The IRS automatically receives data on the income of US residents: so why are we forced to file tax returns every year

Paying taxes in the US is notoriously difficult and costly. And it gets even worse when there are delays and delays, making it especially difficult to seek help from the tax office. Yahoo! News.

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This raises an important question: why should taxpayers navigate the tedious and costly tax filing system at all?

The "simple return" case

In 1985, President Ronald Reagan promised a "non-refundable" tax system in which half of all Americans would never file a tax return again. Under this structure, taxpayers with simple returns will automatically receive a refund or a letter detailing any tax due. Taxpayers with more complex returns will use the current system.

In 2006, President Barack Obama's chief economist, Austen Goolsby, proposed a "simple declaration" in which taxpayers would receive already completed tax forms to review or correct. Goolsby calculated that his system would save taxpayers more than $2 billion a year in tax preparation fees.

Although these two proposals never came to fruition, they illustrate what we all know: no one likes filling out tax forms.

So why should we?

US tax expert Beverly Moran, professor emeritus of law, Vanderbilt University, sees America's costly and time-consuming tax reporting system as a consequence of its relationship with the commercial tax preparation industry, which lobbies Congress to maintain the status quo.

Expensive and time consuming system

Irrevocable submission is not difficult. At least 30 countries allow non-refundable submissions, including Denmark, Sweden, Spain and the United Kingdom.

In addition, 95% of US taxpayers receive at least one of over 30 types of information returns that let the government know their exact income. These informational returns give the government everything it needs to complete most taxpayer returns.

On the subject: California already has high taxes, but the state authorities want to almost double them

The US tax system is 10 times more expensive than tax systems in 36 other advanced economies. But those costs disappear into a no-refundable system, like the 2,6 billion hours Americans spend each year preparing their tax returns.

Free tax preparation

About two decades 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 between the government and the tax industry. As part of the deal, the IRS agreed not to compete with the private sector in the free tax preparation market.

In 2007, the House of Representatives rejected a law providing for free state tax preparation for all taxpayers. And in 2019, Congress tried to legally bar the IRS from ever providing free online tax preparation services.

Only public outcry turned the situation around.

The public part of Free File consists of the IRS, which directs taxpayers to commercial tax filing websites. The private part consists of those commercial structures that divert taxpayers to costly alternatives.

According to the Treasury's Inspector General for Tax Administration, which oversees the IRS, private partners are using computer code to hide free websites and redirect unsuspecting taxpayers to paid sites.

“Consequently, of the more than 100 million taxpayers eligible for free assistance, 35% end up paying for tax return preparation and 60% never visit free websites. Instead of 70% of Americans receiving free tax preparation, for-profit companies have cut that percentage to 3%,” says Beverly Moran.

Tax Savings and Tax Evasion

“You might assume that there are good political justifications for avoiding private sector expansion. Judge these arguments for yourself,” says the expert.

One of the commercial tax authorities' arguments is that taxpayers will miss out on valuable tax savings if they rely on free government training.

“In fact, government software will reflect the same laws as paid preparers, with the same access to tax deductions or credits. In addition, tax preparers such as H&R Block promise to pay all taxes and interest resulting from a failed audit. As a result, these services have every reason to take a conservative, pro-government tax position,” says the expert.

The second argument is that tax returns prepared by the government encourage tax evasion.

“In an irrevocable system, the government reveals what it knows about a taxpayer's income before the taxpayer files,” says Beverly Moran. “So, so the argument goes, the taxpayer knows whether the government missed something and has a reason to let the error stand.”

But taxpayers already know what information forms the government has because they receive duplicates of those forms. The incentive to lie is not increased because the taxpayer avoids weeks of tax preparation.

Support for tax opponents

“Finally, there's an anti-tax argument for burdensome tax preparation: Make tax preparation unpleasant to fuel anti-tax sentiment,” says Beverly Moran.

In the past, Republicans have opposed high taxes. But after decades of tax cuts, Americans no longer succumb to that argument.

According to this argument, tedious tax preparation helps keep the anti-tax fever high. And it fuels public hatred of the government and the tax system.

Unfortunately, the desire of the anti-tax contingent to get Americans to spend time and money preparing tax returns coincides with the desire of the tax preparation industry to receive billions of dollars in fees.

Tax preparation companies are lobbying Congress to keep tax preparation costly and difficult.

Indeed, Intuit, maker of TurboTax, tax preparation software, has called government tax preparation a threat to its business model.

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One example is the earned income tax deduction, a government program for people on low incomes. Credit is so complicated that 20% of people who qualify never apply, thus missing out on thousands of dollars in savings.

“If the government prepared tax returns for everyone, that 20% would receive government support. However, Intuit has lobbied lawmakers to make the loan more complex, thereby attracting more taxpayers to pay for preparation services,” the expert says.

In other words, the tax preparation industry seems to be complicating the system because the potential cost in terms of missed profits is huge.

Only public outcry can change the system, according to Beverly Moran, an expert on the US tax system.

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