Reece: How to fix the tax code

During my tenure as the Internal Revenue Service's deputy commissioner for modernization and its chief information officer, I was often asked what I thought would be the ideal — or at least a better — way for the federal government to collect taxes.

My idea has no chance of being implemented, but not

because it isn't architecturally or technically feasible. Its design is based on systems approaches and techniques that citizens use every day.

But it would still require such a major transformation from the early-1980s system now in place that it would be deemed politically and socially difficult.

For starters, it would eliminate the need for IRS employees whose jobs exist principally to process exceptions or support those who do, whether those exceptions result from citizens filing incomplete returns, underpaying or not filing at all.

But sometimes dreams come true, and here is mine. I would implement a Web-based solution that would collect federal taxes in much the same manner that sales taxes are collected — that is, as part of each transaction in which federal income taxes are payable.

When a payroll is issued or a 1099 transaction is executed, an online record of the tax amount appropriate to that transaction would be posted directly to the taxpayer's account with the IRS.

At least once a year, taxpayers would go online to update their files. As part of this process, taxpayers would:

• Make any updating adjustments to their basic personal/corporate status information.
• Respond to any exceptional issues the IRS might raise regarding amounts owed.
• Agree on the amount owed or to be refunded.
• Execute an exchange of funds.

The result would be an up-to-date record of the taxpayer's account, a complete and accurate account filing, a mutual reconciliation between the taxpayer and the IRS of what tax amounts are owed or should be refunded, and a settlement of the account for the year.

All of this work could be achieved without human intervention. Some exceptions would still require human action or resolution, however. It is also possible that some people who pay taxes do not have computer or Internet access, so they would need special handling.

Other organizations are already doing this, even with the obvious difficulties of moving existing records and data from the out-of-date, unusable platform now in place.

Moreover, commercial institutions were pressing hard during my tenure at the IRS for more automated, interactive information sharing and online filing, examination, and reconciliation methods.

Soon all taxpayers will seek similar options, so someone in the government must figure out how to develop a better system quickly. n

Reece was the Internal Revenue Service's chief information officer from March 2001 to April 2003. He is now president of John C. Reece and Associates, a Washington, D.C., consulting firm.