Should the IRS Fill Out Our Tax Returns?

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?