The IRS already has all your tax data – so why do Americans still have to file their taxes?
(THE CONVERSATION) Doing taxes in the United States is notoriously complicated and Dear. And it’s even worse when there are delays and arrears, making it especially difficult to access the Internal Revenue Service for help.
But for me, it raises an important question: why should taxpayers have to navigate the tedious and expensive tax filing system?
The case of a “simple return”
In 1985, President Ronald Reagan promised a “without returna tax system in which half of Americans would never file taxes again. Under this framework, taxpayers with simple returns would automatically receive a refund or letter detailing any tax owing. Taxpayers with more complicated returns would use the system in place today.
In 2006, President Barack Obama’s chief economist, Austan Goolsbee, suggested a “single returnin which taxpayers would receive previously completed tax forms for review or correction. Goolsbee estimated that his system would save taxpayers more than US$2 billion per year in tax preparation costs.
Although never implemented, the two proposals illustrate what we all know: Nobody likes filling out tax forms.
So why do we have to do it?
Inasmuch as specialist in the American tax systemI see the costly and time-consuming tax filing system in the United States as a consequence of its relationship with the commercial tax preparation industry, which pressures Congress to maintain the status quo.
A costly and time-consuming system
Deposit without return is not difficult.
At least 30 countries allow deposit without returnincluding Denmark, Sweden, Spain and the United Kingdom.
Additionally, 95% of U.S. taxpayers receive at least one of the most 30 types of information returns which allowed the government to know their exact income. These information returns give the government everything it needs to complete most taxpayer returns.
The American system is 10 times more expensive than the tax systems of 36 other countries with strong economies. But these costs disappear in a system with no return, as the 2.6 billion hours Americans spend each year preparing tax returns.
You might be wondering if Congress is just lagging behind, unaware that it can free us from tax preparation? Not true.
Commercial tax preparation
About two decades ago, Congress ordered the IRS to provide low-income taxpayers with free tax preparation. The agency responded in 2002 with “Free filea public-private partnership between government and the tax preparation industry. As part of the agreement, the IRS agreed not to compete with the private sector in the free tax preparation market.
In 2007, the House of Representatives rejected a law providing for free preparation of government tax returns for all taxpayers. And in 2019, Congress tried to legally prohibit the IRS to provide free online tax preparation services.
Only one public outcry turned the tide.
The public part of Free File is that the IRS directs taxpayers to commercial tax preparation websites. The private part includes commercial entities embezzle taxpayers to expensive alternatives.
According to the Treasury Inspector General for Tax Administration, which oversees IRS activities, private partners use computer code to hide free sites and lead unsuspecting taxpayers to paying sites.
If a taxpayer discovers a free preparation alternative, private preparers impose various restrictions such as income or using various forms as an excuse to refer taxpayers to paid preparation.
As a result, of the over 100 million taxpayers eligible for free help, 35% end up paying for tax preparation and 60% never even visit free websites. Instead of 70% of Americans enjoying free tax preparation, commercial businesses companies have reduced this percentage to 3%.
Tax savings and evasion
You might guess that there are valid political justifications for avoiding government and empowering the private sector. Judge these arguments for yourself.
One of the arguments of trade preparers is that taxpayers missing out on valuable tax savings if they rely on free preparation from the government.
In effect, government software would mirror the same laws used by paid preparers with the same access to tax-saving deductions or credits. Additionally, tax preparers like H&R Block promise to pay all taxes and interest resulting from a failed audit. Therefore, these services have every incentive to adopt conservative and pro-government tax positions.
A second argument is that government-prepared tax returns encourage tax evasion.
In a system of no return, the the government reveals its knowledge of the taxpayer’s income before taxpayer records. So, the argument goes, the taxpayer knows if the government missed something and has reason to let the error stand.
But taxpayers are already familiar with the information forms available to the government because they receive duplicates of these forms. The incentive to lie does not increase because the taxpayer avoids weeks of tax preparation.
Finally, there’s the anti-tax argument for onerous tax prep: Keep the nasty tax prep to fuel anti-tax sentiment.
In the past, Republicans have opposed high taxes. But after decades of tax cuts, Americans are no longer influenced by this argument.
Infuriating tax preparation, the argument goes, helps keep the anti-tax fever high. And that fuels public hatred of the government and the tax system.
Unfortunately, the anti-tax contingent’s desire to force Americans to spend time and money on tax preparation dovetails with the tax preparation industry’s desire want to raise billions dollars in fees.
Tax preparation firms lobby Congress make tax preparation costly and complicated. Indeed, Intuit, maker of TurboTax tax preparation software, has listed government tax preparation as a threat to its economic model. ProPublica reported in 2019 on the 20 years of the company’s fight to stop the government from making tax filing simple and free for most citizens.
An example of this complexity is the earned income tax credit, a government program for low-income people. Credit is so complicated that 20% of eligible people never submit a filethus missing out on thousands of dollars in savings.
If the government prepared everyone’s tax returns, I believe that more than that 20% would receive government assistance.
Nevertheless, H&R Block would havelawmakers lobbying complicate credit, which pushing more taxpayers to paid preparation services.
I believe that only public outcry can change the system.
This article has been edited to clarify how tax preparation companies have lobbied Congress.
This is an updated version of a originally published article on March 22, 2021.