Would Automatic Tax Return Preparation Be Possible?

KMHagen for Writedge.com writes: Automatic tax return preparation, based on information the tax authorities already have, is a reality in several countries. California has instituted a ReadyReturn system for state tax filing. Could a similar system be implemented by the IRS?

Each year, in order to file their tax returns, millions of taxpayers in the U.S. wait for their W-2 statements, and maybe 1099 forms for income from investments. Their filing status and dependents haven’t changed since last year. Many of them take the standard deduction and maybe the earned income credit and child tax credit and have no other deductions or credits. Their tax computation is quite straightforward.

When the necessary W-2s and 1099s arrive, they either transcribe the data onto the tax return form, or take the forms to a tax preparer and pay to have it done. Could there be a simpler way? Since the IRS already has the data from the W-2s and 1099s, and the taxpayer’s information from the prior year, would it be possible to automatically generate a tax return that the taxpayer just has to confirm and accept?

Austan Goolsbee, Professor of Economics at the University of Chicago Graduate School of Business and former economic advisor to the Obama administration, proposed such a system, which he called the Simple Return, in 2006. According to Goolsbee, the Simple Return could apply to as many as 40 percent of taxpayers in the U.S. It could save up to 225 million hours in tax preparation time and more than $2 billion a year in tax preparation fees.

Automatic tax return preparation is a reality in several countries of the world. And California has instituted the “ReadyReturn” that allows qualifying taxpayers to file their state income tax return based on a pre-prepared form using information already available.

In Chile, where I lived and worked for several years, employers and financial institutions issue certificates that are similar to the W-2s and 1098 and 1099 forms in the U.S. The SII, the taxing authority in Chile, feeds the information from the certificates into pre-filled individual income tax returns. The taxpayer has the option of using the pre-filled form, simply verifying and accepting it, or preparing a tax return using a blank form, all online on the SII website.

One of the problems in automating tax preparation in the U.S. is the complexity of the tax code. There are so many provisions in the tax code that may or may not apply to a given taxpayer in a given year. Deductions and credits can change from one year to another. And the individual income tax is based on the taxpayer’s family status, which can also change. In many cases the IRS has no way of knowing of these changes, or which deductions and credits the taxpayer might qualify for, due to some complicated qualification requirements.

Also, many taxpayers must prepare their tax returns based on information that is not readily available to the IRS, such as income from their own businesses. The U.S. income tax system is based on voluntary compliance and taxpayers file their tax returns based on taxable income and tax deductible expenses based on their own bookkeeping systems.

But having the option to use a pre-prepared simple return, based on already existing information, could make tax return filing much easier and cheaper for millions of taxpayers in the U.S. Nevertheless, as pointed out by the National Taxpayer Advocate in its annual report to Congress, the complexity of the tax code continues to be the number 1 most serious problem facing taxpayers.