The Tax Technology Gap: Future Issues to Watch

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Over the last ten years, tax authorities have leveraged a variety of new technologies in support of tax collections and enforcement. However, there are several differences between the technology used by the IRS and federal authorities, and state and local efforts to modernize, automate, and become more tech-savvy.

Internal Revenue Service (IRS)

The IRS has been plagued with a series of unfortunate events, in recent years—including the Get Transcript data breach that exposed the personal information of millions of people to hackers. Get Transcript was designed to allow taxpayers to download their personal tax returns in PDF form; unfortunately, hackers ended up accessing much of this data, as well.

This is also so in part because their budget in 2017, after adjusting for inflation, is less than its budget in 1995—according to Fortune’s recent piece documenting the IRS’ tax technology woes. [1] The dilemma is further compounded by the fact that temporary funding—originally issued in 2010 to hire new information security talent at competitive salary levels—is about to expire.

Therefore, one major concern facing the IRS is the same as that of many private companies: lack of adequate website cybersecurity to ensure a hack-proof user interface.

State and Local Taxes (SALT)

Much of the concerns surrounding SALT taxes, as of late, have to do with  the reporting and collection of interstate taxes. For example, the Utah State Tax Commission recently ruled that an online marketplace provider would not be required to collect and remit sales tax. [2] This ruling fails to account for the enormous shift in sales from brick-and-mortar businesses to online sellers and marketplace brands, which are primarily website-based. In other words, the tax code still seems to exist outside of the realm of the Internet, despite the fact that a hefty percentage of retail transactions occur online, now.

Because state and local taxes are collected on a smaller scale than federal taxes, the process for filing them is usually much simpler and faster than for federal taxes, but the evasion of state and local taxes is also much more common, as well. Another ongoing issue is the ever-increasing expansion of nationally-known e-commerce and interstate business, which complicates the issue of state tax revenue.

Tax Modernization

According to Justin Marlowe, the term “tax modernization” joins “tax efficiency” and “tax fairness” as the latest way to frame the controversial issue of “who will pay for state and local government.” [3]

For example, a recent meeting of the American Institute of CPAs in Washington, D.C., went over a long list of issues featuring, most prominently, “tax reform, improvement of IRS taxpayer services, mobile workforce legislation and the fiscal state of the nation.” If the ideal goal is “a sustainable, respect-earning tax administration system,” we will need to collectively decide not only how to track data electronically in order to prevent fraud, but also how to make tax filing, collection, and reporting more transparent. [4]

Considering that our economy is no longer based around a 19th century manufacturing model, we should modernize our tax collection systems in order to prevent tax fraud, tax evasion, and lack of uniformity—especially when it comes to businesses paying their fair share of state and local taxes for online transactions.

Trending Forms of Tax Technology

Accounting Today recently discussed three forms of technology that hold tremendous potential to transform the way finance and accounting departments function: robotic process automation, cognitive computing, and big data platforms—defined as “technologies to help gather, analyze, and capture value from big data.” [5]

Robotic process automation (RPA) is defined as the use of software routines or agents to do work like filing corporate tax returns by applying software robotics to repeatable processes, from start to finish. And cognitive systems can communicate, learn, and reason in order to perform tasks traditionally performed by individual employees –such as analyzing a single line tax item like meal and entertainment expenses.

Lastly, big data analysis allows tax departments and organizations to drive more value toward different types of data, insofar as their focus is on creating more value and providing access to information that allows organizations to build strategies that help them, financially, in the future.

Future Technology Trends

The technology of today and the near future is focused around not only efficiency but also the enabling of a more robust, independent, and transparent model of tax collection and returns—for both federal and state & local taxes.

The level of information security will also need to be more robust as both companies and individuals move more of their information online and through cloud-based platforms. Expect to see more legislation introduced around the issues of interstate taxes and online tax filing regulations—as well as additional guides explaining various types of new tax exemptions.

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To learn more about the newest forms of tax automation and technology, consider enrolling in one of Villanova University’s graduate programs in taxation. Both the Master of Laws in Taxation and the Master of Taxation degrees provide professionals with the tools they need to answer the most pressing questions about the role of local and national taxes in business and society, today.

Related Articles:

The Digital Economy and Tax Law: How Technology Affects Regulation

Technology’s Role in Comprehensive Tax Reform

Constitutional Issues in State and Local Taxes



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