By Owen Giordano

With filing season just around the corner, many Americans are currently getting ready to fill out their tax forms. With the filing process often characterized as a tedious and nerve-wracking process, there have been multiple calls to make the system more user-friendly.[1] Most recently, representative Brad Sherman (D-CA-30) (re)introduced the Tax Filing Simplification Act (“the Act”) to the House of Representatives in 2022.[2] The Act aims to make the filing process far more manageable and faster through a process called pre-filling.[3] While pre-filling is widely used in many other western countries, the Act is facing significant issues that would likely impede its passage.[4]

Before jumping into discussion, it is important to establish what pre-filling entails. Pre-filling is a policy where a governing jurisdiction’s tax department, such as the Internal Revenue Service (IRS), prepares a return on an individual’s behalf.[5] Before the prepared return is filed, it is sent to the individual who the return is prepared for.[6] The individual is then authorized to make corrections to the return to better reflect their financial situation for the year (i.e., any sources of income that were not accounted for, as well as any deductions or credits).[7] The logic behind such a program is simple: most central governments, including the United States (U.S.), already have the requisite information regarding an individual’s income for the year (with some caveats).[8] Specifically, employers in the U.S. are already required to report their employees’ incomes to the IRS for tax purposes.[9] As such, the IRS already has an idea of how much an individual has to pay in taxes to the federal government. Many countries similarly poised as the U.S. have authorized their tax departments to use such information to pre-fill a return for an individual, albeit to different degrees.[10] Notably, Denmark has been using pre-filing programs for decades, and has reported high filing and participations rates.[11]

Importantly, pre-filling programs have existed in the U.S. up until recently, albeit in a limited capacity. In the mid-2000s, the state of California adopted the ReadyReturn policy as a limited pilot-program.[12] The ReadyReturn program allowed for California residents to authorize California’s Franchise Tax Board (the main state tax department in California) to pre-fill said resident’s taxes on their behalf.[13] The program, while highly praised by those who used it, saw limited usage, and was eventually consolidated into the more traditional CalFile program.[14] Despite the program’s limited success and eventual closure, ReadyReturn’s novelty clearly caught the attention of Senator Elizabeth Warren (D-MA). In 2016, she introduced a similar program to Congress.[15] Specifically, the program would allow the IRS to offer pre-filled tax returns to individuals who opt into the program.[16] While the bill never moved passed introduction, it has since been reintroduced in the House of Representatives in both 2019 and 2022.[17] However, neither have moved beyond the introduction phase of legislation.[18]

Despite the appeal of such a program, there exists several issues that are likely preventing its passing in the immediate future.[19] The first problem that likely exist is that the tax preparation companies are, rightfully, concerned about such a development.[20] The potential offering of a free government program that prepares individual returns would significantly undercut the tax preparation industry.[21] As such, it is no surprise that tax preparation companies have lobbied against the passage of this act in Congress (as well as against ReadyReturn in California).[22] Thus, in order for such a program to pass at the federal level, the bill must appease the lobbying arm of tax preparers. A likely solution to this problem is making the program available to only those at a certain income thresholds, as this policy would maintain profitability for the industry, as well as benefit those who need such service most.[23]

Another crucial issue is that the program is predicated on the notion that enough people have faith in the federal government to accurately reflect information. Public trust in the U.S. federal government has been consistently low for several decades.[24] For comparison, Denmark, which has operated pre-filling program for decades, demonstrates significantly higher public confidence in its central government that that of the U.S.[25] While it is notable that the IRS maintains a high degree of public confidence, there still exists negative animus that hurts the agency’s public perception due to the volume of work and the underfunding the agency receives.[26] As such, the program would undoubtedly take time for people to trust, and thus use, should the bill pass. This issue could perhaps be solved by allocating more funds to the IRS, and thereby reducing the error rate.[27]

Finally, such a program would likely be moot due to the existence of free, government operated filing programs offered to low-to-middle income individuals.[28] The IRS offers filing software to those who earn less than $73,000 a year.[29] As such, adopting a pre-filing program could potentially be seen as a needless expenditure of an issue that already has a solution. A potential solution to this problem is for the IRS to merge the two programs, much like what California did with ReadyReturn and CalFile, as a means to limit the resource expenditure on such programs.[30]

With all these issues in in mind, it is apparent that the passage of this bill would face significant barriers to passage. Specifically, while this program would likely assuage the many Americans’ worried about their tax obligations, there are multiple other factors that need to be addressed before this program can work as intended. However, should such issues be addressed, then the U.S. will be one step closer to building public trust in the system that is key to the country’s operation.

 

[1]     John Sides, Why the American Tax System is so Complicated – But Americans are Proud to Pay Taxes Anyway, Wash. Post (Apr. 12, 2018), https://www.washingtonpost.com/news/monkey-cage/wp/2018/04/12/why-the-u-s-tax-system-is-so-complicated-but-americans-are-proud-to-pay-taxes-anyway/; S. 2789, 114th Cong. (2016); H.R. 2297, 116th Cong. (2019); H.R. 8368, 117th Cong. (2022).

[2]     H.R. 8368, 117th Cong. (2022).

[3]     Id.

[4]     See OECD, Tax Administration 2013: Comparative Information on OECD and Other Advanced and Emerging Economies Table 7.3 (2013) (listing countries with a pre-filling program).

[5]     Intra-European Organization of Tax Administrators, Pre-Filled and Electronic Tax Returns 2 (2009).

[6]     Id.

[7]     Id.

[8]     Jeremy Scott & Tax Notes, Elizabeth Warren Is Right About Pre-Filled Tax Returns, Forbes (Apr. 16, 2020), https://www.forbes.com/sites/taxanalysts/2016/04/20/elizabeth-warren-is-right-about-pre-filled-tax-returns/?sh=641f6df38d4f

[9]     Id.

[10]     OECD, supra note 5.

[11]     See Id.

[12]     Kathleen K. Wright, California Income Tax Manual 511 (2008 ed. 2008) (ebook).

[13]     Id.

[14]    Brian Erard, Pre-Completed Income Tax Returns: Evidence from the California ReadyReturn Program, 103 Nat. Tax J. 163, 169 (2004); What was the Experience With Return-Free Filing in California?, Tax Policy Ctr., https://www.taxpolicycenter.org/briefing-book/what-was-experience-return-free-filing-california (last updated May 2020).

[15]     S. 2789, 114th Cong. (2016)

[16]     Id.

[17]     S. 2789, 114th Cong. (2016); H.R. 2297, 116th Cong. (2019); H.R. 8368, 117th Cong. (2022); S.2789 – Tax Filing Simplification Act of 2016, Congress.gov https://www.congress.gov/bill/114th-congress/senate-bill/2789/text (last visited Nov. 27, 2022).

[18]     H.R.2297 – Tax Filing Simplification Act of 2016, Congress.gov, https://www.congress.gov/bill/116th-congress/house-bill/2297?q=%7B%22search%22:%5B%22%5C%22Tax%20Filing%20Simplification%20Act%5C%22%22%2C%22%5C%22Tax%22%2C%22Filing%22%2C%22Simplification%22%2C%22Act%5C%22%22%5D%7D&s=2&r=1&utm_content=null&utm_source=Sailthru&utm_medium=email&utm_campaign=Tuesday%204/19%20Email&utm_term=4ABCD (last visited Nov. 27, 2022); H.R.8368 – Tax Filing Simplification Act of 2022, Congress.gov, https://www.congress.gov/bill/117th-congress/house-bill/8368?s=1&r=14#:~:text=Introduced%20in%20House%20(07%2F13%2F2022)&text=This%20bill%20directs%20the%20Internal,information%20held%20by%20the%20IRS (last visited Nov. 27, 2022).

[19]     Scott & Tax Notes, supra note 9.

[20]     Id.

[21]     Id.

[22]     Id.

[23]     See id. (noting the pushback from tax preparation companies over concerns of loss of profitability)

[24]     Public Trust in Government: 1958-2022, Pew Research Ctr. (Jun. 6, 2022), https://www.pewresearch.org/politics/2022/06/06/public-trust-in-government-1958-2022/

[25]     Trust in Government, OECD (2022), https://data.oecd.org/gga/trust-in-government.htm.

[26]     Publication 5296, IRS 8, https://www.irs.gov/pub/irs-pdf/p5296.pdf (last updated Apr. 2022); Charles Rossotti, Longstanding Funding Shortfalls Fuel Public Perception of IRS, Bloomberg Tax (Apr. 22, 2022),

https://news.bloombergtax.com/tax-insights-and-commentary/longstanding-funding-shortfalls-fuel-public-perception-of-irs (opinion piece written by a former commissioner of the IRS).

[27]     See Rossotti, supra note 27 (arguing that with more funding, the IRS will make less mistakes, and thus increase public confidence in the agency).

[28]     IRS Free File: Do your Taxes for Free, IRS https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free (last updated Nov. 21, 2022).

[29]     Id.

[30]     See What was the Experience With Return-Free Filing in California?, supra note 15 (combining the two similar programs would reduce the amount of resources a state needs to operate said programs).