The conversation
Why can’t the IRS just send Americans a refund – or an invoice?
US taxpayers spend more than $ 2 billion annually on tax preparation fees. Nora Carol Photography / Getty ImagesThe IRS has postponed the tax filing deadline from April 15 to May 17. If taxpayers need even more time to file federal statements, the agency added, they can request an extension until October 15. be a difficult time for many people, and the IRS wants to continue doing everything possible to help taxpayers overcome unusual circumstances related to the pandemic, while working on important tax administration responsibilities, ”said the IRS commissioner. , Chuck Rettig. The announcement may be good news for many Americans, but it also raises an important question: why should taxpayers navigate the tedious and expensive tax reporting system? The case of a ‘simple return’ In 1985, President Ronald Reagan promised a “free return” tax system in which half of Americans would never file a tax return again. According to the structure, taxpayers with simple declarations would automatically receive a refund or a letter detailing any taxes due. Taxpayers with more complicated statements would use the system in place today. In 2006, President Barack Obama’s chief economist, Austan Goolsbee, debuted the “simple declaration”, in which taxpayers would receive tax forms already filled in for review or correction. Goolsbee estimated that his system would save taxpayers more than $ 2 billion a year in tax preparation fees. Although never implemented, the two proposals illustrate what we all know: Nobody likes to fill out tax forms. So, why do we have to do this? An expensive and time-consuming system Archiving without return is not difficult. At least 30 countries allow deposit without refund, including Denmark, Sweden, Spain and the United Kingdom. In addition, 95% of American taxpayers receive more than 30 types of information statements that let the government know their exact income. These information statements provide the government with everything it needs to complete most taxpayer statements. The US system is 10 times more expensive than the tax systems of 36 other countries with robust economies. But those costs disappear in a non-refundable system, as would the 2.6 billion hours Americans spend annually on tax preparation. Perhaps you are wondering if Congress is just running late, not knowing that it can exempt us from tax preparation? Is not true. As an expert on the United States tax system, I see the United States’ expensive and time-consuming tax reporting system as a result of its relationship with the commercial tax preparation industry, which presses Congress to maintain the status quo. The United Kingdom is among dozens of countries that allow deposits without refund for some taxpayers. Loop Images / Universal Images Group via Getty Images Commercial tax preparation Almost 20 years ago, Congress instructed the IRS to provide low-income taxpayers with tax preparation free of charge. The agency responded in 2002 with “Arquivo Livre”, a public-private partnership between the 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 legislation that provided for the preparation of taxes by the government free of charge. And in 2019, Congress tried to legally ban the IRS from providing free online tax preparation services. Only a public outcry changed the tide. The public part of Free File consists of the IRS directing taxpayers to commercial tax preparation websites. The private sector consists of commercial entities that divert taxpayers towards expensive alternatives. According to the Inspector General of the Treasury for Tax Administration, which oversees the activities of the IRS, private partners use computer codes to hide free sites and lead unsuspecting taxpayers to paid sites. Should a taxpayer discover an alternative to free preparation, private preparers impose various restrictions, such as income or the use of various forms as an excuse to expel taxpayers back to paid preparation. Consequently, of the more than 100 million taxpayers eligible for free help, 35% end up paying for tax preparation and 60% never visit the free sites. Instead of 70% of Americans receiving free tax preparation, commercial companies reduce that percentage to 3%. Economy and tax evasion Perhaps you are assuming that there are valid political justifications for avoiding government and empowering the private sector. Judge these arguments yourself. An argument by commercial tax preparers is that taxpayers will lose valuable tax savings if they rely on the government’s free preparation. In fact, government software would reflect the same laws used by paid preparers with the same access to deductions or tax savings credits. In addition, tax preparers like the H&R Block promise to pay all taxes and interest resulting from an unsuccessful audit. As a result, these services have every incentive to take conservative and pro-government fiscal positions. A second argument is that tax returns prepared by the government encourage tax evasion. In a no-return system, the government reveals its knowledge of taxpayer income before taxpayer files. Thus, the argument goes, the taxpayer knows if the government has lost something and has reason to allow the error to remain. But taxpayers already know what forms of information the government has because they receive duplicates of those forms. The incentive to lie does not increase because the taxpayer avoids weeks of tax preparation. [You’re smart and curious about the world. So are The Conversation’s authors and editors. You can get our highlights each weekend.] Strengthening anti-taxes Finally, there is the anti-tax argument for the preparation of onerous taxes: keep the tax preparation unpleasant to fuel anti-tax sentiment. In the past, Republicans have argued against high taxes. But after decades of tax cuts, Americans are no longer influenced by that argument. Exasperating tax preparation, according to this argument, helps keep the anti-tax fever high. And this fuels public hatred for the government and the tax system. Unfortunately, the anti-tax contingent’s desire to force Americans to spend time and money on tax preparation matches the desire of the tax preparation industry to collect billions of dollars in fees. Tax preparation companies are pushing Congress to keep tax preparation expensive and complicated. In fact, Intuit, the maker of TurboTax, the tax preparation software, lists government tax preparation as a threat to its business model. An example is the income tax credit, a government program for low-income people. Credit is so complicated that 20% of eligible people never do it. If the government prepared people’s tax returns, that 20% would receive government support. However, Intuit pressured lawmakers to complicate credit by taking more taxpayers to paid prep services. So far, the tax preparation industry has kept the system complicated because the potential cost in terms of lost revenue is enormous. Only the public outcry can change the system. This article was republished from The Conversation, a non-profit news site dedicated to sharing ideas from academic experts. It was written by: Beverly Moran, Vanderbilt University. Read more: As Australia’s COVID vaccination spreads, we need transparency about when international borders can be reopened. As US tax laws encourage inequality Beverly Moran does not work, consult, hold shares or receive funding from any company or organization that would benefit from this article, and has not disclosed relevant affiliations other than her academic appointment.