Electronic tax compliance - the wave of the future.

• Author: Ramsey, Larry L.

Editor's Note: In this article, Larry L. Ramsey and Jonathan R. Lyon discuss developments concerning electronic tax compliance, including the use of electronic data interchange (EDI), especially among state and local taxing jurisdictions. Mr. Ramsey is a member of Tax Executives Institute's Tax Information Systems Committee, and in that capacity has participated in EDI-related meetings sponsored by the Federation of Tax Administrators, by whom Mr. Lyon is employed. (Mr. Ramsey's employer, Electronic Data Systems Corporation, was recently awarded a contract to develop a value-added network for TaxNet Governmental Communications Corporation.)

The views expressed in this article, however, are those of the authors and not necessarily those of TEl or the FTA. The purpose of the article is to apprise tax executives and other interested individuals of the developments and to solicit their participation in ongoing EDI initiatives, either under the auspices of TEI's TIS Committee or otherwise. Individuals wishing to become active in TEI's activity should contact Anthony P. Verdino, the TIS Committee's chair, at (203) 352-8129. Individuals wishing more information about the FTA's activity should contact Mr. Lyon at (202) 624-5890.

Economic conditions in the 1990s dictate that virtually every business enterprise review and, in some cases, significantly alter their internal processes. The common buzzwords for this analysis include "benchmarking," "flow charting," and "process re-engineering." Often recommendations that result from such studies include eliminating paper from the process and converting to electronic data interchange (EDI). Benefits to be derived from implementing EDI are vast: streamlining data flow; improving accuracy; eliminating costly input errors; reducing headcount; reducing storage and disposal costs; improving data retrieval; and even advancing environmental objectives (such as saving the rain forests).

Most internal processes can benefit from EDI, especially those involving a large volume of data traditionally sent or received on paper, and which eventually need to be converted to machine readable media. Examples of areas in which EDI has worked extremely well are Purchasing and Invoice Processing/Accounts Payable. Using EDI, it is possible to even eliminate vendor invoices and trigger vendor payment directly from a purchase order through matching electronic receivers with an electronic purchase order. Even the payment process can be done electronically.

"What does all this EDI discussion have to do with tax compliance?" you ask. A form of financial EDI--the wire transfer--has been common for processing payments to tax agencies (including the Internal Revenue Service and many state and local tax jurisdictions) for several years. In fact, many States require electronic funds transfer (using the Automated Clearing House banking system) as soon as a company's periodic tax liability reaches some minimal threshold.

The next logical step--electronic filing of tax returns-- is already starting. The IRS has been electronically receiving individual income tax returns from tax preparation firms since 1985. Also...