
their job, how much interest was earned from the bank or investment firm, or how
much money was contributed to your favorite charity.
- A taxpayer-centric dashboard, much like those used by the credit
scoring agencies, that allow a user to login, review how much tax has been paid
in previous years, and what obligations the taxpayer has to date.
- Machine learning driving predictable form completions, based on
the “same as last year” (SALY) approach. More advanced methods can be used to
support businesses in detecting trends within tax filing periods or quarterly,
monthly, or annual reporting trends, including increases or decreases in cash
flow and accruals.
- Do you volunteer? Those miles traveled for your volunteer gig can
automatically be transferred from your wireless-enabled car to the IRS.
- A significant decrease in tax fraud and audits as machines learn
patterns in data and can sport abnormalities early for correction by the
Regardless of the ongoing tax
legislative discussions outcome, one thing is certain – we will continue to pay
taxes. All of the digital capabilities required to make
our lives easier are available today. While it is too late to impact 2017
taxes, 2018 and beyond is open for improvements. Let’s start applying data and
technology to create a better tax game.
Photo by Paul Bergmeir