Homage to information returns.

The issuance of information returns provides another benefit that is often overlooked. It liberates Service staff to fulfill other responsibilities. Much of the work involving information return issuance and monitoring is automated. That being the case, once the wheels of information return issuance are set in motion, the system can generally function on autopilot, periodically generating computerized assessment letters to delinquent taxpayers. The autopilot status of information return issuance enables the Service to redirect its limited resources elsewhere, including to taxpayer services and compliance, which, presumably, can result in the generation of even more revenue and a further closing of the tax gap.

Aside from being a revenue generator for the government and a boon to the Service, information return issuance also provides taxpayers with administrative convenience. To illustrate, were mutual funds and brokerage firms required to track the tax basis taxpayers have in their investments, taxpayers would no longer have to go through the drudgery of recording the tax basis they have in their investments, maintaining such records, and monitoring them for capital changes. If tax return submissions were due, taxpayers would have, right on the face of the Form 1099, all the information that they (or their tax preparer) needed to compute their investment gains and losses. Administrative conveniences of this kind could extend to real estate tax payments, mortgage interest deductions, and a host of other income/deduction items where information return issuance is appropriate (and the proposed reforms instituted). In addition to reducing their tax return preparation time, another by-product of this administrative convenience is that taxpayers could significantly reduce their professional fees.

A final benefit that should flow from expanded information return issuance is that passage of these reforms is likely to renew taxpayers' confidence in the integrity of the tax system. As a general proposition, when taxpayers believe that other taxpayers are compliant and shouldering their fair share of the tax burden, they are more likely to be compliant themselves. Conversely, when taxpayers believe that cheating is commonplace, they are more apt to be derelict themselves. (66) Most taxpayers sensibly recognize the connection between third-party information return issuance and compliance. Why? In a word, third-party information returns limit taxpayers' opportunities to be noncompliant. Thus, the broader the information return coverage, the better reinforced the perception (and, hopefully, the reality) that taxpayer compliance is commonplace.

But before Congress rushes to expand information return issuance, it cannot ignore the costs such expansion will entail. In particular, it cannot blithely overlook third-party costs in gathering relevant tax information and then disseminating such information vis-a-vis information returns.

In some cases, these costs will probably be negligible because the third party in question already has this information readily available. Thus, the cost of putting this information on the face of an information return will equal little more than the cost of printer toner. (67) Moreover, in many instances, even these costs can easily be passed along to taxpayers, who can often offset the amount of these expenses through the administrative savings they realize in the form of reduced tax return preparation fees or the administrative time savings that inure to them.

In other cases, the costs of gathering relevant tax information, preparing information returns, and disseminating such returns may be significant. The third party in question may lack a particular expertise or ability to perform the task at hand. (68)

Consider the application of a new withholding rule, applicable to government agencies, that is supposed to go into effect after 2010. (69) With respect to certain payments to persons providing any property or services, the federal government and most state and local governments will have to deduct and withhold tax equal to 3% of such payments. (70) The revenue estimates associated with the passage of this legislation are relatively trivial (i.e., around $7 billion over a five-year period), (71) leading even a former Service commissioner to question its value in light of its administrative burdens. (72) In this situation and others where taxpayer administrative compliance costs are high, Congress may consider absorbing some of the initial start-up expenses or giving sufficient lead time to enable responsible third parties to develop and institute cost-savings strategies.

The issuance of information returns is not an entirely cost-free enterprise to the government either. It must process the information returns it receives and be in a position to challenge taxpayers who are putatively derelict. (73) To illustrate, along with the submission of tax returns, partnerships and limited liability companies must annually file a Form K-1, which reports individual partners' and members' income and deductions. Ideally, the information a Form K-1 presents should be matched against the information taxpayers report on their tax returns. To date, the Service has experienced matching problems, undermining the credibility of this check-and-balance system. (74) If, then, Congress decides to expand information return issuance to other spheres of inclusion and deduction items, it should give the Service additional financial resources so it can accurately monitor and match the receipt of these returns with what taxpayers actually report. (75)

A final concern some commentators may voice is that the expansion of information return issuance threatens taxpayers' privacy. The position of these commentators is that the government should not have any direct access to taxpayers' financial data and that the government's insistence on requiring the disclosure of such information is intrusive, unnecessary, and beyond the permissible bounds of governance. (76) In lieu of a tax system that relies upon information return issuance, these commentators instead advocate a national sales tax that would render the issuance of information returns unnecessary. (77) Without evaluating the merits of these commentators' positions, if Congress continues to rely upon an income tax system as the means by which to fund the nation's financial needs, the receipt of financial information is imperative, far outweighing the relatively small concerns about privacy. (78)

In evaluating the benefits and costs associated with information return expansion, Congress should be wary when members of industry voice their misgivings. Industry members have a long track record of resisting the implementation of any and all information return requirements. (79) From their vantage point, they stand little to gain if such reforms are instituted. Notwithstanding these misgivings, industry has in the past handled information return issuance challenges with aplomb and minimized the concomitant expenses associated with such issuance, leaving the country more financially solvent as a result. In light of its prior successes in handling information return issuances, there is no reason to assume that members of industry could not once again replicate their stellar performance were information return issuance requirements further expanded.

IV. INFORMATION RETURNS EXPANSION: PART OF A MULTIPRONG APPROACH TO CLOSING THE TAX GAP

Information return expansion can go a long way in helping to close the tax gap, at little cost to third parties, taxpayers, and the government. Although this legislative reform is very attractive, Congress should not delude itself into thinking that expanding information return issuance alone will necessarily put an end to the tax gap. Congress needs to consider several additional options as well.

Some of these steps Congress would find relatively easy and painless to institute. Funding for the Service, for example, should be increased. For years the resources flowing to fund the Service have been anemic. (80) Meanwhile, Congress has greatly increased the scope of this agency's responsibilities, even going so far as to suggest that the Service be used in the fight against sex trafficking. (81) The by-product of having fewer resources coupled with greater responsibilities is that taxpayer audit rates have dipped to historic lows. (82) Just as commuters are more apt to speed if they know that there are fewer police patrolling an area, taxpayers are also apt to be less compliant if they know their chances of being audited have been greatly diminished. (83) Increasing Service funding is thus a productive way to help close the tax gap as risk-averse taxpayers will be more apt to be compliant and those taxpayers who are derelict will be more likely to be caught.