Could the IRS benefit from running its own private blockchain? Forbes contributor Adam Bergman recently cited a previously undisclosed document that states the IRS “plans to spend $291 million updating 140 computer systems” to comply with new tax laws and stay up to date. Would a technology like blockchain be the miracle cure the IRS needs?
The Trouble with Taxes
It’s easy to view the IRS as a monolith. An unchanging force of nature (think death and taxes) that exists in a vacuum. However, according to recent reports such as the coverage by the left-leaning Last Week Tonight, the organization is using woefully obsolete technologies and is having a hard time keeping up with changes in the financial world.
Cryptocurrency and Taxes around the World
One obvious example of this is the difficulty the IRS is having in enforcing tax compliance on cryptocurrency investments and trades. At a recent event in Chicago, bitcoin author Andreas Antonopoulos noted that his recent tax return (presumably in his home country of Greece) was more than 300 pages long. An active cryptocurrency trader would have at least 300 pages of a tax return, if not much much more depending on how frequently they traded.
According to Antonopoulos, a system where law abiding citizens are punished (by needing to file ridiculously complex tax returns) and the law breakers are not – something is seriously wrong.
Today the IRS rules are still vague and nonspecific when it comes to cryptocurrencies. Various statements have indicated that crypto assets should be treated in the same way as gold or other non-currency forms of income or exchange.
To make things worse, the IRS stated that cryptocurrency trades will most likely not be able to fall under the like-for-like exclusion. If it was applicable, the exclusion would have made crypto-to-crypto trades a nontaxable event since you are simply exchanging one thing for another of similar properties.
Private IRS Blockchain?
According to the Forbes piece, the IRS could not only save hundreds of millions of dollars in infrastructure and software development by deploying a private blockchain, they could also improve their own services and increase their ability to collect on all sorts of cases.
Yesterday we covered an OmiseGO live stream where Ethereum co-creator Vitalik Buterin discussed the ease of which a company could deploy a private blockchain that could exhibit nearly all of the efficiencies of a centralized system while still gaining the benefits of being a blockchain based system. Specifically, Buterin suggested that a private organization (such as the IRS) could run their own independent Plasma server to process transactions.
Briefly for those who don’t know, a private blockchain is one where only authorized users have access to it. This is different from a public blockchain like bitcoin where anyone and everyone has full access and can participate via mining or running nodes.
What Would an IRS Powered by Blockchain Look Like?
Let’s take a look and see what such a private blockchain could do for the IRS if the predictions of the Forbes contributor come to fruition.
According to Bergman who wrote the article, the IRS starting its own private blockchain would be “transformational from the speed, security, and cost perspective.”
Bergman gives the example of a bank transferring 401(k) plan funds to an IRA. He suggests that “the transaction can be verified and reported by the parties on a blockchain so that the IRS will have immediate access to the data”.
The author then goes on to suggest that the same could apply to the infamous Form 1099 on which a wide array of financial information is reported on each year. Digitizing the form and tracking it with a private blockchain would allow auditors “instant access to financial or tax return related data” and that the system will not only be faster but it will also offer “security against taxpayer identity theft because of cryptography”.
With major data breaches happening every couple of weeks such as the infamous Equifax hack where hundreds of millions of Americans may have had all of their pertinent information stolen make functions like this even more important.
Will it happen?
While it would be interesting and certainly beneficial to see a blockchain powered IRS, it’s doubtful to happen within the next decade or so. This is because the IRS is still using massively outdated technology in a world that is already increasingly plugged in and networked.
Perhaps this recent step of upgrading their systems will move them one step closer towards implementing blockchain. Or perhaps at the rate data breaches keep happening, the need for blockchain to prevent identity theft will outweigh the costs of implementation.