05 / 21 / 15

Would You Let the IRS Prepare your Income Tax Return?

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I came across a news article earlier this week. (I tend to always click on those news articles relating to taxes and the IRS these days ... who have I become?!) I found it so interesting (and debatable) that I decided I really wanted to write about it instead of my original topic. So here goes! (By the way, I do have my own opinion on the issue, but I'm going to do my best to take an objective approach in my writing.)

Joseph Bankman, a tax law professor at Stanford Law School, has a plan to reduce the stress and cost of filing your yearly income tax returns. He's recently proposed a tax preparation method that would take the detailed records about your financial activity each year (such as W-2s, 1099s, 1098s, etc.) and pre-calculate your tax return. These documents are already provided to the IRS each year, and in our current filing system, matches the documents to make sure you've filed correctly anyway. This return would be sent to you, and if you accepted, you would file it through the mail or electronically. The return would be voluntary, and if you wished to dispute the IRS calculation, you could either make adjustments or reject it and file your taxes just as we do now.

This idea has been faced with numerous opponents, including Intuit (the makers of TurboTax and QuickBooks), who have spent millions lobbying against this filing system. David Williams, the Chief Tax Officer of Intuit, has stated that this plan "necessarily prioritizes revenue generation for government but does not advance taxpayer rights, citizen empowerment or real simplification of the tax code." Intuit has also said that "return-free filing minimizes the taxpayers' voice and control over the tax process by reducing their role in filing their taxes and getting their own money back."

Another group in opposition, Grover Norquist's Americans for Tax Reform, says it is a "conflict of interest" for the government to both collect taxes and calculate how much people owe. A director from Americans for Tax Reform said that mail from the IRS does not strike people as "optional." The Computer & Communications Industry Association, who has a "Stop IRS Takeover" Campaign, has said that this is a "massive expansion of the US government through a big government program". Other tax companies and organizations who've invested millions in lobbying include the American Institute of Certified Public Accountants, H&R Block, and the National Society of Accountants.

Here are some additional facts I found in researching this subject:

  • Major limitation: for anyone with a more complicated return (such as itemized deductions, business expenses from self-employment income, etc.), this system would only help by providing the financial information the government was supplied with (w-2s, 1099s, 1098s, etc.).
  • Other countries: Some northern European countries such as Sweden and Denmark have similar systems with no reported issues.
  • $$: Roughly 25,000,000 Americans used TurboTax in 2012, and the software accounted for more than ½ of all individual returns filed electronically (which made up 35% of their $4.2 billion revenue in that year).

So what do you think? Would you give it a try in an effort to save on tax preparation costs? Are you thinking, NO WAY – I would never let the IRS calculate my taxes for me? I'd love to hear some different perspectives.

I'll end with a statistic. I decided to poll 12 of my co-workers on the issue, and 7 of the 12 said NO -- they would still use a private accounting company/software/self-preparation for their income tax returns. ALL of the remaining 5 had conditions/stipulations they'd want to see in place before trying this free filing system.