Should you let the IRS do your taxes for you?

Jeffrey A. Eisenach Managing Director, Navigant Economics
Font Size:

It’s an annual tradition that around the end of tax season, lawmakers and policy experts discuss ways to make the tax code and tax system more efficient for taxpayers. While much of the discussion this year surrounded the potential for once-in-a-generation tax reform, some participants have focused on making the filing process itself easier.

Today, the majority of individual tax returns are filed electronically, rather than by mail. Electronic filing saves taxpayers money and reduces the likelihood that they will make mistakes. All taxpayers can access free fillable forms to quickly input their data, and 70 percent of taxpayers can use software and file electronically for free thanks to a voluntary public-private partnership between tax-preparation companies and the IRS.

For some, the next obvious step is to get the private sector out of the way altogether. Under so-called “return-free” proposals, the government would prepare individuals’ tax returns, annually sending a pre-filled form for a taxpayer to review and approve. Proponents say a government-run system would be simple, painless and convenient, and would significantly reduce errors in the tax-filing process. If you believe this, I have some opportunities in the solar-panel business I’d like to talk to you about.

The truth is that a return-free system only sounds good until you think about it. When you do, it doesn’t take long to understand why we need to keep the government out of the tax-preparation business.

To begin with, creating a return-free system would require the largest and most ambitious information technology upgrade in IRS history. Given the sheer scale and complexity of its operations and its status as a government agency, it is perhaps not surprising that the IRS has had a poor track record when it comes to designing and implementing technology modernization programs, including delays, cost overruns and outright failures. The most optimistic estimates are that creating a return-free system would cost hundreds of millions of dollars and take several years — but history suggests it could cost billions and take a decade or more.

Even if a return-free system could be implemented, the benefits would fall far short of the costs. Anyone who has ever done business with a government agency knows that, first, many IRS-prepared tax returns will have errors and, second, trying to get those errors corrected will be a nightmare. Then there is the problem of privacy: Each year, the IRS mails tens of thousands of refund checks and other documents to the wrong addresses. Under return-free, thousands of completed tax returns would be delivered to the wrong people.

Experience abroad confirms these fears are well placed. Such problems have been commonplace in foreign countries that have tried to implement return-free — despite the fact that their tax codes are far simpler than ours. For example, the United Kingdom’s government-provided online filing program has been plagued by technical and operational difficulties, and British taxpayers have faced problems ranging from security breaches to overpayments, lost tax notices and delays in returns. In response, British authorities are now considering adopting a system similar to the U.S. “free file” model.

It’s also difficult to see what benefits a return-free system would generate, either to taxpayers or to the IRS. First, thanks to the complexity of the U.S. tax code, the vast majority of taxpayers wouldn’t even be eligible for the return-free option. Second, taxpayers with simpler returns can already use tax-preparation software or online options for free. Does anyone seriously think the IRS version will be better?

Some U.S. states have experimented with return-free systems. So far, few have met their goals for taxpayer participation. In California, less than one percent of taxpayers have chosen to use the state’s much-ballyhooed online system.

Much of our politics today runs on bumper-sticker slogans, and the notion of a return-free tax system makes for a pretty good bumper sticker. In the real world, though, a government takeover of the tax-return business won’t eliminate tax returns, nor will it make them simple, painless, convenient or error-free. In the end, common sense and our own experiences are all we need to know the right answer here.

Consider this: Virtually every year, the government adds some sort of new wrinkle designed to make tax filing harder and more complicated. All the private sector has ever done, on the other hand, is try to make it easier.

Jeffrey A. Eisenach is a visiting scholar at the American Enterprise Institute and a managing director at Navigant Economics.