Currently, the IRS often ends up auditing tax returns months -- in some cases, years -- after they've been filed. While no reasonable person would claim that audits are enjoyable in the first place, having such a gap between the date of the return and the start of an audit can make the process even more difficult.

Doug Shulman, IRS Commissioner, has talked about the difficulties the current system presents, and his goal of changing the system so that examinations occur nearer to the time when the returns are filed. Speaking in April 2011 before the National Press Club, Commissioner Shulman said, "This after-the-fact compliance approach can create problems and frustrations for both taxpayers and the IRS. It can be a real dilemma for taxpayers, who may no longer have the money that was refunded to them, but it turns out, they were not entitled to. There's also possible sticker shock because interest and perhaps penalties may have been accruing on any tax due for up to three years. Taxpayers ask, 'Why didn't you notify me earlier?' This hurts the IRS' image and contributes to a "gotcha" perception."

Yesterday, the IRS hosted its second meeting on its vision for a Real-Time Tax System (RTTS). "Under such a system, the IRS could match information submitted on a tax return with third-party information at the beginning of return processing and provide the opportunity for taxpayers to fix the tax return if it contains data that does not match IRS records," according to an announcement about the meeting. Among those scheduled to speak were representatives of businesses, financial institutions, software companies and state revenue commissions. At an earlier meeting in December, representatives from consumer groups, tax professionals and state and federal government entities spoke.

As Shulman envisions it, under an RTTS, the IRS would get all information returns filed by third parties, such as W2s and 1099s, before individual taxpayers file their returns. Taxpayers or professional preparers could access the information via the Web, and download it into their returns, using commercial tax software. They would add any self-reported and supplemental information, and then file their returns. The IRS would embed the third-party information into its filters, and immediately reject any return that did not match its records. "We would then have more accurate returns and deal with many more problems up-front. We could shift resources to spend more money getting it right in the first place, and do less back-end auditing," Shulman said.

Moving to this type of system would require reworking the IRS' technology systems -- not an inexpensive undertaking, as Shulman noted. In addition, some current practices on the taxpayer side would have to change. For example, information returns, like Form 1099s, would need to be put into the system earlier.

A Bloomberg article on the December 2011 meeting provides some information on the potential benefits: "Long-term benefits to the government would include 'billions in net revenue and cost savings resulting from upfront quality checks on tax returns being filed with IRS.' Taxpayers would save millions of dollars in penalties and interest and have millions of fewer contacts with the agency under a real-time system, according to the IRS."

Of course, a few obstacles stand between the current "look-back" system and an ideal real-time one. Patricia Thompson, chair of the AICPA's Tax Executive Committee and a practicing CPA, spoke before the December meeting. While stating that the AICPA supports the idea of a real-time tax system, she identified several challenges. Among them: "Congress' perennial enactment of year-end tax legislation. Unfortunately, this situation creates havoc for the IRS when trying to administer the tax filing season, particularly during the early weeks of the filing season. These perennial tax law changes would need to be factored into any deliberations over a move to RTTS." Thompson also expressed concerns about any IRS requirement to resolve discrepancies prior to accepting a return. "This would introduce issues surrounding the taxpayer's obligation to provide a "timely-filed" return to the IRS and potential penalties."

Some see even more nefarious intentions in the IRS' vision. "There's actually a fairly insidious plan behind all of this. The Real-Time Tax System is just an appetizer for the pièce de résistance of the revenue establishment--a 'return-free' system where the IRS would calculate your tax obligation for you (convenience!) and simply ask for your signature in large, friendly letters," wrote Tom Giovanetti, president of the Institute for Policy Innovation (IPI), in BigGovernment.com.

Shulman, speaking before the American Institute of CPAs in November 2011, addressed this concern. "I've been asked a lot whether this vision is one of the IRS pre-filing tax returns and sending them out. That's not what this project is about."