Due to the pandemic, the IRS extended the due date for 2020 individual income tax returns from April 15 to May 17. Some people want it extended further. We should instead be asking: Considering today’s technology, why do we still cling to any due date?
Over two decades ago, technology created e-commerce that enabled us to make purchases 24/7, without having to fill out an order form. Online banking means no trips to the bank or ATM, no need for monthly statements to be mailed to us, and we have 24/7 access. Even medical records and prescriptions can all be securely handled online.
In contrast, individual income tax filing continues as it has for decades — we wait for paper W-2 and 1099 forms to be physically mailed to us in January, we then enter our data into a software program or send it to a tax return preparer. We review the printed or online forms before e-filing or paper mailing the return by the stated due date.
While shopping, payments, banking and investing have been radically changed by technology since the early 1990s, tax compliance only goes as far as tax preparation software and e-filing. We have allowed the underlying information to enter the digital world only partially. It is past time to change this. So, what’s needed to make April 15 be just any other day?
I’ve devoted over 35 years to a career based on tax compliance and planning. This experience in conjunction with decades of research on tax and technology lead me to urge lawmakers and tax agencies to make better use of technology such as encryption and other security measures, biometrics, blockchain, artificial intelligence and advanced internet capabilities. Doing so will revolutionize income tax compliance providing benefits to taxpayers, employers and other payers, technology providers and governments. It will also build respect for our tax system through simplification and eliminating the dreaded April 15 due date.
This is how elimination of a filing due date can work: A digital file is created once your paycheck is auto-deposited to your bank account. At the time any income is transferred to you, it should feed into your “tax cloud,” which is a secure repository that you control. You select the software that uses this data daily or weekly to compute your federal and state income tax liabilities at that point in time.
The software would ask you for your marital status, age of your children, bank account and other information needed to calculate your income tax obligation and make necessary transfers to or from your bank account. This system would also pick up your mortgage payments, charitable contributions and similar tax items because digital records exist for them. If you own a business, your accounting software can be configured to also feed regularly into your tax cloud repository.
At any point in time, likely using a smartphone app tied to your tax software, you can easily determine if you owe or have overpaid. If you owe, a swipe on the app transfers the payment from your securely linked bank account, credit card or digital payment tool to the tax collector. If you overpaid or are due a refundable credit, you can let the IRS or state agency hold it for you (as many people do because they like refunds) or take it at that time.
Legally, we’d still need dates to finalize your liability and close the return so the timeframe for any corrections or tax audits can have a specified end date each year like we have today.
There are at least three compelling benefits of modernizing how we file income tax returns. First, this just-in-time filing process means no more due dates to get your personal return filed. You’d have your tax information readily available at any time. Adjustments needed to ensure use of the proper tax rates would be made throughout the year.
Second, the IRS would no longer need to issue its annual alert about non-filers who might lose refunds. An IRS news release of April 5 aimed to alert 1.3 million individuals to file their 2017 return to avoid losing about $1.3 billion of refunds that expire May 17, 2021. With the just-in-time system, individuals more likely would not miss a filing date since they would no longer exist. All individuals would have received any overpaid taxes automatically.
Finally, this system eliminates the need for employers, banks and other payers to mail information returns to payees. Instead, the information would be in the payee’s tax cloud when paid and sent to the IRS at the same time.
Will this 21st century approach to income tax compliance work for everyone? Well, according to the Pew Research Center, 7 percent of people today do not use the internet. It is likely, though, that this percentage will continue to drop and it will take a few years to transition to the new system.
Also, the FDIC estimates that 6 percent of households are unbanked. Cost savings realized by governments and payers from a modern filing system can be used to assist with this matter.
Will return preparers and accountants lose their jobs? Perhaps some. But many individuals likely will want assistance setting up and periodically reviewing their cloud repository and software. Time no longer spent on 20th century tasks can instead be used to provide more valued services such as financial planning. And new software tools will be desired to work with your cloud repository to help with various financial and legal matters.
So, let’s start picturing our income tax compliance obligations in a different light and without the anxiety-ridden April 15 due date. Think of what income tax compliance can be with use of technologies that already simplify many aspects of our lives like money transfers, purchases, bill payments and communications. Income tax compliance can and must be improved with 21st century technologies. Let’s demand it of our lawmakers and the IRS now.
Annette Nellen, CPA, Esq., is an accounting and taxation professor at San José State University and a Public Voices Fellow with The OpEd Project. She runs the 21st Century Taxation blog.