The way taxpayers and tax administrations use technology and digitalization is impacting how citizens interact with governments, and it will force tax practitioners to rethink how the profession operates in the future.

Tax administrations such as the IRS and South Korea’s National Tax Service are moving forward in this space. For example, South Korea created a robust in-house IT team focused on collecting data, tracking transactions, and sharing such information with other organizations. Between 2011 and 2016, the tax service reduced compliance costs by the equivalent $1.03 billion. It also increased the tax revenue per tax official by 20 times within 33 years and reduced the cost of tax collection by half in the same amount of time.

Meanwhile, the IRS is working to improve data analysis and detect unusual and potentially non-compliant activities, with the aim to digitize over one billion documents by 2025. Through its modernization plan, the IRS has worked to enhance customer experience through digital communications with taxpayers, such as is the case with electronic notices.

Both the South Korean and the Chilean tax administration have successfully implemented prefilled tax-filing systems, in which taxpayers use information from previous filings—either by themselves or through third parties—to auto-complete some oftheir tax forms. These types of systems make tax filing cheaper and more accessible.

Chile’s system has proven so useful, particularly for individuals, that early tax refunds were approved for 98% of the filings made during the first eight days of the 2024 tax season.

The US, South Korea, and Chile have successfully used their treasure trove of data to audit and anticipate tax fraud. Such tools range from basic scoring systems to anti-fraud tools triggered when a system detects a “risky” tax behavior. This might include sales by a taxpayer without assets, or employees or purchases that don’t seem to match a taxpayer’s business.

Taxpayer fraud is detected by considering, either via fixed parameters or artificial intelligence, what a normal company could do in similar circumstances versus what the taxpayer is doing. If not reasonable, tax fraud might be the explanation.

For example, the IRS’s Return Review Program detected $13 billion in pre-refund fraud from 2015 until 2021, which has represented a return on investment of 13,900% for the agency.

With technology at the forefront of anti-tax fraud measures, practitioners and taxpayers should understand that flying under the radar or being unnoticed is now uncommon. Real-time anti-fraud measures demand quick reactions and proper backup documentation to determine the economic reason for each taxpayer’s moves.

Informal Cash Economy

Technology also plays a big part in targeting cash in the informal economy—the part of the economy that isn’t officially monitored or taxed.

South Korea has implemented an e-cash receipt system, whereby merchants issue cash receipts through systems facilitated by cash receipt services providers, providing such receipts with specific numbers and communicating the transaction to the tax administration. It tackles the extensive use of cash while taking advantage of the wide availability of free internet, mobile services, and smartphones. This has enabled it to track roughly $100 billion in cash transactions that could have otherwise flown under the radar.

The e-cash receipt system surely played a part in tracking billions of dollars in transactions. But the incentives associated with the system—such as an e-cash receipt lottery, tax deduction for businesses, and income deduction for consumers—directly helped facilitate this by putting the right incentives in place and facilitating tax compliance. Between 2014 and 2021, these incentives increased the number of merchants using the system by 50%.

As part of its commitment to address tax collection in the informal economy, Chile has proposed requiring tax registration from all suppliers of point-of-sale units. The country is particularly targeting cash and the extensive use of credit cards and other means of electronic payments.

The proposal would require any digital intermediation platform associated with either goods or services, such as marketplaces, to demand proof of being registered taxpayers from anyone that uses its platform.

Outlook

Though technology has become a fundamental aspect of tax compliance, legal systems across the globe aren’t all evolving as quickly.

How much of our data are we willing to disclose for the sake of improved technological tools? Technology’s availability and use should be seen as a fundamental right for taxpayers, not a privilege. The government should be limited in how it can use such information without infringing on taxpayers’ privacy.

When considering how to make tax compliance more manageable, it might seem appealing to be able to use a tax technology tool if a tax administration knows all our purchases and can distinguish—without our input—what might or what might not entitle us to a deduction. But it might not be worth it to lose our privacy for the sake of making things just a little easier.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ignacio Gepp is partner with Puente Sur in Chile.

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