FAQ: What is IRS's new "real-time" tax system?

Doeren Mayhew

FAQ: What is IRS's new "real-time" tax system?

IRS Commissioner Douglas Shulman unveiled his "real-time" tax system idea late in 2011. Since then, the IRS has had public meetings with stakeholders, including representatives of taxpayers, government officials, tax professional associations, and many others, to discuss moving the IRS away from its traditional "look-back" system to a "real-time" system. As explained by Shulman, the goal of a real-time system is to resolve problems with a taxpayer's return before it is processed rather than wait until after it is processed.

Real-time system

Today, many routine transactions, especially financial transactions, are done in "real-time." Consumers can access their bank and other financial accounts online 24/7. Communicating and doing business with the IRS, however, is still very much slower.

Traditionally, the IRS has operated on a "look-back" system. That is, the IRS accepts returns, processes them and then contacts taxpayers about any problems on the returns. Frequently, it takes the IRS many months to contact a taxpayer about an issue with a return. A real-time tax system, as described by Shulman, would improve the return filing process by accelerating the IRS's response time.

Under a real-time tax system, the IRS would match information submitted on a return with third-party information at the beginning of processing rather than after the return has been processed. This "real-time" activity would give taxpayers the opportunity to correct their return before the IRS completes processing the return. Problems could be resolved much more quickly, Shulman has predicted.

Forms W-2

A real-time tax system could begin with changes to the processing of Form W-2, Wage and Tax Statement. Requiring more electronic filing of Forms W-2 by employers could improve processing time, payroll industry representatives told the IRS in January 2012. However, a real-time tax system would likely require the IRS to accelerate the matching of Form W-2 data it receives from the Social Security Administration (SSA) and that could place an additional burden on the SSA.

Issues

Moving to a real-time tax system is not something that will happen overnight. Proponents of a real-time tax system have recommended moving up the April 15 filing date. Under current law, the deadline for filing individual income tax returns is April 15 and only Congress can change that date.

The IRS would also have to adjust its return processes. The IRS currently resolves most mismatches of return information and third-party information post-filing. Resolving these issues before a return is processed would likely require more IRS personnel and would also impact many professional return preparers during their busiest time of the year: the filing season.

The IRS is currently operating under very tight budget parameters. Congress reduced the IRS's funding for fiscal year (FY) 2012 and additional cuts may be made in future IRS budgets. These budgetary pressures make moving to a real-time tax system unlikely at the present. Most recently, Shulman acknowledged that a real-time tax system is a "long-term destination" rather than a "short-term project."

If you have any questions about the IRS's real-time proposal, please contact our office.


If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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