Tax Return Preparation

Workshop Proposal for Jurix 2002
Scott A. Taylor
Professor of Law
School of Law
University of St. Thomas
1000 LaSalle Avenue, TMH #344
Minneapolis, MN 55403
USA

The Internet provides easy access to information at a low cost. In addition, the Internet permits rapid communication with only a minor cost. Finally, computer software, when linked with the communication feature of the Internet, enables very reliable information processing when dealing with complicated systems. The various governments in the United States (federal, state, and local) have exploited these three features of the digital world (access to information, communication, and information processing) and have succeeded in making remarkable strides in providing e-government services. One of the most successful areas involves tax systems.

Federal Income Tax System

The single largest revenue raiser in the history of mankind is the federal individual income tax of the United States. Each year it raises over $1.2 trillion from more than 130 million individual taxpayers. The statute and regulations that provide the tax system’s rules are contained in seven thick volumes of thin paper with densely packed print. It is a miracle that the federal income tax system works at all. Instead of working at just a passable level, the system is incredibly efficient and costs just a fraction of a ce nt to collect each dollar of revenue. So how does a tax system operate so well with so little in resources? A large part of the success of the federal income tax system comes from its consistent use of the tools found in the digital world.

Tax Preparation Software

Within the United States an industry of tax return preparers has flourished. More than half of all tax returns are prepared by professional return preparers, almost all of whom use a computer software product. These software products are relatively inexpensive and are extremely reliable. A very popular product among preparers and DIY taxpayers is Turbotax. [See: http://www.turbotax.com/] This product is very inexpensive and is designed to help those who know very little about the tax law. One version of the software uses an interview method in which an on-screen professional asks the taxpayer a variety of questions. The answers to the questions then become information that the software uses to prepare a return. The software also contains expert information that is available as needed depending on the characteristics of the individual taxpayer. Another feature of most software systems is the ability to import existing data from financial records and bank accounts. A very helpful feature of all the leading software programs is an error detection function.

Tax software, provided by the private sector for the convenience of preparers and DIY taxpayers, has made life much easier for both taxpayers and the Internal Revenue Service (the agency that administers the federal income tax system). More accurate returns benefit taxpayers because they receive speedier refunds and avoid audit costs after filing their returns. The software, because of its efficiency, dramatically lowers return preparation costs. Return preparers charge less, and DIY taxpayers spend less time. The Internal Revenue Service obviously benefits when it receives accurate returns because its audit and compliance costs remain low.

A critical feature of the tax software programs is the one permitting electronic filing of returns. Obviously, the software puts the return data into digital form, which in turn enables transmission of the data over the Internet.
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