Important Enough

To Be Historic:
Considering the Future of Online Tax Filing
In the United States and the United Kingdom
A PROCEEDINGS DOCUMENT OF THE AMERICAN LEGISLATIVE EXCHANGE COUNCIL (ALEC)
INTERNATIONAL RELATIONS POLICY SUMMIT ROME – OCTOBER 2007

A Strategy Guide from the Center for Digital Government

Important Enough To Be Historic:
Moments of history and
a word on context
History matters. Try as individuals and institutions
may for a fresh start, it is impossible to make a clean
and complete break from their pasts. Nor is it advis-
able, insofar as our histories remind us of formative
moments and foundational principles that were true
then and are true now.
History matters in the unfolding of human events —
ranging from issues of war, peace, and terrorism, and
the relationships among church, state and the fourth
estatei — to arcane models of the role of government
in an open economy. Such a spectrum was on display
during a gathering by a group of conservative Ameri-
can legislators in Rome in early October, 2007.
The history-laden Italian capitol was the backdrop
for a policy summit convened by the International
Relations Committee of the American Legislative
Exchange Council (ALEC). In addition to govern-
ment-to-government meetings with Italian officials,
delegates also: explored recent history leading to the
2
Good Friday Agreement with His Excellency Daithi
O’Ceallaigh, Irish ambassador to the United King-
domii; reviewed U.S. diplomacy in the Mediterranean
with the Honorable Frederick Vreeland, ambassador
of the United States to Morocco (retired); and were
briefed on the Vatican’s work with worldwide media
on ethical standards by Most Rev. Archbishop John
Patrick Foley, just days before the announcement of
his elevation to Cardinal.
In the shadow of these encounters with historic ar-
chitecture and artifacts — not to mention these and
other men and women of history — is the matter of
tax collection, as practiced in the United States and
the United Kingdom. The Policy Summit turned its
attention to this arcane but important subject during
a session hosted by John Cabot Universityiii featuring
Baroness Angela Billingham of the British House of
Lords, also a member of the U.K. All Party Parlia-
mentary Taxation Group.
 CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM
Historic tipping points in tax
administration: here and there
The United Kingdom and United States have not
always seen taxation the same way. Even a casual
review of history reminds us that taxation without
representation helped foment the American Revo-
lution, and that the Boston Tea Party of 1773 was
a catalytic event toward independence.
Some 235 years later, taxation remains a politi-
cal issue with important economic and societal
impacts. More recent history is instructive in un-
derstanding the current dilemma faced by taxing
authorities in both countries.
Their respective tax administration systems in
their current form date back at least a half cen-
tury; both were born of deliberate policy choices,
not historic accidents. In 1944, the United King-
dom introduced its Pay as You Earn (PAYE) pro-
gram under which:
1. Employers deduct tax from their employees’
pay according to PAYE codes which reflect the
employees’ personal circumstances.
2. The amount withheld by employers and passed
on to HM [Her Majesty’s] Revenue and Cus-
toms (HMRC) is designed to match exactly the
tax liability for each employee.iv
In 1953, the United States Congress rechristened
the country’s federal taxation authority as the
3
Internal Revenue Service (IRS). With the name
change came the decision to stop the practice of
preparing individual tax returns, reflecting, in
part, recognition of the conflict between prepar-
ing returns on behalf of taxpayers and enforcing
tax rules against taxpayers. In the years since,
employers withhold federal income tax based on
the employee’s own estimate of his or her liability
— paying the difference, or having it refunded
at year’s end — while the self-employed estimate
what they owe and pay quarterly.
Some 65 years after PAYE’s introduction, Lady Bill-
ingham laments that the U.K. system remains “more
abacus than (a) computer,”v perpetuating a system
in which employers bear the burden of being the
tax collector while taxpayers, for their part, do not
know how much tax they are paying. That blind
spot notwithstanding, PAYE “works great if you are
on payroll,” says Billingham, because tax calcula-
tion and payment is out of sight and out of mind.
Those Britons not on payroll fall into the category
of self assessment and are left to figure out the va-
garies of the system for themselves. To redress these
shortcomings, the Parliamentary Tax Group set as
its goal, “a U.K. tax system (that) must approach the
tax system in the USA where … the citizen plays the
central role in their tax affairs, rather than the state
or the employer.”vi
Important Enough To Be Historic:

Over there: trans-Atlantic yearnings, or just envy?

Indeed, both countries have demonstrated a ten-
dency to look abroad for tax policy alternatives,
seeking to possibly adopt something that is work-
ing somewhere else. In the United States, the IRS
National Taxpayer Advocate, Nina E. Olson, con-
tended that the country needed to adopt the U.K.
tax system because it costs nothing and works
perfectly. Back in London, the chair of the Parlia-
mentary Tax Group expressed bemused surprise
at the American perception that the “U.K.’s tax
system was working perfectly at a minimum cost
to government and taxpayer alike. Whilst flatter-
ing it does not match the reality we face.”vii
The reality in both countries is two-fold. Tax au-
thorities have administered tax rules that grow
ever more complex with each change in tax law
or administrative code. Taxpayers have turned to
bookkeepers, accountants and others for help —
attempting to minimize the total tax bill and es-
cape the anxiety of running afoul of the tax man.

A disruptive moment births an industry

The need for professional tax help has spawned Storefront tax preparation was the first of two in-
a new industry; private tax bureaus have flour- dustries spawned by the U.S. federal government’s
ished in the United Kingdom and storefront tax deliberate decision to stop filling out tax forms on
preparers in the United States. On January 25, behalf of its taxpayers. The origin of the second
1955, Henry and Richard Bloch scrapped their new industry followed the introduction of the
Kansas City, Mo., based bookkeeping company personal computer and created the opportunity
(United Business) in favor of a new firm that spe- to have software help manage the relationship be-
cialized exclusively in income tax return prepa- tween taxpayers and their government.
ration: H&R Block Inc. Its growth, and that of
their competitors, corresponded with the grow-
ing complexity of the tax code itself. Consider,
for example, that IRS Form 1040 came with 16
pages of instructions in 1955 and ballooned to
191 pages by 2005.

4
 CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM
Codification: in law and in software
If the rules are known and codified in statute and
administrative code, they can be codified in soft-
ware: The software itself could act as an agent on
behalf of individuals. Where personal income tax
is concerned, the tax preparation software indus-
try did the heavy lifting of reverse engineering
the tax code, originally at the federal level and,
in time, the state level. While an increasingly
common practice — in the second decade of the
commodity Internet — the tax software industry’s
pioneering work demonstrated a new and viable
way of doing the public’s business.
These origins illustrate that disruptive moments
make for historic opportunities; a single policy
decision begat two new industries and the eco-
nomic activity that came with them. Another
such moment came in 2003 from the tax software
industry’s creation of the Free File Alliance. The
Alliance is generally known as a partnership be-
tween the IRS and about 20 private tax software
companies created to encourage more taxpayers
to file taxes electronically, or, to use the favored
term, e-file. Through separate agreements, the
5
Alliance provides free state filings in 20 jurisdic-
tions. Moreover, the Alliance was a convergence
of public policy need, corporate philanthropy
and enlightened self interest. The policy intended
to extend e-filing to the poor and underserved,
mapping well with the philanthropic goals of the
Alliance’s founders. At the same time, the indus-
try was concerned about the risk that the IRS
would reverse the decision that had created the
tax preparation industry in the first place. The in-
dustry agreed to provide free filing services to ec-
onomically disadvantaged taxpayers in exchange
for a commitment by the IRS not to enter the tax
software industry or create an online portal that
would phase out commercial offerings.viii Through
the Alliance, the industry provides free filings for
70 percent of the population, with the remaining
30 percent constituting the market of paying cus-
tomers for the industry. To those ends, Free File is
available through the official IRS Web site to tax-
payers with incomes of $54,000 or less in 2007,ix
incrementally more than the previous benchmarks
of $52,000 in 2006 and $50,000 in 2005 when
the income thresholds were introduced.x
Important Enough To Be Historic:
Revisionist mandates:
seizing failure from the jaws of victory
The 70-30 percent income split and related thresh-
olds were consistent with the Alliance’s purpose
and origins. Through the Alliance, the industry has
provided more than 15 million free filings to eli-
gible taxpayers since the program’s inception.xi The
IRS estimates that approximately 93 million tax-
payers are eligible to e-file each year. In 2006, the
IRS e-file program handled 77 million returns,xii
3.9 million of which were through Free File.xiii
Here again, history matters. Measured against its
original purpose, Free File can reasonably be consid-
ered a success — particularly given the daunting chal-
lenges related to governing and keeping together the
Alliance which involves 20 competing software com-
panies, the federal government and 21 states. It has
also materially contributed to meeting the goal set by
Congress in 1998 to have 80 percent of all tax returns
filed electronically by 2007. One IRS estimate sug-
gested that the e-file tally approximated 72 percent of
all returns filed.xiv It is also worth noting the intrinsic
cost and accuracy benefits of online filing.xv
But the Alliance is not being measured against
its original purposes. It is now being measured
against a new goal: universal service, a policy ob-
jective that was not in view in 2003 and, in fact,
runs counter to the founding idea behind the Alli-
ance. To be clear, universal service itself has a long
and proud history, particularly with reference to
rural electrification and the extension of phone
service to underserved, remote communities.
Some in Congress, together with some consumer
activists and state tax authorities, are pushing to
6
extend the model to online tax filing by advocat-
ing a government-provided end-to-end tax filing
and payment service.
The Consumer Federation of America, Direc-
tor of Consumer Protection Jean Ann Fox asked,
“You don’t have to pay a commercial company to
mail in your paper tax returns, so why should you
have to pay them to electronically send them?”
In Congress, U.S. Senator Daniel Kahikina Aka-
ka (D-Hawaii) introduced the Free Internet Fil-
ing Act in which he calls for the IRS “to provide
universal access to individual taxpayers filing their
tax returns directly through the IRS Web site.”
Akaka recharacterizes Free File’s original constitu-
ency — the poor and underserved — as a “select
group,”xvi stating that they should not be the only
taxpayers to have free filing privileges.
Sen. Charles Grassley (R-Iowa) views universal free
filing as an entitlement under which the govern-
ment “has an obligation to taxpayers to make sure
‘free’ really means ‘free.’” Sen. Max Baucus (D-
Mont.) calls on the IRS to build a “direct portal
on the agency’s Web site to allow taxpayers to file
directly and truly for free, regardless of income,”xvii
despite the agency’s sustained problems with mod-
ernizing its core technology systems.xviii
Having studied the technology practices of tax
authorities in both countries, Lady Billingham
cautions against overlooking the risks of the re-
spective approaches, “In the U.S., the IRS has
chosen to stay out of the software market and has
 CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM

negotiated with the software industry, for indus-

try to offer free software to low income groups
through the Free File Alliance. However in the
U.K., the revenue authority has taken responsi-
bility for delivering online tax filing on its own
terms. They entered into major contracts to de-
sign and build new government online systems to
provide the service.”xix

A universal service tax portal would almost cer-

tainly force the end of the Free File Alliance. In
doing so, it would recreate the problems that the
Alliance was established to address — undermin-
ing the industries that were created through the
IRS decision to withdraw from preparation of
individual tax returns. The detrimental economic
effects of such a reversal would ripple through
storefront shops in strip malls across the country,
into the software industry and across the Internet.
Ironically, the chief risk to the Free File Alliance is
an ahistoric revisionism under which a new man-
date is retrofitted onto a model that was working
given its original terms of reference.

7
Important Enough To Be Historic:
Downwind of failure:
implications for the states
The ALEC delegates also explored the cascading
effects:
• The move would deny taxpayers the advantages
and efficiencies that come with the Web and that
they have come to expect in all other parts of
their lives.
• The move puts the Alliance at risk. Should the
Alliance be forced out, it will have a torrential
effect on the 21 Free File states.
• States would have to replace, at their cost, some-
thing that had been provided at no cost to state
government.
• For government, it would mean assuming the
risk of software updates to reflect a constantly
changing tax code. If there were no Alliance,
each legislative change would be an unfunded
mandate to the respective tax agencies to make
programming changes. With the Alliance, tax
software companies want to be first, fast and
seamless in incorporating changes to retain cus-
tomer loyalty.
• As competitors, the Alliance members must
compete to serve taxpayers each year. That com-
petitive aspect is important in that it relies on the
market for self correction.
At the risk of oversimplification, policymakers in
both countries have choices that stand in bold relief
— repeating history, for good or for ill, or building
a digital platform for governing responsibly, securely
and sustainably into the future.
8
The important policy discussions that necessarily
attend the future of e-filing should take place in
the context of contemporary understandings of
government modernization:
• It is not about the portal, it is about transactions,
such that the official portal is a non-exclusive
route into the applications and Web services that
stand behind it.
• Free Filing is really an architectural component
entirely consistent with where technology itself is
heading — service-oriented architecture (SOA),
shared services, Web services and Web 2.0.
• In this context, remember that the Free File Alli-
ance was prototypical of a Web 2.0 environment.
The architecture changes in the general technol-
ogy sector will cause government to reconsider
the common understanding of what the World
Wide Web is, retaining everything of value as
media (the collection of Web sites) but transi-
tioning to a full-fledged computing platform
serving Web applications to end users.
In many ways, these contemporary architectures
pair the disruptive moments that come through
policy and economic developments with disruptive
technologies that allow organizations to seize on
the game change.
 CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM
Fresh start or old mistakes:
public service in the balance
For the 2006 fiscal year, the IRS processed
133,917,068 individual income tax returns and
collected $1,236,259,000,000 in related revenue,
which accounted for 44 percent of its total $2.2
trillion in tax receipt net of refunds. Even at that,
the agency estimates that $300 billion of taxes
owed are not collected each year, a shortfall that
informs its current policy slogan, Service Plus En-
forcement Equals Compliance.xx
Contrast that with the long-held motto of public
service in the U.K., “Public services exist for the
patient, the pupil, and the people who are to be
served.”xxi The distinct mottos may reflect different
positions on the same continuum. In good times,
tax authorities tend to emphasize customer ser-
vice but, during periods of economic downturn,
they turn their attention to enforcement issues to
preserve fund balances in the public treasury.
In the discussion with Lady Billingham, there
were a number of hard-learned lessons that should
inform policy decisions on both sides of the At-
lantic. Her verbatim observations are categorized
in three areas as follows:
1. Serving Mobile and Transient Populations.
Centralized tax administration crumbles amid chang-
ing economic, labor and technology landscapes
Administrative and compliance costs rise pro-
foundly as workforce becomes more mobile.
The economy in the United Kingdom has be-
come far more dynamic. At the same time, the
9
HRMC’s own estimate says that 5.7 million of
about 35 million taxpayers in the U.K. are paying
the wrong amount of tax. Compliance costs are
rising disproportionately faster for smaller busi-
nesses than larger businesses, making them less
competitive and therefore less likely to take on
more staff.
As changes to the U.K. labor market continue
apace, the need for greater decentralization of
the tax process and relief for employers and small
businesses arises. The greater empowerment of
the individual for his own financial affairs may
well be the direction we have to take.
1. No Fear. Trust is sacred in the relationship between
the tax agency and the taxpayer.
Law abiding citizens should not have to be afraid
of their government or departments. Not only
is it plainly wrong, but it can lead to intimida-
tion and a reluctance to challenge tax authorities
which results in increased tax errors. Unfortu-
nately, all too often, taxpayers feel that it is bet-
ter just to accept what the HMRC says than to
attract attention and further examination. The
staff of HMRC must stop treating all taxpayers as
if they are trying to defraud the state and accept
that the majority of us want to pay the tax that we
genuinely owe.
The (tax) group’s work pointed towards revelations
made by the national audit conducted earlier this
year for self-assessment taxpayers. The HMRC
made estimates for people who had underpaid
Important Enough To Be Historic:
due to unintended errors but did (also) provide
the same assistance to those who had overpaid.
These figures are vital to understanding the extent
of the problem and as a result the HRMC has re-
sponded accordingly. Clearly, when acting as the
nation’s calculator and tax collector, in order to
maintain the taxpayer’s trust, the HMRC needs
to be seen as focused equally on overpayment as
they are on underpayment — or else people will
question whether their roles are compatible.
Unintentional errors where taxpayers completed
their returns wrongly but had done so in good
faith led to at least £300M worth of tax errors.
Clearly, the service currently offered by HRMC
is not meeting taxpayers’ needs and the potential
to simplify the process through technology is cer-
tainly not being utilized.
3. Seizing the Inevitable. Toward citizen self-
assessment and online self-service
The tax group compared the progress made in
the United States and in the United Kingdom
in getting taxpayers to file online and reviewed
the strategies that were used in the two countries.
They found that while very similar targets were
set, over a comparative time scale, the percentage
of taxpayers filing online in the states was almost
double the rate in the U.K. In fact, in the U.K., in
2005 when it was envisaged that the majority of
taxpayers would be filing online, only 17 percent
were actually doing so. (Of 10 million self-assess-
ment filers in the U.K., 2.9 million file online.)
10
The report argues that this disparity was due to
the different approaches taken by the two gov-
ernments in particular around the involvement of
the private and non-for-profit sectors. The U.K.
needs to look abroad for solutions where govern-
ment creates incentives for filing online and, in-
deed, to the United States, where the private sec-
tor has been involved with great success.
The move toward compelling — rather persuad-
ing — taxpayers to file online also appears to miss
a fundamental point concerning moving taxpay-
ers online in the first place. The targets that were
put in place to increase the availability and uptake
of government e-service were not put in place for
their own sake; they were there to drive the inno-
vation and efficiency that would result in better
service to the public. And one more suited to the
individual needs as a citizen and a consumer. The
group also argued considerable progress needed
to be made in order to deliver service suited to
citizens’ needs.
Clearly, there are contextual differences between
the United Kingdom and the United States, in-
formed by their respective histories, cultures and
public policy priorities. But in much of the fore-
going, the letters IRS could be substituted for
HMRC and the observations would hold true.
 CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM

Conclusion: A precarious perch

The public policy purposes and practices related to conventional wisdom is to undo the reforms of 1955
electronic tax filing in the United States and the United that separated filing and enforcement out of a tra-
Kingdom face an uncertain future. The two systems ditional sense that “universal” is synonymous with
have notable differences but both are confronting a “government provided.” This adherence to tradition
point of no return where the old ways of doing things without regard to underlying principle has also turned
simply will not do. an industry alliance on its head. The original philan-
thropic purpose of extending free electronic tax filing
The scope and magnitude of this inflection point is to underserved populations has been deemed inad-
captured in, of all things, a musical. In the opening equate by those who call for free filing for all. This
song, the central character Tevye explains how life is as is a newly exerted right that taxpayers should be able
precarious as the perch of a Fiddler on the Roof. The fa- to file and pay electronically directly, without having
ther, milkman and village philosopher draws heavily on the transaction mediated by a private company. A
“tradition” but later concedes that the purpose underly- new model of collaboration in which public, private
ing the customs have been forgotten or forsaken. Only and civic sectors playing to their respective strengths
in the second act does he see the change in the order of in support of a common public purpose may be “the
things. “Love,” Tevye concludes, “it’s the new style.” new style,” but movements in Congress and some
large states risk missing out on its benefits because
Tradition also plays heavily in the institutional prac- they are blinded by the kind of tradition with which
tices around tax filing. In the United States, the new Tevye struggled.

Endnotes
i xi
The fourth estate is a traditional name for the press, referring to it as the “fourth branch” of Fred Pace, “It’s time to start thinking about income taxes,” The Register-Herald, December 30, 2006.
government; the term indicates the role and the importance of the free press in a democratic society. http://www.register-herald.com/archivesearch/local_story_364191448.html
xii
http://nie.brownsvilleherald.com/newspaperterms.htm IRS, May 2007.
ii xiii
The Good Friday Agreement was a political deal aimed to form a lasting settlement following the “Free File: More consumer-friendly, more protections,” Center for Personal Finance, January 2007.
1994 paramilitary ceasefires in Northern Ireland. It was signed on April 10, 1998. http://news.bbc. http://hffo.cuna.org/14953/article/1737/html
xiv
co.uk/2/hi/uk_news/northern_ireland/4079267.stm IRS. “E-File Returns Running at Record Pace” March, 2007. http://apps2.irs.gov/newsroom/
iii
John Cabot University is an American University in Rome. www.johncabot.edu. article/0,,id=169196,00.html
iv xv
The Future of Income Tax Administration in the UK (Preliminary Findings), UK All Party “According to Mr. Bert Dumars, the Director of the IRS Electronic Tax Administration, it costs 55
Parliamentary Taxation Group, London, June 2007: 1. to 75 cents to process an electronic return while it costs about two dollars to process a paper return.
v
Baroness Angela Billingham, Comments to the ALEC International Relations Policy Summit on In addition, the error rate for electronic returns is one percent while the error rate for paper returns
the Preliminary Report of the U.K. All Party Parliamentary Taxation Group, John Cabot University, is 20 percent.” See “Akaka Introduces Free Internet Filing Act: Bill requires IRS to provide universal
Rome, October 4, 2007. access to individual taxpayers filing tax returns directly through IRS Web site,” Floor Statement
vi
Ibid. by U.S. Senator Daniel K. Akaka. March 30, 2007. http://akaka.senate.gov/public/index.
vii
The Future, Op Cite. iv. cfm?FuseAction=speeches.home&month=3&year=2007&release_id=1624.
viii xvi
Economist Joseph Stiglitz used the familiar stop light metaphor of green, yellow and red to parse Ibid.
xvii
the role of government in the digital, networked age. That work was important in helping define Kay Bell, “Free filing in, refund loans out,” Bankrate.com, Jan. 16, 2007
xviii
how government should use the tools of the Internet. In summary form: a green light that public See, for example, an article that dates from the same year during which the Free File Alliance was
agencies should go in all good haste and do good work; a yellow light indicated that government formed. David Clay Johnston, “At IRS, a Systems Update Gone Awry,” New York Times, December
should proceed but do so with caution; and a red light meant stop, do not enter because, while the 11, 2003. http://query.nytimes.com/gst/fullpage.html?res=9C06E6DC173CF932A25751C1A965
task is important, it is already being done by parties outside of government. (See Joseph E. Stiglitz, 9C8B63&scp=5&sq=IRS+technology.
xix
Peter R. Orszag and Jonathon M. Orszag, The Role of Government in a Digital Age, A Report Billingham, Op Cite.
xx
Commissioned by the Computer and Communications Industry Association, October 2000.) Jack Speer, “IRS Commissioner Assailed on ‘Tax Gap,’” National Public Radio Morning Edition,
ix
More information on IRS Free File at www.irs.gov March 21, 2007.
x xxi
“Free File: More consumer-friendly, more protections,” Center for Personal Finance, January 2007. Billingham, Op Cite.
http://hffo.cuna.org/14953/article/1737/html

11
 © 2008 e.Republic, Inc. All rights reserved.
100 Blue Ravine Road
Folsom, CA 95630
916.932.1300 phone
916.932.1470 fax
www.centerdigitalgov.com

Intuit Inc. is a leading provider of business and financial management solutions for small and mid-sized businesses, consumers and accounting professionals. Its flagship
products and services, including QuickBooks, Quicken and TurboTax software, simplify small business management and payroll processing, personal finance, and tax
preparation and filing.

Acknowledgements:
Paul W. Taylor, Ph.D., Chief Strategy Officer for the Center for Digital Government and the Center for Digital Education

The Center for Digital Government, a division of e.Republic, Inc., is a national research and advisory institute on information technology policies and best practices
in state and local government. Through its diverse and dynamic programs and services, the Center provides public and private sector leaders with decision support,
knowledge and opportunities to help them effectively incorporate new technologies in the 21st century.
The Center’s special reports and papers provide two decades of experience and insight into the most important policy and management issues facing governments,
and offer strategic approaches for planning and implementing technology, funding sources, and case studies from jurisdictions.