Should the IRS Fill Out Our Tax Returns?

By :: April 8th, 2010

Terrific debate at a Tax Policy Center conference I moderated today on technology and tax filing. The crux of the argument: Should the IRS fill out your tax return for you?

In one corner: TPC co-director Bill Gale, who argued that technology makes it possible for the IRS to take a first pass at the returns of millions of Americans. The agency would not have the last word—you could make changes before accepting the return. But the taxman could give you a head start by filling in your wage income, exemptions, and standard deduction and perhaps even figuring some other deductions and credits. This, he says, could be a huge benefit for those who file Forms 1040A and 1040EZ.

Bill recognizes that this system won’t work for everyone—investors, people in business partnerships and others would still have to crunch the numbers themselves. But many other countries already use such a system (called Tax Agency Reconciliation). And, he adds, the technology already exists. After all, credit card companies can process and track billions of transactions with remarkable accuracy.

In the other corner:  Bob Weinberger, a senior fellow at the Aspen Institute Initiative on Financial Security and a former top executive at the tax prep firm H&R Block. Bob counters that the “fatal flaw” of such a system is that it could delay refunds for months. For many taxpayers, Bob argues, getting a check from IRS in April is a key to their annual financial planning, and postponing that refund would generate a huge backlash. Bob also said such a system would be a huge drain on IRS resources. 

Perhaps not surprisingly, Bob added that many taxpayers would be better off sticking with commercial preparers who not only calculate taxes but perform an annual financial checkup for their clients.

Another panelist, John Guyton, chief of IRS office of Forecasting and Service Analysis, gave some important background to this debate. According to John, in 2009 nearly 90 percent of taxpayers used either paid preparers or commercial software. And the use of software surged from 17 percent of taxpayers in 2001 to 29 percent. He added that this year some people may have begun shifting from paid preparers to software.

It is pretty clear that nearly all of us either need help doing our returns or think we do. TPC’s Elaine Maag, the fourth member of today’s panel, says that two-thirds of low-income families use paid preparers. Many might be able to file without help (and some are abused by fly-by-night firms) but they are overwhelmed by the process. “It is too complex and too fear-inducing,” Elaine concludes.

Her solution is to simplify the tax code for these families. Among her suggestions: Create a standard definition for a child, eliminate the asset test for the earned income credit (there would still be an income limit), and consolidate all education credits into one.

Listening to these experts convinces me more than ever that that the tax law is far too complicated. Unless we replace the current income tax system with a far simpler version or perhaps a Value Added Tax, it is only going to get worse. We are not going back to doing returns on our own. So the question is: Do we want to continue to pay private companies to help or do we want to let the IRS do it for us?   
 

  

21Comments

  1. Anonymous  ::  1:43 pm on April 9th, 2010:

    I agree with your conclusion on tax simplification. For most people, a VAT with an employer-distributed set of credits (even quite generous credits) is preferable to the current system. It also encourages work and may be used to entirely up-end many family income support programs (which also require complex filing and other leaky bucket costs).

  2. Anonymous  ::  1:57 pm on April 9th, 2010:

    The problem I see with IRS filling out the forms for people is their historic accuracy rate. When the IRS help line is wrong a large percent of the time, and their computer systems lag behind current technology, what assurance do we have that IRS prepared returns will be more accurate? Will the inevitable errors be random, or, like the supermarket cash registers, will the errors tend to favor the IRS? Who will audit the auditors?

  3. Anonymous  ::  11:25 am on April 11th, 2010:

    The IRS is like an umpire, they are right, even if wrong – with one codicil, you can go to Tax Court to challenge the IRS. In baseball, the ump is final.
    Not only wages are reported to the IRS. All manner of things are disclosed. Every disclosure could trigger the appropriate form and calculations. For example, if you have an HSA disclosure, a form will pop up asking how much of that spending was qualified (or unqualified). They could do everything the computerized packages do, but for free.

  4. Anonymous  ::  3:37 pm on April 11th, 2010:

    Yes, the process should be simplified. I had not thought about them actually filling out the form for me, but there are only stupid reasons for irs.gov to not be a useful resource, a comprehensive assistant to taxpayers. For example, what are the good reasons for 90% of filers to pay for tax prep? Here's one stupid reason: the IRS will not allow individuals to file their returns online WITHOUT a 3rd party. Unbelievable. My state lets me go online, fill out the form, click, I'm done. When I tried to file at irs.gov, it put me through a means-test to determine whether my income was low enough to “qualify” for “free” filing by way of an exchange so I could “pick” from a list of 3rd party websites to file online. It took me a little while to realize that irs.gov was performing as a feeder on behalf of 3rd party, for-profit tax prep. It infuriated me and since then I patiently file paper forms. It would be more efficient for irs.gov to let me do this directly online, but oh well…. Clearly, it's more important for the IRS to feed business to a 3rd party. I don't have to participate in that, so I won't. Happy to spring for the stamp. Now. In defense of irs.gov, they may have eliminated this means-testing feature in the last few years but I wouldn't know. Since irs.gov alienated me by obstructing my ability to file online, I haven't gone back to see if they've departed from doing business development on behalf of 3rd parties. So maybe it's more direct now, but I wouldn't know.
    I believe irs.gov should harness the technology to serve the taxpayers. I have many online accounts; I would value an IRS portal-page that consolidated my tax info in one location, documenting the status of my relationship with the IRS. I say, give me the option to select and view my tax form as completed by the IRS computer (and then let me file online at no extra charge). Or let me choose paper, or 3rd party if it's still confusing. There are no good reasons anymore for the IRS to not offer digital full-service for their customers, we the taxpayers.

  5. Anonymous  ::  5:58 pm on April 12th, 2010:

    Second. I love efile, but I see no reason to pay some third party for that service when many (most?) states seem able to provide it for free. Hell, I wouldn't even mind paying $20 to the IRS for the service, but forcing people to contribute to the profitability of private companies?
    I also think taxes are overly complex, but even if made simple (or replaced w/ simple VAT) as years go by and politicians have their groups to pander to it will simply get complex again. Just about anyone can structure a simple and even a truly fair tax scheme, but one that can get through congress?

  6. Anonymous  ::  6:31 pm on April 13th, 2010:

    My understanding was that the EITC does not have a traditional asset test and that this was something that distinguished the EITC from other programs such as food stamps (for example, here is Sheila Zedlewski comparing the two programs — see question 5). When we talk about the EITC asset test, are we referring to the $3,100 limit on investment income? If not, what sorts of assets count toward the asset test and how low is the limit?

  7. Anonymous  ::  6:39 pm on April 13th, 2010:

    That's correct. I'm talking about the $3,100 limit on investment income. — Elaine Maag

  8. Anonymous  ::  7:22 pm on April 13th, 2010:

    Do we have any idea how restrictive this asset test is? That is, what proportion of tax units have investment income greater than $3,100 that would otherwise qualify for the EITC? I am not sure if TPC has ever done a simulation to answer this question. Also, I wonder what type of investment income these tax units receive. Is it mostly in the form of capital gains from selling a family home or other property, or is it mostly in the form of interest and dividends?

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