Why Can't the Government Provide Your Tax Data?

"Tax Filing Simplification Act" Proposed for Return-Free Filing

Why Can't the Government Provide Your Tax Data?
April 29, 2016

Every year, you receive tax information from employers and other entities. You have to wait for forms, make sure they are correct, hang onto them until tax filing time, and in some cases, ask for corrected forms. The IRS gets a copy of these same forms and uses them to compare the answers with the taxes you submit. Since the IRS gets the same information you do, why don't they fill out all the information for you and send you a tax form with that information already submitted?

A fine question, says Senator Elizabeth Warren (D, MA). She has introduced the Tax Filing Simplification Act of 2016 to require the IRS to set up a free-online tax preparation service and allow taxpayers downloadable access to third-party information (such as W-2 forms from employers). In essence, this allows return-free filing for simple tax situations — and more importantly, they will not have to pay a tax preparer to file these taxes.

Those with more complicated tax situations (capital gains, itemized deductions, etc.) would still require additional paperwork and a more traditional tax form, but at least those taxpayers would still have a head start on tax season.

This concept is already in place in several countries such as Sweden, Finland, Norway, and Estonia with success from the taxpayer's viewpoint. Imagine your taxes taking only five minutes with no preparation costs, as these countries report.

There are a few roadblocks to Sen. Warren's bill, not the least of which is the tax preparation industry. The idea of return-free and cost-free filing for simple tax circumstances has been around since Ronald Reagan; in 2001, the Bush administration directed the IRS to provide Americans with the means of free online tax preparation in these cases. The IRS complied with its Free File service that is available to those making $62,000 or less — but it did so by turning to the tax-preparation companies for assistance.

Free File is not IRS software; it is the product of the Free File Alliance between the IRS and several major private tax preparation firms. As part of the agreement, the IRS was prohibited from creating its own tax preparation software that would effectively be a competing product. Sen. Warren's bill would ban the IRS from such agreements and mandate that the IRS create their own software.

Currently, Free File is only used by around 3% of those eligible. Sen. Warren says that the program isn't working and notes various flaws — for example, each software company can set up their own eligibility criteria, leaving taxpayers confused and potentially directed to products that they do not need. Free File advocates say the issue is mainly with publicity. Too many people are unaware that the program even exists.

Critics of Sen. Warren's bill point out that this system will cost taxpayer money to implement, and the IRS is strapped for resources as it is. Advocates counter that reduced errors and costs on the consumer end will actually save money in the long run. However, there are other concerns about the IRS' ability to control properly and distribute this information — recent breaches are enough to give one pause.

Others are concerned that this bill eases filing and collections, making future tax increases easier. It is the Tax Filing Simplification Bill — not the Tax Simplification Bill.

It seems logical that we should make tax filing as easy as possible for most Americans, but perhaps we should be careful what we wish for. Senator Warren's proposed bill may not be what any final bill looks like. Remember the old joke about a tax form containing only two lines:

  1. How much money did you make last year?
  2. Send that amount to the IRS.

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Photo ©iStock.com/gruizza

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