Drafts or proposals for tax returns

In a previous Post, the ten minutes one, we mentioned the possibility of offering drafts or pre-filled fields of returns to taxpayers as a strategy to simplify the action of the administration to taxpayers.

In this regard, I was lucky to recently participate in an interesting exchange of views on whether or not the tax administration should propose to taxpayers, or to most of them, pre-filled returns or a kind of draft-returns.

Sometime in the discussion, a colleague wondered if it was a contradiction that the administration did such a thing in a self-determination tax system which is widely supported by tax returns. Furthermore, he wondered if such a thing does not affect what we call the subjective risk.

Luis Cremades, the Head of the Spanish Tax Agency Mission at CIAT, told us that they had similar concerns when they were discussing whether to prepare or not the “famous” draft. However, the situation was clarified when a policy of transparency was developed based on providing to taxpayers information that the Administration had about them and about their economic activity. In that sense, it would be absurd for taxpayers to hide what they know the administration knows about them. To develop the proposal is just the next step.

Of course, for the administration to take that step it will be necessary that the data obtained from their own systems and specially the information obtained from third parties is reasonably complete and reaches a very high level of reliability. If the job is done well, many taxpayers will only have to confirm the proposal, others will have to complete it with some elements, probably supported with information that the administration does not have or fails to obtain, and others will correct values that do not apply. These adjustments, if very few, would not be difficult to handle, but what is best, they would help to refine every time with more detail the processes for obtaining information.

If we do not take the last step, that of preparing and proposing the draft, we can think that the number of taxpayers who, intentionally or not, submit a return that would be observed by the Administration will be higher, much higher. Depending on the volume, these taxpayers would receive informal communications or notices pointing out the differences and inviting them to substitute the return to correct the mistake. Some of these taxpayers would be audited with desk or field audits. Of course, not all, probably they would be too many.

Replaced returns surely would generate penalties and interests. But probably not all identified taxpayers would replace their returns and not all who would replace them would immediately pay the differences and the resulting penalties and interests. Some, hopefully the least ones, will maintain their position and try to file objections or wait for arrears collection actions for making their payments. Let’s call them group X.

If everything goes well, thanks to the work of the administration to identify and report the differences, to require the voluntary replacement or determine the taxation with an audit, many of these taxpayers will replace the return statements and compliance will improve. In the medium term, these taxpayers will surely be more careful in the future.

If the extra step is taken, and the draft or proposal is submitted, we could assume that taxpayers, except for those of group X, would accept the return or will complement it. The number of differences resulting from the cross matching will be significantly lower and the returns would be more correct, at least in terms of information available to the administration. It is true that many penalties and interest will be avoided, but things would be better from the beginning and we know that the later a problem is corrected, the more difficult and expensive its solution will be. Furthermore, by not having to control what is already known, the Administration may direct those resources to other purposes.

Of course, we must insist that before taking that step, the administrations must ensure to obtain the necessary information to do so, at the right opportunity with the highest quality. This process is essential. Only if and when it succeeds, I think it is worth the effort. With regard to the subjective risk, if the process is correct and sufficient, I don’t think it decreases, but it will most likely increas.

How to present that draft or that proposal is the subject of another discussion: from the sending of return statements that can be confirmed by a button on the cell phone to fully online returns in which the fields would already appear filled out. In any case it is clear that this proposal is just that: a proposal. The determination of taxes continues to be the responsibility of taxpayers. In preparing the draft on the basis of available information, the administration does not renounce to make subsequent cross matching with information obtained later neither to audit the taxpayers.

Greetings and good luck

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