Comparing The Income Tax: U.S And Other Countries

Out of 55 jurisdictions surveyed by the Organization for Economic Cooperation and Development (OECD) for their 2017 Tax Administration Series (TAS) report, 25 reported that tax revenue exceeded more than 50% of total government revenue in 2014, making tax administrations the principle government revenue collection agency in more than half of the countries surveyed. What are the characteristics of a successful income tax administration? Many taxpayers will agree that the main factors include compliance ease, trust/security, and support services. The biggest frustration with the U. S. tax administration is very well all three. There is little simplicity with the current U. S. tax system and how it is administered. The trust is low amidst a time of large tax fraud. And many failed attempts at trying to get an IRS agent on the phone. Tax administrations may look for efficiencies with as few people as possible, trying to cut costs, timely processing of returns and payments, and timely collection of taxes owed.

This paper takes a look at the U. S. income tax administration and how it compares to other players in the world. Most of the information is obtained from the OECD’s 2017 Tax Administration Series (TAS) that provides comparative data on OECD and other advanced and emerging economies. Appendix E includes a list of the 55 countries that participated in the study.

The Internal Revenue Service (IRS) is the United States’ tax collection agency and administers the Internal Revenue Code (IRC) enacted by Congress. The first mention of an Internal Revenue commissioner and the first time the U. S. saw an income tax was in 1862 when President Lincoln and Congress enacted an income tax to pay for Civil War expenses. The income tax was shortly thereafter deemed unconstitutional and repealed. It wasn’t until 1913 with the ratification of the 16th amendment that Congress was given authority to enact an income tax. That same year, the first Form 1040 appeared.

“In the 50s, the agency was reorganized to replace a patronage system with career, professional employees where the IRS commissioner and chief counsel are selected by the president and confirmed by the Senate”. The IRS underwent a full reorganization under the IRS Restructuring and Reform Act of 1998 “to closely resemble the private sector model of organizing around customers with similar needs. ”

IRS Publication 594 provides a general description of the IRS collection process, a series of actions the IRS can take to collect taxes a taxpayer owes if they are not voluntarily paid. The IRS collection process starts with an assessment, a determination of how much a taxpayer owes. This normally occurs when a taxpayer files a tax return. If they fail to file a return, the IRS will determine the liability for them. If the taxpayer owes money, the IRS will send at least two bills for tax due plus any penalties and interest, which will continue to accrue until the amount owed is paid in full. If the amount is still unpaid after receiving a final tax bill, the IRS will begin collection actions, which can range from applying previous or subsequent tax year refunds to the tax due (until paid in full) to seizing property and assets.

Taxpayers have several options for paying their U. S. tax liability, including electronic payments (online, by phone or from a mobile device), paying by debit or credit card (online or phone), paying directly from a checking or savings account via Direct Pay, or by mailing a check to a local IRS office. The IRS also includes an independent organization that helps taxpayers understand their rights and protects them under the Taxpayer Bill of Rights. This organization, the Taxpayer Advocate Service (TAS), “helps taxpayers who are experiencing financial difficulties, facing an immediate threat of an adverse action, who have attempted it have been unable to resolve their problems with the IRS, and those who believe an IRS system or procedure is not working as it should. ”

How do these options and TAS services compare to other countries? Are they enough for U. S. taxpayers to have confidence in their tax administration? The OECD Tax Administration Series (TAS) 2017 provides internationally comparative data on aspects of tax systems and their administration. This data was collected from the participation of 55 advanced and emerging economies, and includes performance-related data, ratios and trends up to the end of the 2015 fiscal year. The taxpayer base is becoming more global and digital every year. This realization is forcing tax administrations to consider how they can best support this growing group of taxpayers and to make changes accordingly. Specifically, they are looking at how they can “provide easier approaches to compliance, providing greater tax certainty and reducing costs, with an increase in co-operating across borders, sharing information and rulings, updating tax treaties and joining forces to tackle the threats arising from base erosion and profit shifting tax evasion”.

The OECD 2017 TAS reports that there is a need for tax administrations to work with third parties in order to meet taxpayer expectations. In the past, many countries, including the U. S. , have relied on data supplied by taxpayers in the form of a tax return. This required administrations “to focus on what information to keep, how to keep it and how to access it. ” The focus is now shifting to how that data can be used more effectively. By using third parties more, tax administrations are seeing lower storage costs and more time and resources available for analytics. There has also been increased reliance on tax intermediaries (bookkeepers, accountants, advisory professionals and tax agents) to provide or confirm the information processed by tax administrations. The OECD report points out that the number of staff employed by tax administrations has been reducing all across the world. It is not surprising that the U. S. is included in this trend.

The jurisdictions surveyed in the OECD study report that a tax administration should be able to achieve and provide the following services; “integrated registration process for taxpayers; effective and low cost processing (assessment) of tax return and tax payments; effective and timely support and services to help taxpayers fulfil their obligations; effective and timely verification interventions that confirm the accuracy of reported information; effective and efficient interventions to collect overdue payments and returns; and access to timely and cost effective tax disputes processes. ” The four functions below are explored in more detail:

• “Assessment: there is not consistent growth in using electronic method to file or pay taxes. Many jurisdictions still report managing large paper-driven processes.
• Services: telephone remains the major means of taxpayer inquiry and many administrations report high volumes of in-person inquiry.
• Verification: electronic audit methods and the use of third party data are changing how administration representatives perform the work.
• Collection: there was an upward trend in collectable tax debt reported in the 2015 edition of the OECD report, which has slowed, with more than half the administrations that provided information reporting decreases in the level of their collectable tax debt between 2014 and 2015. ”

As part of the administration function, jurisdictions are looking to implement electronic filing and payment to reduce costs and improve the services they provide to taxpayers. The OECD reports that the use of “e-channels” for filing and paying is higher for business taxpayers (4 out of 5) than personal income tax return files (2 out of 3). The IRS requires electronic filing with limited circumstances for paper filing. The use of e-filing and electronic payments seems to be higher for businesses as well. This may be due to the fact that many business returns are prepared and filed by tax return prepares, who are required to file electronically, whereas the simpler individual income tax returns are filed by the taxpayers themselves, some who prefer paper filing.

According to the OECD’s 2017 TAS report, one of the more significant innovations in tax return process design over the last two decades has been the development of pre-filled tax returns, primarily for personal income taxpayers. The pre-filled approach involves administration “pre-populating” the taxpayer’s return or on-line account with information it has collected from third parties. As the extent of pre-population is generally determined by the range of electronic data sources available to the administration, it is critical to this approach that the legislative framework provides extensive and timely third-party reporting covering all relevant taxpayer information. Advocates of pre-filling initially encourage its use by tax regimes that allowed relatively few deductions and credits, and these only where they could be verified with third party data sources. Out of the 55 countries surveyed, 37 reported using pre-filled returns in 2015. Advances in rules based technologies and analytics now mean that the approach can now be considered more widely. Due to the complexity of various deductions and credits afforded to individual U. S. taxpayers and the exclusions upon exclusions under the IRC, it is nearly impossible to implement a pre-populated tax return system. Although there is some interplay with third parties and the IRS, it does not account for the multiple deductions and credits available and used by taxpayers. There either needs to be a significant tax reform to simplify the IRC, which is currently in the works, or the third-party information reporting to the IRS needs to be increased.

Timely and efficient service is a critical part of tax systems that are based on voluntary compliance. This includes responding to taxpayer inquiries on the application of tax laws, and providing public and private rulings as well as statutory determinations on the administration’s view of the law. Administrations working “with” the taxpayer to develop systems and processes report increased levels of participation, taxpayer trust and confidence in the tax system as a whole. The 50 administrations that reported having a taxpayer service and assistance sector indicated the following as high priority: “better managing service demand; supporting taxpayers by providing more self-service options that also reduce the tax compliance burden; providing an improved tax rulings service; increasing taxpayer satisfaction; and compliance by design. Aside from the complex tax law, U. S. taxpayers complain about the IRS’s response time. This is due to the decrease in IRS employees, which results in a bigger call backlog. To remediate this, the IRS has improved and added information and services available online, and has clarified to taxpayers and tax return preparers the inquiries that will be addressed over the phone. The verification function in tax administration measures the accuracy and completeness of the information reported by the taxpayer. According to the OECD report, this function employees on average one-third of tax administration staff through conducting desk or field based “tax audits. ” Appendix D depicts the most common case selection criteria by the 53 administrations that provided information on their verification function. Focusing in on the U. S. , IRS examinations can occur either via mail or in person (taxpayer’s home, place of business, or an IRS office. One method used to select a return for examination is matching amounts reported on the tax return to information returns filed by third parties to identify incorrect amounts. The IRS may also rely on “studies of past examinations or on certain issues identified by other special projects. ”

The collections function involves the government taking action against those who do not file a return on-time and/or make a payment when it is due. Even with evidence of the “pre-filled or no return” system being utilized, the filing of a tax return still remains the main method by which a taxpayer’s liability is declared in a majority of jurisdictions participating in the OECD study. Because the pre-filled returns are not an option in the U. S. , the IRS relies on the taxpayer to file a timely and accurate return and timely pay any tax due. If a return is not filed after receiving ample notice from the IRS, the IRS may file a Substitute for Return (SFR) with any information it has.

The OECD tax administrations are putting innovation at the forefront to come up with better ways to collect taxes. Examples of methods utilized in the past include seizing bank accounts, increasing penalties or court procedures, and insolvency proceedings. There has been more focus on the development of policy or administrative approaches that help avoid tax debt or to increase taxpayer intervention.

“To meet the expectations of government and taxpayers for an efficient and effective tax system, tax administrations have long focused on business improvement and innovation. ” The 2017 OECD TSA study points out that the Forum on Tax Administration (FTA) has done many studies to assist administrations in improving the cost-effectiveness of their operations. Examples of strategies provided that support this include: “measures to increase the use of electronic services, delivery of new identity approaches, new uses of advance analytics to manage risk and personalize service, as well as the introduction to new technologies, digital services and business transformations initiatives”.

The U. S. tax administration has many inefficiencies that are costly to a taxpayer and the government as a whole. Aside from the complex IRC, the assessment process can use some sprucing up. The IRS should look for ways to making filing returns easier, maybe even going to a “pre-filled return” system for individuals. This will lead to less paper-filed returns and more accurate filings. The verification and collection processes are similar to other tax administrations, which isn’t a good thing. There should be more collaboration with other countries to implement more efficient processes and procedures so U. S. taxpayers can restore their confidence in the U. S. tax system and not dread April 15th.

References

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