Coming soon: The IRS will do your taxes for you

Matt K. Lewis Senior Contributor
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Imagine this scenario: The IRS may soon just do your taxes for you — and send you the bill.

If this sounds farfetched, it’s not.

With a new congressional “super committee” tasked with finding $1.5 trillion in cuts by November, creative ways to find additional revenue are in high demand. And allowing the IRS to prepare you taxes could be one solution.

The idea has been around for a while, but has been picking up steam in recent years. In 2006, Senate Finance Committee Chairman Max Baucus (D-Mont.) argued it would close a $345 billion annual difference between what the government believes taxpayers owe them and what the IRS actually collects, which he calls the “tax gap.”

“I think the solution [to the tax gap problem] is to get rid of the middle-man and no fees required,” he said.

Obama’s former Chairman of the Council of Economic Advisers Austan Goolsbee made a strong case for it in a 2006 New York Times op-ed, explaining, “… the revenue service could send you a tax form already filled out with the information it has for you — a Simple Return — rather than a blank tax form. You would simply check the numbers against your W-2 and 1099 and then sign it.”

But this isn’t just an idea floated by senators and presidential advisers. While running for president, then-Sen. Barack Obama touted it during a 2007 speech at the Tax Policy Institute: “The government already collects wage and bank account information,” he said, “so there’s no reason the IRS can’t send Americans pre-filled tax forms to verify.”

While the notion of allowing government to encroach on yet another aspect of our lives might sound like a hard sell, members of the Computer and Communications Industry Association (CCIA) believe this is a very real threat.

“There is a fundamental conflict of interest if the tax collectors also become the tax preparer,” said CCIA President and CEO Ed Black. “If you don’t trust the fox to guard your hen house, why trust the IRS to do your taxes. It’s the same exact thing. They make it sound so convenient, but it’s really just a convenient way to kiss your deductions and tax credits goodbye.”

Black is among the increasing number of voices who worry the “super committee” might see this as a quick way to raise taxes by  $345 billion per year – the amount of the “tax gap” – without a single member of Congress ever having to vote for a tax increase.

“Most members of Congress, especially the Republicans, do not want to vote for a tax increase,” Black said. “But if the super committee calls having the IRS do people’s taxes an ‘accounting change’ or a ‘convenience to the taxpayer,’ they raise taxes by hundreds of billions of dollars per year and no one even knows about it.”

Advocates argue that allowing the IRS to prepare tax returns is a creative solution that simplifies the tax code, provides convenience to the taxpayer, and helps America balance its budget. As then-Senator Obama said during that same 2007 campaign speech: “Making this change would save Americans more than two billion dollars in tax preparer fees, more than 200 million hours of work, and an incalculable amount of headache and heartburn.”

“This mean’s no more worry. No more wasted time. No more extra expenses for a tax preparer,” he said.

“It’s brilliantly Machiavellian,” says CCIA’s Black.

So how would letting the IRS do your taxes actually close a $345 billion annual “tax gap”?

First, it’s important to note that your accountant or storefront tax prep company like H&R Block or electronic-filing software — whoever helps you do your taxes — all work for you. Sure, they must comply with the law, but it is in their best financial interest to help you pay as little as legally appropriate. If they do this well, you will continue to use them. In a sense, they have an adversarial relationship with the IRS.

But there’s another systemic problem. Goolsbee is correct in noting that the government already knows how much money you earn (via W2 forms and 1099’s). But what they do not necessarily know (unless you assume they know all) is which tax credits and deductions you might be legally entitled to.

“The IRS can do your taxes only if it has all your financial information,” explains Grover Norquist, president of Americans for Tax Reform. “The demands for more information about your economic life will increase.”

For example, if you get married or have a baby, getting a deduction would be contingent on informing the IRS of your change of life status. The same goes for buying or selling a house, caring for a sick relative, giving to charity, or any of the other ‘life events’ that might lower the amount of taxes you owe the government or entitle you to a bigger refund.

“If the IRS does the preparation,” says Club for Growth executive director David Keating, “people will wind up paying too much because the IRS won’t be on the lookout for loopholes that could cut your taxes now, or next year.”

But the fact that citizens would likely pay too much is a feature, not a bug.

In March, Congressman Jim Cooper (D-TN-05) introduced the Simple Return Act (H.R. 1069). The congressman’s press release called it, “a bill that would get the IRS to do your taxes for you.” He also noted that the Simple Return would allow the IRS to fill out a basic tax return for every American with the financial information it already receives from each taxpayer’s employer and financial institution: W-2 and 1099.

Cooper estimated that 40 million Americans would be eligible for the service, but some suspect this would just be the beginning. To combat the push, Rep. Sam Johnson (R-Tex.) has authored H.R. 2528, the Taxpayer Freedom Protection Act, “to rescind the authority of the Secretary of the Treasury to develop a return-free tax system.”

It is unclear whether or not the “super committee” will actually propose this “solution,” but anti-tax activists, as well as those who represent the interests of tax preparers, are taking it seriously. Still, for something that has been openly discussed by everyone from Barack Obama to senators and congressmen, the idea is receiving remarkably little press coverage.

Matt K. Lewis