Homage to information returns.

I. INTRODUCTION

One of the most important administrative features of the nation's tax system involves the issuance of information returns (such as Form W-2s and Form 1099s). Most studies indicate that such returns are pivotal in causing taxpayers to be forthright in their reporting practices. These same studies indicate that in the absence of such returns, taxpayer compliance plummets. (1) To close the tax gap--the difference between what taxpayers owe and what they actually pay (2)--Congress should ask itself the following question: without causing undue administrative burdens, can Congress expand the issuance of the information returns to encompass an even broader array of taxable events and transactions?

Currently, the issuance of information returns is widespread and deeply embroidered in the fabric of the Internal Revenue Code (Code). Congress requires the issuance of information returns for wages, interest, dividends, and a myriad of other situations. (3) Some commentators argue that these existing requirements represent the outer limits of administrative feasibility.

Technological advancements, however, have created new areas of expansion that Congress should target. More specifically, over the last two decades, tax return software has become increasingly widespread, sophisticated, and user-friendly, so much so that in preparing their tax returns, the vast majority of taxpayers deem themselves scriveners, more or less transferring data from their information returns to their tax returns. (4) Tax preparers, too, who have struggled to maintain their preparation fees in the face of technological advancements and outsourcing, (5) relish the use of information returns as the tool that enables them to produce completed tax returns in a cost-efficient manner.

This article explores the policy implications associated with information return expansion. First, Part II considers those areas in which expanding information return issuance is feasible and expedient. Next, Part III examines the benefits and costs associated with such expansion. Then, Part IV analyzes why information return expansion alone will not close the tax gap and outlines other compliance measures Congress should consider instituting. Finally, in Part V, this article draws several conclusions.

II. METHODS TO EXPAND INFORMATION REPORTING

To determine the feasibility of information return expansion, Part II first considers technological advancement since the last major information return expansion occurred. Next, Part II considers how these technological advancements should shape the next major information return expansion.

A. Technological Changes and Their Impact on Tax Administration

By way of background, approximately a quarter of a century ago, Congress instituted its last major information return expansion. More specifically, in 1982, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which required that brokers delineate the gross proceeds arising from securities and commodities transactions on information return forms. (6) Since then, Congress has made several minor legislative changes that have enlarged the purview of information return issuance, (7) but nothing that remotely approaches the legislative scope of its sweeping TEFRA changes.

Since information return policy has remained fairly static since the passage of TEFRA, it is altogether appropriate to ask whether there have been technological changes of sufficient magnitude to justify another major information return expansion in the intervening years. Clearly, the answer to this question is yes. Rather than trying to present a complete overview of the technological changes that have transpired over the last quarter of a century (which is unnecessary and certainly beyond the scope of this study), Part II instead highlights those technological advancements which could impact information return expansion.

Certainly, over the last two and one-half decades, the most monumental technological change has been the introduction of the Internet and its widespread usage. Although the Internet celebrates no single exact birth date, in 1969 the United States Department of Defense developed a small network of computers that could communicate with each other in emergency situations. (8) The ability to have computers communicate was the genesis of the Internet. (9) At first, as standards emerged in message formats, the development of the Internet proceeded slowly. (10) By the early 1990s, however, these standards were much more fully developed, and Internet usage grew exponentially. (11) Today, Internet usage has become a staple of American culture. (12) People constantly turn to the Internet for information and rapid communication. The presence of the Internet has single-handedly reshaped people's expectations, touching almost all spheres of their existence, from how they conduct their banking affairs to where they discover romance.

The Internet's power and ease of use has had a tremendous impact on tax administration. Most significantly, taxpayers consider, for good reason, computers to be central to the tax return preparation and filing process. Many taxpayers, for example, prepare their tax returns by uploading information returns issued by their employers, banks, and brokerage firms. (13) Additionally, taxpayers, in increasing numbers, submit their completed tax returns by e-filing them. (14) Indeed, many state governments and even the federal government provide some taxpayers (depending upon filing status) with the ability to prepare and submit their tax returns directly online. (15)

Aside from the Internet, since 1982 technological changes have transformed the ability and speed of computer processing units (CPUs). Due to microchip processing advancements, CPUs typically operate at speeds many times faster than their predecessors a quarter of a century ago. In addition, modern CPUs also store many times the amount of data relative to typical 1982 models. (16) The implications of faster microprocessors and larger memory storage are well known: they facilitate data collection, processing, and retention, all of which are central in the tax administration process.

Finally, advancements in computer software have made even the Luddites of the tax community amenable to computer use. In 1982, the availability of computer software packages was sparse, and the packages that were available often proved difficult and clumsy to use. The world is now a far different place. Computer software packages can readily perform a variety of tasks such as word processing (e.g., Word) and bookkeeping (e.g., QuickBooks). The ease of use and widespread familiarity of computer software packages have transformed taxpayers' attitudes toward tax preparation. Indeed, tax return preparation software packages regularly rank among the software packages with the highest annual sales, and the trend is toward further growth. (17) With the assistance of on-screen software prompts, taxpayers armed with their information returns, but having only the slightest familiarity with the tax laws, can now successfully complete their Form 1040s.

In sum, over the past quarter of a century, technological changes have fundamentally transformed the way people live their lives. It is, therefore, not a leap of faith to say that information return issuance should not be immune to these revolutionary technological changes. To the contrary, where possible, insofar as information return expansion is concerned, Congress should capitalize upon these technological changes. The next section explores the possibilities of information return expansion.

B. Technological Changes and Their Implications for Information Return Expansion

The ability to quickly collect, process, and store information has opened up a universe of opportunities where information return expansion is now technologically possible. In expanding information return issuance, Congress should be mindful to institute only those reforms that are cost-efficient and affect areas where taxpayer compliance is low.

Cost efficiencies typically arise in those situations in which there are economies of scale and/or there is information asymmetry. In the context of information return issuance, each of these phrases has a different meaning. The phrase economies of scale refers to those situations in which the information return issuer is better situated than the individual taxpayer to gather and process information. Put differently, the information return issuer so regularly and frequently encounters a particular situation that, unlike the individual taxpayer, it develops a unique expertise to distill and disseminate this information. The phrase information asymmetry pertains to those situations in which one party to a transaction is more likely than the other party to have command of the tax laws. In light of this command, this party is better situated to alert the other party (and the government) to the tax implications associated with the transaction or transactions in question.

Along with being cost-efficient, information return issuance makes sense only in those particular situations in which taxpayer compliance is lackluster. In situations in which taxpayer compliance is reportedly high (e.g., federal gasoline excise taxes), (18) instituting an information return requirement would be superfluous. By contrast, in situations in which taxpayer compliance is reportedly low (e.g., submission of gift tax returns), (19) instituting an information return requirement could significantly bolster compliance.