Doing your taxes isn’t all that difficult for many Americans. It’s nothing more than data entry.
The majority of the time, doing your taxes is sifting through different Internal Revenue Service forms that arrive in the mail. W-2s reveal your earnings, 1099s show other revenue such as one-time gigs, 1098s show mortgage interest or tuition payments, and so on.
But here’s the problem with those forms: they’re also available from the IRS. For many people, the IRS has all the information it needs to compute their taxes, give them a completed return, and have them sign and submit it to the IRS if everything appears to be in order.
This isn’t just a speculative proposal. Denmark, Belgium, Estonia, Chile, and Spain are among the countries that already provide such “pre-populated returns” to their residents. According to a new study, at least 41% of American households, or 62 million tax-filing units, could have their complete tax returns handled this way with no more intervention.
Unnecessary returns in the tens of millions
Lucas Goodman and Andrew Whitten of the Department of the Treasury’s Office of Tax Analysis, Bruce Sacerdote of Dartmouth, and Katherine Lim of the Minneapolis Fed are the authors of the paper.
The dataset the research utilizes, which is a randomized, representative sample of actual tax returns filed in 2019, is explained by half of the authors who work for the Treasury.
The IRS is stringent about who is allowed to use this level of specific tax data (it has to be for tax policy work), but it’s a goldmine for those who want to dig into it.
The IRS data in this case allowed the authors to create “pre-populated forms” for taxpayers based on information the IRS already had, and then compare those returns to the ones that were actually submitted by taxpayers. If they’re the same, a pre-populated return policy might work for them.
The authors add that “a pre-populated return is regarded successful if the computed tax liability is approximately equal to the tax liability actually stated on the 2019 tax return.” This was one of two approaches they employed;
the other involved sifting through IRS returns in search of issues that would prohibit a pre-populated return from being properly completed. This method yielded higher estimates of how many returns could be generated automatically.
The former, more conservative technique discovered that the IRS could accurately prepare 41 percent of returns, or 62 million tax units, in this manner. (A taxing unit can be a single individual, a family headed by a single parent, a married couple and their children, etc.
– anyone the tax return represents.) The most conservative approach, which counts everyone without difficulties that would impede an automatic return, yields 73 million returns, or 48%.
People who aren’t currently filing taxes may benefit from pre-populated returns. Many persons in the United States are exempt from filing an income tax return, either because they earn too little to trigger the obligation or because the money they do get comes from a partially exempt source such as Social Security.
However, because of benefits such as earned income and child tax credits, these people often benefit from filing a return. The earned income tax credit (EITC) in particular is designed to help low-income persons who don’t earn enough to owe income taxes.
Despite these benefits, approximately 22% of eligible taxpayers do not claim the EITC in a normal year; according to one estimate, two-thirds of those who do not receive the benefit did not submit a tax return. The combination of social assistance programs and a complicated tax law imposes major barriers to entry for less-affluent Americans.
As a result, the authors of the automatic filing study calculated how many non-filers would gain from such a system. They predict that 7.2 million taxpayers who aren’t compelled to file are due refunds worth an average of $411. A pre-populated filing system would be more likely to obtain those unit returns.
Is it time to say goodbye to tax returns… for everyone?
It might be a significant step forward for the tens of millions of homes for whom pre-populated filing works. However, 41-47 percent of households is not a majority, and in a perfect world, the remaining 53-59 percent of tax units would benefit as well. So, what are the roadblocks in their way?
Table A2 in the paper’s appendix estimates the percentage of returns with various properties that preclude a pre-populated return from operating. Schedule C, or self-employment income, is the most common, accounting for 16.2 percent of all returns:
People estimate their profits from self-employment or odd jobs differently from the 1099 forms given to the IRS. They may have large company expenses or jobs that did not result in a 1099 form, affecting their tax liability.
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Itemized deductions are the second most prevalent, accounting for 10.9 percent of all returns. Since the standard deduction was boosted by the Trump tax plan in 2017, these have become considerably less common, although practically everyone who itemizes claims the charitable deduction or the state property tax deduction. They can’t be included on pre-populated reports since they rely on information that isn’t routinely supplied to the IRS.
Both of these challenges are difficult to overcome. More and more low-income people are reliant on self-employment income, especially with the development of “gig economy” firms like Uber, Lyft, and DoorDash that issue 1099s and treat employees as contractors, making auto-filing impossible.
You could fix the itemized deduction problem by eliminating them, but I’m not sure the folks whose taxes you’d save in the process would appreciate it.
Other issues, on the other hand, maybe easy to resolve. A considerable number of taxpayers had wage income that differed from what was reported on their W-2 forms; improved wage reporting rules for businesses could help.
Difficulties establishing what portion of pension income is taxable were also mentioned, which a simplified pension taxation system may alleviate. As a volunteer tax preparer, I’ve seen a lot of pension concerns, and our current system is ridiculously complicated.
I enjoy thinking about taxes, but learning about the “simplified approach” for calculating pension taxes made me want to die.
Even if the IRS can complete “just” two out of every five returns automatically, it’s worth wondering why they aren’t. Even if “just” 62 million homes benefited, it would save a significant amount of time and aggravation each year, making tax season much more efficient.
The average non-business filer spends nine hours a year filing their 1040, according to the IRS. Even if we assume that returns that can be auto-filled are less complex and take half as long, that amounts to 279 million hours of life, or approximately 32,000 years of life, that would not be squandered if 62 million filers were able to do so. That sounds great!