By Jonathan Light
Contrary to conventional wisdom, death and taxes are not the only constants in American life. There is one other: change. The changes in the way taxpayers of the 21st century will earn their living and how they will interact with state revenue agencies could hardly be more sweeping or significant.
Those of us in the business of using technology to facilitate tax compliance see a paradox: Even as our economy becomes more complex (and perhaps because of this complexity), taxpayers want tax compliance to become simpler, faster, cheaper, and more transparent. Indeed, the Internet experience, with its emphasis on accessibility and individual control, is increasingly the lens through which people evaluate all transactions, including tax compliance. As the nature of tax planning becomes continuous and occurs in realtime, taxpayers will demand more information and policy feedback in the normal course of commerce. This is a tremendous shift from the old “only on April 15th” perspective.
Challenges Facing Tax Agencies
To better understand these challenges, American Management Systems (AMS) conducted a comprehensive research study on the changing face of tax compliance. The report reflects a year-long analysis of taxpayer trends, obtained through interviews and focus groups with CPAs, CFOs, CEOs, entrepreneurs, technology experts, and taxpayers.
The chief finding of the study was that the traditional taxpayer isn’t so traditional anymore. It uncovered—
Growing complexity. The days when the typical taxpayer relied on a single employer for a paycheck for an entire career, or even a majority of income in a single year, are fading fast. Americans today are changing jobs at a rapid pace, receiving income from multiple sources, and launching their own business ventures rather than working for large employers. Individuals are increasingly likely to have acquired financial assets in portable 401(k)s, IRAs, Keogh plans, or retirement and education savings accounts, with all their inherent tax complexities.
Small businesses are also changing rapidly. Companies that once considered themselves strictly local now do business online across the nation and, in many cases, around the world. Companies that were once involved in only one or two straightforward types of transactions now operate at a level of complexity previously the preserve of businesses a hundred times their size. The traditional boundaries of state tax laws are becoming invisible to business online, and taxpayers increasingly experience complex compliance scenarios across multiple jurisdictions.
Rising expectations. Technology is turning the once specialized task of tax preparation into a commodity. Consequently, many tax-preparation firms are moving away from simple tax preparation to ever more sophisticated planning and advice. Similarly, tax agencies can use web pages and other technology to provide basic information and other low-level value-added services that the 21st century taxpayer will come to expect as a matter of course.
The tax system is not about to go on automatic pilot—quite the contrary. If Mom and Pop, Inc., no longer file Form 1040 EZ, their growing sophistication will lead to complex, time-sensitive requests directed at tax agencies, requiring a level of expertise and service not currently available. Just-in-time (JIT) information—and finding a single agency employee who can take ownership of a taxpayer’s questions—will ratchet up expectations placed on tax agencies. As the director of development at one Silicon Valley company responded, “I want to pay my taxes. People want to comply. But I want it to be easy, to be digital, to fit my lifestyle, which is fast. I’d like to see one-click withholding.”
Going global. National boundaries are disappearing, and the trend toward global commerce has repercussions on tracking and taxing taxable transactions. State tax laws have traditionally been based on geographic boundaries that are effectively invisible to online businesses. The Internet is providing many businesses with markets they had never considered before.
Our research also uncovered a growth in the global sourcing of labor, particularly in the area of intellectual capital. Technology professionals from five continents can collaborate on a single project without ever physically meeting or even leaving their homes. Small businesses are becoming more complex in their financial transactions, market reach, and supply chains; in some respects they resemble Fortune 500 companies of a decade ago.
The repercussions for tax agencies are obvious. Global transactions—business-to-business (B2B), business-to-consumer (B2C), and even consumer-to-consumer (C2C)—make data collection increasingly difficult, especially when transaction data can be stored almost anywhere. Consumers and small businesses suddenly possess what is, in effect, a Swiss purchasing account: untrackable, unmonitored, and untaxed. All this suggests a growing need for international harmonization if governments wish to regulate and tax electronic commerce.
Access and privacy. Information technology increases individual control over tax compliance, even as it triggers its own set of challenges. The ease with which tax data can be accessed and transmitted online raises concerns about system security and privacy policy. The survey indicated that people are adamant about wanting easier access to their tax information—but they also want privacy. While some worried about hackers breaking into their accounts, the more technology-savvy focused their concern on control issues, namely the likelihood that private data might be used for purposes other than those for which it was provided. Revenue agencies must address security concerns if they wish to cultivate trust in technology-driven tax transactions.
The trust factor. Because tax agencies operate with an expectation of voluntary compliance, the level of public trust is key to an agency’s ability to collect revenue. Raising taxpayers’ trust factor is critical for another reason: As one of the few public agencies with which almost every citizen interacts on a regular basis, tax agencies play a front-line role in building civic trust in government. Satisfying citizen concerns will go far toward establishing a positive public perception of government as a whole.
How Should Tax Agencies Respond?
As the 21st century begins, the challenges faced by state revenue agencies are every bit as profound as the opportunities provided by the digital revolution—and agencies must respond. Based on the AMS study’s findings, revenue agencies must—
The same changes will create a new set of challenges for agency administrators—near-term needs that will require revenue agency officials to do the following:
Collaborate. Tax administrators and state legislatures will need to explore new ways of cooperating across borders to make compliance easier for citizens. Meeting this challenge will require both administrative and statutory change.
Keep pace with change. Tax administrators are going to need a far more detailed understanding of the changes shaping the economy to keep pace with a constantly changing economy. Meeting this challenge will require an ongoing investment in training and education if tax administrators are to avoid becoming a barrier to business development.
Disseminate data. Today, a few agency experts have sophisticated knowledge of tax policy and its interpretation, but the changing environment will demand wide knowledge sharing with citizens and agency employees alike. Meeting this need will require both technology support and different expectations of the job skills and training required by tax administration staff.
Inform and influence policy. As tax revenue sources and the percentage of revenues derived from them change, tax administrators must provide legislators and other decision makers with high-quality information on these trends in order to better inform public policymaking. Enhanced prediction capabilities will become even more essential for policymakers that must make choices quickly.
Adopt technological innovation. Tax administrators will need more flexible systems in both the front and back office than ever required before. As citizens push to expand the self-service envelope—and the rules of tax administration evolve to meet those rising expectations—technology toolsets will need to be redesigned; patching old systems will prove less feasible.
Adapting to change will require a pace of change atypical of government institutions. Tax agencies that resist change or simply fail to keep pace could become a significant drag on business growth in their jurisdictions. By the same token, a progressive revenue agency—one that uses technology to its advantage—will constitute a considerable competitive advantage, with positive impact on taxpayer compliance and the public trust.
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