There may be 2-D bar codes in the future of paper-filed returns, if recommendations from the Government Accountability Office are followed.In its end-of-year report on last year’s tax season, the GAO said that the Internal Revenue Service exceeded the previous year’s performance by most measures. However, it noted a number of opportunities to realize additional savings and increase tax compliance, with the barcoding of paper returns among them.
The GAO noted that paper returns limit the effectiveness of the IRS’s enforcement programs, since to control costs, the IRS does not transcribe all the lines on paper tax returns into its computer databases, which limits the amount of information available electronically for enforcement purposes.
Barcoding would solve the problem, the GAO said, since the information posted to databases is readily available for use in the IRS’s automated compliance-checking programs. Those programs include matching tax return entries with information returns from third parties, such as Form W-2s from employers or Form 1099s from financial institutions, and selecting suspicious returns for audit.
The IRS processed approximately 135 million individual income tax returns during 2007. The number of returns filed electronically increased by 9 percent over the previous year, with 79 million e-filed returns and 56 million paper returns. As a result, the IRS has been able to see real savings by reducing the staff needed for labor-intensive paper processing, according to the GAO.
“In 2006, the IRS used almost 1,700 (36 percent) fewer staff for processing tax returns than in 1999,” it said. The IRS estimates that this saved it $78 million in salary, benefits and overtime, while reducing ancillary space by closing submission processing centers.
To avoid disadvantaging taxpayers who file electronically, the IRS has a policy of posting the same information from electronic and paper returns to its databases. “If a line is not transcribed from paper returns, it is not posted from electronic returns either,” the auditor general said.
BENEFITS OF BARCODING
The IRS believes that transcribing and posting more comprehensive information from individual income tax returns could facilitate the audit process by allowing for improved case selection, and could also potentially better define specific tax gap issues. For one of its main enforcement programs — the Automated Underreporter Program — IRS officials estimated that having all tax return information available electronically would result in a $175 million increase in tax revenue annually, while at the same time reducing its “no-change” rate, making it less likely that the IRS would select taxpayers for further contact where no additional tax was assessed.
State officials confirmed that greater access to return information would allow them to verify information on state returns and improve their enforcement programs, while reducing the number of compliant taxpayers who were contacted, the GAO said.
The agency offered two options to increase e-filing — mandates and barcoding. “Last year we suggested that the Congress mandate electronic filing by paid preparers meeting certain criteria, such as a threshold number of returns,” it said.
The other option — barcoding of all printed returns prepared using commercial software — would also help further the benefits of electronic filing. “The IRS has done preliminary research showing that 100 percent of the information on a return could be condensed into a bar code, which could be read by hand-held scanners. Consequently, barcoding produces some of the efficiencies of electronic filing by replacing the labor-intensive transcription process and eliminating transcription errors,” it stated.
2-D barcode technology converts the taxpayer’s return information into a unique barcode that is printed on the return. The processing system then reads the taxpayer’s return information from the 2-D barcode, instead of from the fields on the paper return.
The GAO noted that a Treasury Inspector General for Tax Administration report found that states experienced a reduction of 50 to 90 percent in time and effort to process paper returns through the use of barcoding. Although the Wage and Investment Operating Division canned a proposal for barcoding in June 2007 because it involved upgrading a legacy system, a new funding proposal is being developed for no earlier than 2010 that will likely include barcoding.
However, the “IRS does not know what actions are needed to require commercial software vendors to include bar codes on printed returns,” the GAO said. “Without knowing the necessary actions, the IRS cannot estimate the costs and time frames for a bar code program.”
Some vendors are already up and running with bar code technology, said Teresa Mackintosh, vice president of marketing for Thomson Tax and Accounting. “The IRS mandated barcoding a couple of years ago for K-1s, and a number of states now mandate 2-D barcoding,” she said. “We took it a step further last year and added 2-D barcoding for W-2s and Forms 1099. We also offer the technology free to any software company that wants to implement it,” she said. “A few vendors have taken us up on the offer, but most have invested in [optical character recognition] as a transitional technology.”
“Anything we can use to help the agency process returns more efficiently and accurately has an indirect benefit to our customers,” said Zeke Gikas, manager of the forms design team for Thomson’s CS Professional Suite and chair of the government liaison committee of the National Association of Computerized Tax Processors. “Adobe has also worked with the IRS to generate 2-D bar codes on K-1s,” he said. “And the IRS has supported scan lines on certain vouchers similar to the numbers you see on the bottom of a check. It incorporates information on the voucher itself — it’s a voluntary option for vendors.”
Since tax software vendors already incorporate 2-D barcoding into the 13 states that require it, adding it to their federal 1040 packages would not be a problem, according to Gikas: “Vendors that already support it can pretty much do any bar code, provided they follow the standard set by the Federation of Tax Administrators and NACTP.”
The FTA became involved as a clearinghouse for information and development of 2-D bar code technology among the various states. It developed 2-D format standards for the states in conjunction with the NACTP. “If the IRS asked us, we could do it,” he said. “Based on current technology, it wouldn’t be difficult to support. It’s ultimately a business decision.”
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