Homage to information returns.

(7) See Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, [section] 323(a), 110 Stat. 1936, 2062 (adding section 6050Q (requiring the issuance of information returns for any person who pays long-term-care benefits)); see also Small Business Job Protection Act of 1996, Pub. L. No. 104-188, [section] 111(b)(1), 110 Stat. 1755, 1763 (adding section 6050R (requiring the issuance of information returns by people, using cash, who purchase $600 or more of fish for resale)).

(8) See generally JANET ABBATE, INVENTING THE INTERNET (1999).

(9) Id. ch. 1.

(10) Id. ch. 5.

(11) Id. ch. 6.

(12) See WADE ROWLAND, SPIRIT OF THE WEB: THE AGE OF INFORMATION FROM TELEGRAPH TO INTERNET (1999).

(13) The Service website indicates that over 50% of income tax returns were filed electronically for 2005. Internal Revenue Service, Number of Returns Filed Electronically, by Type of Return and State, Fiscal Year 2005 (2005), http://www.irs.gov/pub/irs-soi/05db04nr.xls.

(14) Id.

(15) California for example has launched a pilot program in which the State Franchise Board prepares draft tax returns for certain eligible taxpayers. Joseph Bankman, Simple Filing for Average Citizens: The California Ready Return, 107 TAX NOTES 1431, 1432 (June 13, 2005). For certain eligible taxpayers (e.g., adjusted gross income that does not exceed $52,000 in 2007), the Service has put into place a program that permits e-filing of their income tax returns free of charge. I.R.S. News Release IR-2006-187 (Dec. 5, 2006) ("For 2007, taxpayers who earn $52,000 or less will be able to find a Free File offer for which they are eligible. This means 70% of all taxpayers--ninety-three million people--will be eligible for Free File.").

(16) See, e.g., E.K. Miller, The Computer Revolution, 8 IEEE J. 27, 29 (1989) ("Advances in microprocessor design and large-scale integration technologies have led to faster clock speeds, larger word sizes, and greater addressable memory."); Nick Tredennick, Microprocessor-Based Computers, 29 COMPUTER 27, 33 (1996) ("Microprocessor performance doubles about every 18 months.").

(17) See IRS Oversight Board, Report Reveals Need for Tailor-Made Customer Service, 2006 TNT 229-36 (Oct. 1, 2006) (showing that for 2004, 80% of filed tax returns, for example, were prepared using tax return software).

(18) See, e.g., Brian Francis, Gasoline Excise Taxes, 1933-2000, STAT. OF INCOME BULL., Winter 2000-2001, at 140, available at www.irs.gov/pub/irs-soi/00gastax.pdf (showing how the federal gasoline excise tax has been a reliable revenue source throughout the twentieth century).

(19) JONATHAN FEINSTEIN & CHIH-CHIN HO, INTERNAL REVENUE SERV., THE IRS RESEARCH BULL., PUBL'N NO. 1500, PREDICTING ESTATE TAX FILINGS AND TAXABLE GIFTS 39-45 (1999) (estimating that approximately one-half of all gift tax payments are evaded).

(20) I.R.C. [section] 1001. In arriving at taxable income, gains are includible in gross income under section 61(a)(3) and losses are deductible under section 165(a). I.R.C. [section][section] 61(a)(3), 165(a).

(21) For a detailed discussion of section 1001, see generally Louis A. Del Cotto, Sales and Other Dispositions of Property Under Section 1001: The Taxable Event, Amount Realized and Related Problems of Basis, 26 BUFF. L. REV. 219 (1977).

(22) For direct investments, the taxpayer's initial tax basis must be adjusted for sales commissions and other capitalized costs. See Woodward v. Commissioner, 397 U.S. 572, 575 (1970); Spreckels v. Helvering, 315 U.S. 626 (1942); see also Treas. Reg. [section] 1.1012-1(b) (as amended in 1996) (noting that real estate taxes paid by purchaser are included in the tax basis of the acquired real estate); Treas. Reg. [section] 1.263(a)-2(e) (as amended in 1997) (detailing how brokerage commissions must be capitalized in basis). Taxpayers are not always familiar with those rules or how they apply. For investment acquisitions that do not involve a taxpayer's direct investment, several even more intricate rules apply. Gifts require knowledge of the donor's basis, and adjustments must be made for any gift and generation-skipping transfer taxes paid. I.R.C. [section][section] 1015(d)(6), 2654(a)(1). Bequests require knowledge of date-of-death values and whether an alternate valuation election was made. I.R.C. [section] 1014. Finally, interspousal transfers require knowledge of the spouse's or ex-spouse's basis in the investments transferred. I.R.C. [section] 1041(b). Even those taxpayers who wish to be compliant with those rules may find the relevant information difficult or impossible to locate.

Tax basis does not remain fixed during the period of investment ownership. To the contrary, tax basis remains entirely fluid. The tax basis of S corporation shares and of interests in entities classified as partnerships for federal income tax purposes are subject to constant upward and downward adjustments. See I.R.C. [section][section] 1367(a) (shareholder's basis in an S corporation), 705(a) (partner's basis in a partnership interest). The capital changes corporations may undergo can have a major rippling effect on the tax basis shareholders have in their shares. See, e.g., I.R.C. [section] 307(a) (requiring a tax basis allocation be made after a tax-free stock distribution). Most taxpayers lack the ability, time, or resources necessary to track their tax basis resulting from those events.

Taxpayers will also have a difficult time knowing their tax basis in investments at the time of disposition. To illustrate, if marketable securities are purchased in a series of transactions, it is necessary to "identify" the basis of those securities when they are later sold (assuming that all of the taxpayer's securities are not sold in the same tax year). Treas. Reg. [section] 1.1012-1(c)(1) (as amended in 1996). When the specific identification method cannot be followed, the default rule is first-in, first-out (FIFO), which (being a technical accounting convention) the typical individual investor may not be either able or willing to grasp. Id. To complicate matters further, mutual fund shares can, under an election, be subject to an "average cost" basis rule if the shares are held in street name. Treas. Reg. [section] 1.1012-1(e) (as amended in 1996).

(23) Notice that there is no requirement (akin to that found under section 274(d) requiring all travel and entertainment expenses to be substantiated) that basis be "substantiated" by records or other documents. The instructions to Form 1040, under the heading "General Information," has a short section entitled "How Long Should Records Be Kept?" where it is stated that tax returns, worksheets, and forms should be kept for three years. Records relating to property should be kept longer insofar as they are relevant for determining basis. The operative word here is should, not must. Another Service publication, IRS Publication 552, is similarly nonassertive. I.R.S. PUBLICATION 552 (2005). This publication states that "everybody should keep" basic records for their homes, but the publication says nothing about other property. Id. at 2. Under "How Long to Keep Records," the same Service publication states that basis records should be kept until the period of limitations expires for the year in which the property is disposed. Id. at 6. In none of those Service publications or forms is it stated that basis records must be kept.

(24) One might yet presume that tax return preparers and tax professionals would steer taxpayers toward tax compliance and accurate tax basis identifications. Because of their flat fee arrangements for tax return preparation work, there is an economic disincentive to pursue basis inquiries; and professional ethical standards support this "don't ask, we don't want to know" attitude. That problem is compounded by the fact that the provision dealing with tax return preparer penalties, section 6694, adopts the same posture. Thus, Treas. Reg. section 1.6694-1(e)(1) states: "[T]he preparer generally may rely in good faith without verification upon information furnished by the taxpayer. Thus, the preparer is not required to audit, examine or review books and records, business operations, or documents or other evidence in order to verify independently the taxpayer's information." Treas. Reg. [section] 1.6694-1(e)(1) (as amended in 1992). The regulation goes on to say that the preparer cannot ignore the implications of information actually known by the preparer or neglect to provide substantiation required by an Internal Revenue Code (Code) section or regulation as a condition for claiming a deduction, but those exceptions would rarely require any kind of basis inquiry. Id.

(25) See GOV'T ACCOUNTABILITY OFFICE, CAPITAL GAINS TAX GAP: REQUIRING BROKERS TO REPORT SECURITIES COST BASIS WOULD IMPROVE COMPLIANCE IF RELATED CHALLENGES ARE ADDRESSED (GAO-06-603, 2006) [hereinafter CAPITAL GAINS TAX GAP] (estimating that at least $11 billion of the 2001 tax gap is attributable to taxpayers inflating their tax basis); Joseph Dodge & Jay A. Soled, Debunking the Basis Myth Under the Income Tax, 81 IND. L.J. 539, 581 (2006) (estimating that overall capital gain underreporting for 2005 could result in revenue losses that are as high as $60 billion).

(26) See Joint Comm. on Taxation, JCT Sends Tax Gap Recommendations to Grassley, 2006 TNT 203-13 (Oct. 20, 2006) [hereinafter Tax Gap Recommendations] ("Now, many firms provide basis information as a courtesy to their customers, both in regular account statements and in annual information reports.").