Back in 2004, a Stanford tax professor attempted to simplify the tax filing process with a California pilot. His proposal was called ReadyReturn and started with a pre-populated tax return with income generated from government records. The taxpayer could make corrections and add expenses and deductions.
Of those in the pilot, 99% said they’d use it again. A NPR podcast details what happened next. On the federal side, a bill titled the Taxpayer First Act seeks to block the IRS’s ability to develop its own Free File program.
Failure to make filing taxes cheap and easy
The IRS could develop a program similar to other developed countries. This would be similar to ReadyReturn where the IRS would pre-fill tax forms with income data it has from employer withholdings.
Why isn’t there more momentum to ease the filing process by using information that the government already collects? Big companies have invested heavily in lobbying efforts (According to ProPublica, $6.6 million last year) to defend their industry profits. They have been working for years to make sure the IRS does not create this type of system.
The industry has promised to provide free filing services to taxpayers who earn less than $66,000. While 70% of taxpayers qualify and could file for free, only 3% actually do so. Critics argue that companies use their free file as a marketing tool for upselling paid products – state tax forms or faster refunds.
Anxiety related to collecting all the required documentation and filing taxes can even lead procrastination and years of unfiled returns. Penalties related to filing late and paying late will then add on to increase an outstanding back tax balance. A simplified process could mitigate these issues.
While it is unclear whether the proposed legislation will make it into law (similar legislation was introduced last year), it is fascinating to pull back the curtain on lobbying efforts seeking to maintain the status quo. The IRS is well placed to ease the tax filing burden on taxpayers, however, the Service faces headwinds in developing a cheap and easy process.