Each year hundreds of millions of Americans file their personal income tax returns using a form 1040.
The average American spends eight hours and US$110 doing so. Much of that money goes to professional tax preparers and software companies. Much of that time is spent entering information that the IRS already has, such as salary and wage data found on W-2s.
While helping low-income Americans file their taxes this year as part of the IRS’ Volunteer Income Tax Assistance program, I’ve been struck by just how much of the effort that goes into tax preparation is unnecessary.
So why do we still have to do it?
The common wisdom is that it’s the IRS’ fault, and that it is only thanks to the helpful tax preparation companies that the filing process is manageable.
However, the opposite is true. There is a way to make tax filing easier and cheaper – and even unnecessary for many – but it’s the tax preparation companies that are keeping it from happening, with some help from conservative anti-tax activists and even lawmakers.
An easy way to simplify taxes
Even though the tax code itself is quite complicated, it is not difficult to make the tax return filing process simpler.
For a large percentage of filers, the IRS already has all of the information needed to file their taxes. The agency has your income and withholding information from W-2 and 1099 forms and details about your household such as dependents and filing status from the previous year’s return. Even for those who itemize, the IRS already knows things like how much you paid in mortgage interest.
Thus there’s nothing, technically, stopping the IRS from – at a minimum – doing a first draft of a tax return for you – known as a “pre-populated return.” Then, if you have changes to make, you could modify it. For example, if you had another child, got married or had some deductions to itemize that weren’t reported to the IRS.
A simpler return process like this could apply to up to 40% of tax filers, saving them up to the equivalent of $44 billion over a decade.
What’s stopping easier filing
There are two special interests that block these reasonable solutions to reduce Americans’ tax filing burden.
The first is the tax preparation industry, including tax preparation companies like H&R Block and software developers like Intuit, the creator of TurboTax. These companies make money from the tax filing process being complicated, so they lobby against measures to simplify it.
Case in point: A recent bill called the Taxpayer First Act includes a provision prohibiting the IRS from developing its own online tax preparation platform that could be used by many Americans – but would compete with the “free file” system currently run by private companies. The House passed it on April 9.
The bill’s co-sponsors are bipartisan – and incidentally include Democratic Congressman John Lewis from Georgia, my representative and the representative of most of the low-income people whom I assist in the IRS low-income tax program.
The tax preparation industry spent $6.6 million last year alone lobbying legislators to support measures like this. They also spent millions lobbying against California’s return-free pilot project called ReadyReturn, which lives on but only on a small scale.
The second special interest opposing reasonable tax filing simplification efforts is the conservative anti-tax movement, spearheaded by activists like Grover Norquist. They claim they oppose a return-free filing system because they see it as a conflict of interest for the IRS. I believe their real motive is that by keeping the tax filing process costly and inconvenient, Americans will be more opposed to taxes generally.
Ironically, even one of their heroes, Ronald Reagan, advocated for return-free filing.
Tax simplification myths
The myth is that tax simplification means reducing the number of tax brackets. In fact, how simple or complicated the tax code is, and how simple or complicated the filing process is, have nothing to do with the number of tax brackets.
Calculating your tax based on the brackets is trivial; it’s the rest of the tax code that is complicated. Reducing the number of tax brackets will just make the tax code less progressive, increasing the tax burden on the poor while reducing it on the rich.
An unnecessary burden
The IRS’ job should be to make tax filing as easy as possible. But it is stymied by Congress’ refusal to allow reasonable improvements to the overly complicated tax filing system it designed.
Yes, making tax filing simpler would hurt tax preparation companies’ profits. But trying to avoid hurting a small niche industry, in my view, does not justify the enormous, unnecessary burden on millions of Americans who must waste their time with pointless busywork.
Garth Heutel does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
Authors: Garth Heutel, Associate Professor of Economics, Georgia State University