The IRS has postponed the April 15 tax filing deadline to May 17, and that announcement may be welcome news for many. But it also raises a question: Why should taxpayers have to navigate the tedious, costly tax filing system at all?
In 1985, President Ronald Reagan promised a “return-free” tax system in which half of all Americans would never fill out a tax return again. Taxpayers with simple returns would automatically receive a refund or a letter detailing any tax owed.
In 2006, President Barack Obama’s chief economist, Austan Goolsbee, premiered the “simple return,” where taxpayers would receive already completed tax forms for their review or correction. Goolsbee estimated his system would save taxpayers more than $2 billion a year in tax-preparation fees, but the system was never implemented.
At least 30 countries permit return-free filing. Furthermore, 95% of American taxpayers receive more than 30 types of information returns that let the government know their exact income. These information returns give the government everything it needs in order to fill out most taxpayers’ returns.
Only public outcry can change the system.
The U.S. system is 10 times more expensive than tax systems in 36 other countries with robust economies. But those costs vanish in a return-free system, as would the 2.6 billion hours Americans spend on tax preparation each year.
As an expert on the U.S. tax system, I see America’s costly and time-consuming tax-reporting system as a consequence of its relationship with the commercial tax-preparation industry, which lobbies Congress.
Almost 20 years ago, Congress directed the IRS to provide low-income taxpayers with free tax preparation. The agency responded in 2002 with “Free File,” a public-private partnership with the tax-preparation industry. As part of the deal, the IRS agreed to not compete with the private sector in the free tax-preparation market.
In 2007, the House of Representatives rejected legislation to provide free, government tax preparation. And in 2019, Congress tried to legally bar the IRS from ever providing free online tax-preparation services.
The public part of Free File consists of the IRS herding taxpayers to commercial tax-preparation websites. The private part consists of those commercial entities diverting taxpayers toward costly alternatives.
According to the Treasury Inspector General for Tax Administration, private partners use computer code to hide the free websites and take unsuspecting taxpayers to paid sites.
Should a taxpayer discover a free preparation alternative, the private preparers impose various restrictions as an excuse to kick taxpayers back to paid preparation.
Instead of 70% of Americans receiving free tax preparation, commercial companies whittle that percentage down to 3%.
Are there valid policy justifications for avoiding government and empowering the private sector?
One argument is that taxpayers will miss out on valuable tax savings if they rely on free government preparation.
In fact, the government software would reflect the same laws used by the paid preparers with the same access to tax-saving deductions or credits. Further, tax preparers such as H & R Block Inc. promise to pay all taxes and interest resulting from a failed audit. As a result, these services have incentives to take conservative, pro-government tax positions.
Another argument is that government-prepared tax returns encourage tax evasion.
In a no-return system, the government reveals its knowledge of the taxpayer’s income before the taxpayer files. Thus, the argument goes, the taxpayer knows if the government has missed something and has reason to let the mistake stand.
Finally, there is the anti-tax argument for onerous tax preparation: Keep the process unpleasant to fuel anti-tax sentiment.
To date, the tax-preparation industry has successfully lobbied to keep the system complicated. Only public outcry can change the system.
Beverly Moran is a professor emerita of law at Vanderbilt University. Distributed by The Associated Press.
