Wednesday, January 11, 2012

Tax Simplification: Use Data

This year, I hope politicians on both sides of the aisle heed professor Annette Nellen's advice to simplify tax law.  Nellen's article, for the American Institute of CPAs (AICPA) highlights remarks by IRS Commissioner Douglas H. Shulman on simplifying tax law.  Nellen provides a table showing broad agreement between the Commissioner's prescription for simplification, and recommendations by the AICPA.  They both start with setting common standards and seeking a single, simple approach to a tax problem.

I have often thought about tax simplification from the starting point of tax statutes, and simplification of the underlying Code. That may be what David Brooks had in mind, in this week's column, advising Obama to champion simplifying the tax code among other good government measures.  However, by using the data at its disposal, the IRS can go a long way toward simplification on its own.  What I mean is this:

The IRS has massive amounts of data on the transactions of citizens and businesses and what impact those transactions had on tax determinations by the IRS.  This data could be used to provide deterministic answers for a huge variety of specific taxpayer questions.

The IRS already provides guidance in a number of forms to individuals and businesses, with respect to the agency's interpretation of the law for particular circumstances.  However, this advice comes in the form of written documents and letters that add to the overall volume of information that is required to understand and act on the law.

What I imagine is a tax calculator -- something like H&R Block or TurboTax software  -- but using prior years' data, combined with IRS policy decisions, to prospectively help taxpayers determine the consequences of certain events or tax decisions.

Of course, the devil is in the details.  But this is a place where the high volume of data that the IRS deals with can actually be an advantage toward simplification, just as Google uses its tremendous data advantages to simplify many informational challenges that would otherwise be far too complex.