President Reagan's dream of a tax system in which most people wouldn't have to file returns apparently is not to be. The Internal Revenue Service says it just isn't feasible.
The idea, advanced by the president when he sent his tax-overhaul plan to Congress in May 1985, eventually would have allowed most taxpayers to settle their accounts with the government simply by verifying the accuracy of a return prepared by the IRS.
A yearlong study "has led to the conclusion that it is not currently feasible to implement a return-free system which meets the desired objectives at a reasonable cost," the IRS has concluded in a report to Congress.
Among the problems with the proposed system:
It would require most participating taxpayers to wait until early April to receive refunds; the IRS now mails more than 30 million refunds by the end of March each year.
The change could make it difficult for taxpayers to meet deadlines for filing their state tax returns. Returns in most states must include a figure that is available only from the federal return.
The inability of the IRS to compare information documents, such as statements of interest earned, with returns could result in generation of inaccurate returns by the agency. This document-matching process is one of the most effective compliance tools available.
Perhaps even more important, the IRS found that the system probably would not significantly reduce the paper-work burden on taxpayers.
Reagan had estimated that "by the early 1990s, more than 50 percent of all taxpayers could be covered by the return-free system. It is estimated that at this level of participation the return-free system would save taxpayers annually approximately 71 million hours in actual return preparation and $1.6 billion in fees paid to professional tax preparers."
In its report to Congress, the IRS wrote:
"Although participants would be relieved of the burden of filing returns, they would instead have the burdens of understanding the return-free tax system eligibility requirements, filing a postcard (to elect to participate), verifying the IRS report and notifying IRS of any discrepancies or disagreements.
"Based on the information currently available, the extent of the irreducible burden might not be significantly less than the burden of completing a return."
Under the best of circumstances, the return-free system could be used only by taxpayers with relatively simple tax situations. For example, the 38 percent who itemize deductions could not participate; nor could those who claim a child-care credit, nor those who have children with investment income over $1,000.
In essence, the simplified system would be feasible only for those who now file the one-page Form 1040EZ or Form 1040A (except those with a child-care credit). There would be no simplification for filers of the long form, who generally have the more-complicated returns.