Obama plan to beef up tax info system draws mixed reviews

System that pinpoints discrepancies between tax returns and third-party reports has led to recent boost in collections.

A proposal by President Obama to ramp up an information system to weed out erroneous tax returns is drawing a mixed reaction from policy and contracting experts.

The Obama administration's fiscal 2010 budget recommends shifting discretionary funds to beef up a system that searches for discrepancies between a taxpayer's return and reports from third parties, such as employers.

"If the [Internal Revenue Service] can crack down on high net worth scofflaws' -- people and businesses' -- payment of back taxes and fines, [that] improves the federal balance sheet and is one more step toward balancing the budget," said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, a market research firm.

The IRS proposal aligns with Obama's pledge to reduce the federal deficit and increase accountability in government through technology.

Last week, "The president made a point of saying that the feds were going to look carefully at tax loopholes that favor offshore-based entities. This is one of the governmental functions that has a high potential return," Bjorklund said.

The program targeted for expansion, the Automated Under-Reporter system, enabled IRS to collect 22 percent more tax dollars in fiscal 2008 than in 2007, according to the Treasury Department.

Obama's budget projects that spending $7.19 million over five years on enhanced tax enforcement, partly through the expanded use of AUR, would reap an estimated $13.35 million in savings.

But some federal IT observers aren't convinced of the system's efficacy.

"It's a little bit disappointing to see emphasis on back-end outcomes rather than trying to invest in [systems] that prevent these things from happening in the first place," said Larry Allen, president of the Coalition for Government Procurement, a trade group for federal contractors.

The administration instead should focus on establishing a clearer tax code, creating user-friendly e-filing systems and improving taxpayer outreach, he said. "Those are all front-end systems that would lessen the need to crank out spending on enforcement and catching wrongdoers," Allen added.

Recent Government Accountability Office reports have noted weaknesses in the current AUR system.

A January report found that the system does not identify the reasons for mismatches -- whether, for example, the problem was due to misreporting on the taxpayer's end, a mistake by an employer or an IRS error in transcribing paper forms.

A July 2007 GAO report stated that AUR -- one of the main programs to check sole proprietor tax compliance -- has "a limited reach."

Information returns that the system uses to verify sole proprietors' income only cover about 25 percent of such taxpayers' gross receipts and generally few of their expenses, GAO said.

"Barriers to submitting information returns, including complex requirements and lack of convenient electronic filing, also limit AUR's reach," the report added.

IRS officials told GAO that due to resource constraints, they do not always contact taxpayers when AUR finds a discrepancy.

Some tax policy analysts say enhancing the system could deter tax evasion.

"Not surprisingly, when you know somebody is watching, you are more likely to do what you're supposed to do," said J.D. Foster, a senior fellow in the economics of fiscal policy at the Heritage Foundation, a research institute.

But, "If you think you're being required to send in all this information and there is no one at the IRS who is capable of doing anything with it ... taxpayer compliance might go down and taxpayer outrage might go up," he said.