E-commerce and tax administration.
* Combined with continuing advances in technology and reduced costs of hardware and connectivity, use of the Internet will continue to mushroom over the next decade.
* In the area of tax administration, the trends reflect a move away from an exclusive emphasis on electronic filing, refund and payment of taxes and information dissemination, to broader uses of e-government.
* As e-commerce continues gaining momentum in the global marketplace, tax administrators will have to expand their capabilities to grapple with the complex tax-related issues posed by the Internet revolution.
In the new millennium, more and more transactions of all types are occurring via the Internet; practitioners and Federal and state governments are just beginning to maximize use of the electronic arena. This article explains the services that these factions will have to offer to stay competitive in this new, technology-driven environment, and related issues.
The use of the Internet and electronic commerce (e-commerce) has exploded within the past five years, and the growth rate is accelerating. Combined with continuing advances in technology and reduced costs of hardware and connectivity, use of the Internet will continue to mushroom over the next decade. As with any major change, this growth creates both challenges and opportunities for the private sector. It also requires tax and other government regulatory and enforcement agencies to grapple with new issues to prevent increased noncompliance. Importantly, the Web and related technologies offer the government the opportunity to fundamentally (and constructively) alter its relationships with its citizens. Many citizens now file their Federal and state tax returns electronically. Citizens pay taxes and receive refunds electronically; they also seek information, assistance and advice in an electronic environment. The possibilities seem limitless as three-way partnerships between citizens/consumers, government and the private sector create new ways to use cyberspace.
The Growth of E-Commerce
The growth in use of the Internet, the backbone of e-commerce, has been phenomenal over the past few years. Congress established a working group in 1998 to study e-commerce and to provide it with information on size, growth and potential. The First Annual Report of the United States Working Group on Electronic Commerce (issued in 1999) stated "that fewer than 10 million people were using the Internet in 1995, and that more than 140 million people worldwide were using the Internet in 1998." The report concluded that more than one billion people worldwide will be using the Internet in the first decade of this century.(1)
The report was referenced in a concurrent resolution introduced in the House of Representatives in September 1999 that urged the President to seek a global consensus to a ban on tariffs and some forms of taxation on e-commerce and the Internet. The resolution also stated that "by the year 2006, more than one-half of the U.S. workforce is expected to be employed in industries that are either major producers or intensive users of information technology products and services. Electronic commerce among businesses is expected to grow to $1.3 trillion dollars from the current level of just under $45 billion."
Importantly, the adoption of the Internet to conduct business activities has not been confined to the private sector. Government agencies and entities (IRS, Social Security Administration, White House, state agencies) have led the way in establishing-Websites for disseminating information, allowing the filing of tax and other information returns, paying taxes and other services.(2) The growth of this activity (perhaps more accurately described as "e-government") has paralleled the growth of e-commerce in the private sector.
Applications for Tax Administrators
While the growth of the Internet and e-commerce is astounding, so are the fundamental changes under way in how and where government is conducted. In the area of tax administration, the trends reflect a move away from an exclusive emphasis on electronic filing, refund and payment of taxes and information dissemination, to broader uses of e-government. Online account problem resolution, access to account information and transcripts and verification of filing, are now increasingly available. Taxpayers can routinely access and download forms, regulations and news releases. Increasingly, "electronic tax administration" no longer simply means fling tax returns.
The trend away from simply providing information to offering interactive services is considered to be a key competitive advantage of e-commerce. Consulting firms have established e-commerce/ e-government practice leaders within their basic lines of service (i.e., tax, assurance and consulting). The e-commerce practice leader's purpose is to lead the way in changing how consulting firms have traditionally delivered their professional services and products; e-commerce must be integrated into day-to-day business practices. One result of this integration is the heavy use of interactive Internet and intranet sites that serve both clients and employees very interactively. Again, it is insufficient simply to provide information; users have to be able to complete transactions.
Thus, organizations should think of e-commerce both externally and internally. Internally, this trend consists of offering personnel services, benefits administration, payroll and timekeeping functions, supply ordering, travel services, conference arrangements and online training. Such internal products sometimes become external products as their value in the market is recognized.
Not only can a product or service be "sold" via the Internet, many of the supporting activities can be tracked and managed within an e-commerce system. For example, a system can easily provide inventory control (including loss and shrinkage control), management information, shipping and delivery information and information on customer complaints. Further, business, financial and tax data can easily piggy-back these e-commerce systems.
Another promising area within e-commerce and e-government is the ability and desirability of electronic recordkeeping. The volume of records, and the ability to query the resultant databases, provides the opportunity to maintain and use management and financial information in extraordinary ways. This capability can also provide e-government, through "partnering" between tax administrators and taxpayers to exchange data, to speed up interchanges of data in tax examinations and to reduce and correct errors that cause customers and taxpayers problems.
E-government is facilitating greater interaction among the government, taxpayers and the private sector. In a recently publicized pilot project, the IRS proposed a program in which the Service would electronically transmit taxpayer transcripts to authorized third parties. This type of interaction moves beyond the approach of e-government to simply provide information. This also moves past the mode of two-way transactions, creating three-way transactions among the government, the taxpayer and the private sector. This project also reflects the tension inherent in e-commerce and e-government over the need for privacy, security and controls on the use of the personal data.(3)
Modification of practices, policies and procedures is an important underpinning of e-government. For example, in the e-filing area, the IRS and state tax agencies have spent enormous time and energy on the question of the need for a signature on electronically filed (e-filed) tax returns. In December 1999, the IRS announced that it would mail 11 million postcards to taxpayers containing e-file customer numbers (ECNs) that recipients could use as signatures on returns filed electronically, eliminating the need to mail paper signature documents.(4) According to the IRS, of the 2.5 million e-filed returns received in 1999, 660,000 used ECNs. A similar program allows taxpayers that e-file through participating tax preparers to create their own personal identification numbers as electronic signatures. Thus, technology is delivering alternative solutions to this problem; it is an excellent example of the need for modification of existing procedures in the face of new technologies.
While e-commerce, the Web, online access and the blending of the Web with entertainment all provide new and exciting opportunities, there are many challenges. Despite the growth in the use of the Web, there are still fewer users than nonusers. Thus, for many businesses and government agencies, duplicative delivery systems must be maintained. However, as the use of e-commerce and e-government expands, the demand increases for Internet-based services.
Knowledge management is important to ensure a Website is not overpopulated and that the information contained therein is current and correct. 0This becomes a major issue as the volume of information provided increases. The information to be provided and how much will be made available have to be continually addressed. The issue of who can post comments and answers to issues raised by external customers on the Internet (or by employees internally on an intranet) will also need to be addressed, especially in the area of taxpayer service, in which the issues are numerous and potentially complex. The cost of maintaining and providing information online must be weighed against the potential universe of use.
Another question arises. As e-government expands, the line begins to blur between the services the government should provide and those the private sector should provide. The ability to provide online interactive services to citizens must be considered in the context of the role of government versus the role of the private sector. This issue shows up quickly in the areas of financial advice, tax planning and tax preparation.
Making the access point visible in the sea of Websites and gaining attention for a product or service in the glut of online sites is difficult. Moreover, the Web may also increase the competition base when customers shop online.
One of the major attributes of the Internet is the speed with which transactions can be conducted and completed. However, it also makes it harder to prevent erroneous and fraudulent transactions and to recover losses resulting therefrom. While there is additional glamour attached to "e-commerce or e-government fraud," in many instances, it is not the electronic nature of the transaction, but the speed with which transactions are completed, that creates the challenge. Conversely, electronic transactions can be subjected automatically to many more filters and screens. In addition, updates in fraud detection methods can be rapidly implemented.
Challenges for Tax Administrators
As e-commerce continues gaining momentum in the global marketplace, tax administrators will have to expand their capabilities to grapple with the complex tax-related issues posed by the Internet revolution. Government agencies (and especially tax departments) must be vigilant to balance access and security. The issue of security in e-commerce and e-government raises many concerns. Individuals want their privacy protected and financial transactions secure so that personal data and finances are protected. Businesses share these concerns and also want business data, trade secrets and strategic plan information protected.
Taxpayers also want to ensure that, in the case of electronic interactions with tax agencies, safeguards are in place that restrict government access to only the data that taxpayers knowingly and willingly make available. When the IRS and various state tax agencies first introduced the Electronic Federal Tax Payment System (EFTPS), many taxpayers voiced concern about providing access to private information that they would otherwise not willingly disclose. Thus, increased e-government services trigger privacy and security issues when new services are to be offered via the Web.
To harness the opportunities now available with the Internet, it is paramount that tax administrators modify their practices, procedures and policies to accommodate e-government. To take full advantage of these new processes, the level of responsibility and scope of authority vested in certain employees may need to be broadened. Likewise, the techniques tax agencies use to conduct compliance operations may need to be revised. For example, while electronic record storage was available for some time, it was not until March 1997 that the IRS issued procedures allowing for the destruction of original paper documents underlying computerized records.(5)
Additionally, tax administrators must deal with" big brother syndrome" The ability of government to gather, analyze and use data from its own records, as well as data available from commercial databases, gives rise to fears about omnipresent government. This is a strategic issue and a "political consideration" that must be dealt with as tax agencies increase their ability to gather, analyze and exchange data.
While all of the advantages to e-commerce between private-sector entities could apply to e-government transactions between business and government, some commentators have expressed concern. Writing about electronic funds transfer, Lillian Brown, Esq., chair of the American Bar Association's Employment Taxes Subcommittee, stated, "While the government gets its money faster and saves time and costs associated with a collective check-based system, individual businesses must cope with multiple payment systems, a diminished paper trail and potentially altered legal landscape, along with the advantage of paying a single creditor electronically."(6) These issues should not be taken lightly as government moves to increase e-government services. While EFTPS has worked exceedingly well, these issues must be dealt with in planning future e-government applications.
A number of compliance concerns must also be addressed. For example, in the information reporting context, the IRS announced that, due to the large volume of de minimis barter exchanges occurring daily via the Internet, the barter exchange reporting requirements under Sec. 6045 may impose burdens on the exchange that outweigh the benefits of the information collected on Forms 1099-B.(7) Thus, the IRS moved to ease the reporting requirements by providing a de minimis exception for barter exchanges of property and services worth less than $1. "The IRS expects the new rules to be especially relevant for services bartered over the Internet, such as the exchange of advertising or banner space on Web sites, which has only nominal market value."(8) While the actual value of banner space can be argued, this exemplifies tax administrators' thought processes about tax administration in the real world. The IRS stated it is studying whether special rules should apply to certain bartering transactions of electronic or Internet services.
How does a tax agency cope with growing Internet sales, lightning-fast transfers of money, and a Web without geopolitical boundaries? Couple this with technology that allows for masking the actual location of many sites, and the potential for noncompliance is huge. A current IRS study revealed that of 1,600 Websites studied, 9.5% of the beneficial owners could not be identified. An unnamed IRS source was quoted as saying, "It is significantly more difficult to identify a taxpayer in the electronic world than in the normal population."(9) According to Joseph Guttentag, Senior Adviser in Treasury's Office of Tax Policy, although new technologies are exploding old boundaries, e-commerce has introduced a level of complexity that increases opportunities to avoid tax altogether.(10)
Theoretically, all the advantages of business-to-business and consumer-to-business electronic transactions also apply to business/individual-to-government transactions. However, it is important overall to recognize that mandates to use e-government may be viewed differently by taxpayers. Mandatory use of e-government for transactions may result in an actual or perceived shifting of cost from government to user. This, in turn, leads to resistance to the use of e-government. This is not necessarily wrong policy (as taxpayers eventually pay for all government services), but must be viewed in the context of the client/taxpayer when government plans to expand e-government requirements.
Public- and Private-Sector Partnerships
There has been excellent progress in creating partnerships between the government and the private sector in using e-commerce, especially in the area of tax administration. Does this portend a trend in the blending of government and private-sector capabilities to improve services to taxpayers?
There has already been some such blending. The software industry has made major investments in technology and in the development of tax preparation tools. This includes software that gathers and calculates tax, assists in tax planning, incorporates the latest IRS and state publications in its electronic packages and electronically fries completed returns. The trend now is a shift away from having to place this software on users' desktops to simply providing online access to these software packages on the Internet.
Over time, the use of e-filing and e-transactions could shift the initial processing of tax returns to the private sector. The filing of returns and information electronically through private-sector software and portals may eventually mean that the IRS and state tax agencies simply get the data needed electronically, creating the first virtual tax service centers (and, eventually, eliminating paper filing).
Over 12 million individuals in the U.S. are using tax software, and 200,000 tax professionals use such programs to make tax preparation easier, faster and more accurate.(11) Other major players in this partnership arena are the payroll service companies which, together, collect and electronically deposit billions of dollars in payroll taxes weekly.
The e-commerce/e-government revolution sets the stage and requirements for radical change in tax administration. There art many uncertainties associated with the evolution of e-government. Tax administrators must balance the needs of taxpayers with the need to protect our society's high degree of voluntary compliance. Opportunities and challenges abound as the use of e-commerce and e-government is leveraged in the private and public sectors,
(1) House Concurrent Resolution 190, 106th Congress, 1st Sess. (9/30/99).
(2) The trend towards greater use of the Internet for governmental e-commerce is not confined to the U.S. As of Oct. 22, 1999 (nine days before Oct. 31, 1999 deadline for filing personal income tax returns), the Australian Tax Office (ATO) had received approximately 6.8 million returns. Of these, 4.1 million were filed using the Electronic Lodging System (ELS). Sec http://www.ato.gov.au (Australia) and http://www. govt.nz (New Zealand). The ATO also maintains a highly rated Web page that explains ELS; a similar Website is maintained by New Zealand's Inland Revenue. Sec ATO, National Performance Report--Processing 99 (10/29/99). Use of the Internet is becoming the norm.
(3) See "Barr Discusses Proposal for Electronic Disclosure of Tax Data," Tax Analysts, Daily Tax Highlights and Documents (10/26/99).
(4) See IR-1999-98 (12/7/99).
(5) Rev. Proc. 97-22, 1997-1 CB 652.
(6) Brown, "Electronic Fund Transfers: Panacea or Pandora's Box?," 1 J. of Tax Prac. & Proc. 3 (Aug./Sept. 1999).
(7) Notice 2000-6, IRB 2000-3, 315.
(8) See IR-2000-03 (1/5/00).
(9) See "IRS Studying E-Commerce Tax Problems," Tax Analysts, Daily Tax High lights and Documents (10/26/99).
(10) See "Internet Often Loopholes for Taxpayers, Frustration for Collectors, Guttentag Says," 222 Daily Tax Report (11/18/99), p. G-1.
(11) Federation of Tax Administrators, 1999 Technology Conference.
Phil Brand, M.S.A. Director KPMG Consulting LLC Washington, DC
Lauren Roberts, J.D., LL.M. Manager, Tax Controversy Services Practice KPMG LLP Washington, DC
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|Publication:||The Tax Adviser|
|Date:||May 1, 2000|
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