The IRS could be about to revolutionize the way Americans file their taxes.
The Cut Inflation Act signed into law by President Biden on Tuesday provided the agency with $80 billion in funding, including $15 million to produce a report on a free, government-run electronic reporting system that proponents of tax simplification have been calling for a long time.
But the agency has a tight deadline to deliver.
While most of the $80 billion for the IRS in the new legislative package will be spent over the next decade, the agency has only about a year to render its electronic filing report.
Specifically, the agency needs to determine how much an online filing system would cost, the design of the system, and what taxpayers would think of using it.
Tax experts say the system could take two basic forms: one more conservative in scope and one more sweeping.
The most conservative option would be a standardized government version of popular commercial software from companies like Intuit, H&R Block and TaxACT that prompts users to complete a digital tax return.
There is already an IRS program that allows low-income Americans to use these and other commercial products for free, but the program has failed.
An April report from the US Government Accountability Office found that while 70% of taxpayers are eligible for the Free File Alliance program, only 3% use it.
In its agreement with the commercial vendors, the IRS signed a non-compete clause promising not to create its own free software tool.
Former Treasury Inspector General for Tax Administration (TIGTA), J. Russell George, testified before the Ways and Means Committee in 2006 that “according to representatives of Alliance member companies interviewed by TIGTA, their main purpose is to prevent the federal government from getting into the tax preparation business.
It’s unclear how a new free e-filing system would align with the IRS’ agreement with private tax preparers, but it may simply be allowed to expire if the agency decides to go ahead. forward with its own large-scale public filing system.
The Free File Alliance came about because Congress originally mandated the IRS to completely abolish tax filings in a law called the Internal Revenue Service Restructuring and Reform Act of 1998.
After a major lobbying campaign by the tax preparation industry, the Free File Alliance was introduced as a way to allow low-income Americans to file their taxes for free without getting rid of tax returns. .
The Alliance removed the institutional impetus from the move to no-return reporting, which likely would have rendered large segments of the tax preparation industry utterly useless.
In 1998, Congress directed the Treasury to “develop procedures for the implementation of a no-return tax system under which appropriate individuals would be permitted to comply with the Internal Revenue Code of 1986 without performing the return required”.
Filing without a return is the second, most dramatic option for a free IRS-run electronic filing system that experts say could be under consideration again under the Tax Reduction Act. ‘inflation.
Deposit without return is used by many countries with advanced economies that are members of the Organization for Economic Co-operation and Development. This basically means that the government would do your taxes for you, withholding what is owed, then doing its own accounting without requiring any forms to be submitted by taxpayers.
The main type of non-return deposit – used by the UK, Japan and Germany, among dozens of other countries – is called an exact hold system. With this system, the IRS would try to withhold less tax from people’s paychecks and skip the refund process necessitated by self-filing tax returns.
“In most of these countries, taxpayers fully meet their tax obligations through withholding tax payments made throughout the year,” the Treasury Department found in a 2003 report on tax systems. without return.
But experts say all of the tax credits in the U.S. tax code make self-reporting useful, if not necessary, from an administrative standpoint.
“With the withholding, the IRS already has that information. So it’s kind of annoying that you have to go through that and enter it in yourself. But in the US we have, for example, a filing So if your employer knows your income, they don’t necessarily know your spouse’s. Employer withholding does not reflect various tax credits and programs,” said Alex Muresianu, tax analyst at Tax Foundation, a Washington think tank, in an interview.
The other type of no-return deposit is called agency reconciliation. This is where “tax authorities prepare individual tax returns based on information returns from employers and others, and send taxpayers a completed tax form for review,” according to the Treasury report.
Some studies have shown that the government would lose revenue with this type of system since the IRS does all the office work without relying on taxpayer returns.
“If you as a taxpayer know things that the IRS doesn’t know that are to your benefit, then you might not want to share that with them,” said Robert Weinberger, a nonresident fellow at Urban. -Brookings Tax Policy Center. interview. “But there are arguments that it would be worth it because the whole system would be simplified and people would be happier. So maybe that’s a compromise we’d be willing to make.
The government concluded in 2003 that a simplification of U.S. tax law, which is replete with credits and exceptions to credits, should be a prerequisite for implementing any tax-free system.
“Moving to a no-return tax system without first simplifying income tax would require substantial changes in tax administration,” according to the Treasury report. “These changes could shift the burden from taxpayers to other parties, including employers, financial institutions, state governments and the IRS.”
But that prerequisite may no longer make sense in an age where everything from doctor visits to school records can be viewed instantly online.
Proponents of tax simplification say a leaner tax code, which now has nearly 10 million words between laws and regulations, would be worth the effort.
“Making tax filing as easy as possible is critical,” Frank Clemente, director of the left-leaning advocacy organization Americans for Tax Fairness, said in an interview. “We have to get away from this feeling of opposition. A simpler tax system will reduce costs, increase compliance, and make people feel better about the IRS.
Clemente added that the $15 million set aside in the Cut Inflation Act for the e-filing report “indicates a seriousness in moving beyond where we are now on this issue.”
“Whatever the proposals, it means there has to be a plan behind it,” he added.
Proponents are keeping tabs on a provision of the law’s e-filing task force requirement that states it must consider “differential coverage options based on the taxpayer’s adjusted gross income and the complexity of statements”.
They say this emphasis on “differential coverage” might suggest that Americans with more complicated tax returns, who are generally wealthier, might interact differently with a new electronic filing system than the average earner. These differences could raise questions about the fairness of such a system.
In a memo to IRS Commissioner Charles Rettig on Wednesday, Treasury Secretary Janet Yellen expressed concern about the unfairness built into the tax system, which she described as “two-tiered.” .
“Most Americans pay what they owe, but those at the top of the distribution often don’t,” Yellen wrote.
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