John Klotsche is a partner and former chairman of the executive committee of the law firm Baker McKenzie. He was a senior adviser to the IRS Commissioner from 2003 to 2008.
French philosopher Blaise Pascal’s satirical line on verbosity, “The letter I have written today is longer than usual because I lacked the time to make it shorter,” is a timely reminder that the dreaded tax season is upon us. Millions of individuals and families are making their annual pilgrimage through Form 1040 and its 13 schedules, accompanied by the 106-page instruction booklet loaded with gobbledygook.
Meanwhile, House Republicans have laid down a marker for tax simplification, proposing to lower tax rates, increase the standard deduction and end a host of special-interest provisions. They estimate that these changes would reduce the share of taxpayers who itemize their deductions from about one-third under current law to 5 percent.
Their ultimate goal: “The revised tax filings for most Americans will be simple enough to fit on a postcard.”
Yet this falls one crucial step short of achieving the ultimate goal of tax simplification: shifting the burden of preparing returns from taxpayers to the government.
After all, the IRS has all the information it needs to do what many taxpayers toil over annually, except it can complete the task more efficiently and accurately. Employers and financial institutions feed variable inputs such as wages and salaries (the W-2) and interest and dividend income (the 1099) directly into the IRS database. The IRS uses this information to cross-check the accuracy of filed returns.
Why require taxpayers to spend time gathering documents and information and struggle to decode the forms and instructions? Why push 56 percent of taxpayers to pay professional preparers and 34 percent to purchase tax-preparation software?
The tax code contains 2.4 million words , plus 7.7 million in “interpretative” regulations. The Tax Foundation reports staggering tax compliance numbers: Individual taxpayers toil 2.6 billion hours each year gathering information and preparing the 1040 alone.
This idea for the tax agency to do the heavy-lifting computations is not new. California launched just such a program, ReadyReturn, in 2004 and recently took its best features and folded them into CalFile, the state’s easy-to-use service offering free e-filing. European countries, Scandinavian in particular, call it a tax agency reconciliation system. Most taxpayers in Denmark (87 percent) and Sweden (74 percent) participate. This is much more than a theoretical idea.
Congress even thought such a system meritorious when it mandated in 1998 that the Treasury Department develop “procedures for the implementation of a return-free tax system” for 2008 and beyond. The 2008 launch-year deadline has, of course, long come and gone.
How would it work? The IRS would determine eligibility for something that could be called “EZReturn,” based on a taxpayer’s prior return, and prepare a “draft” 1040. It would notify taxpayers of their eligibility and establish a secure online mechanism for reviewing drafts or mailing addresses for the returns to be sent. A given taxpayer would then review the return and (a) agree to the content and file it electronically or by mail, (b) make appropriate changes and file it, or (c) toss it in the trash and start from scratch. EZReturn would be entirely voluntary.
What’s the downside? The most obvious is Armageddon for the powerful tax-preparation industry, a $9 billion business employing 300,000 bean counters. Case in point: Intuit (maker of TurboTax) spent $3 million lobbying (unsuccessfully) to torpedo California’s ReadyReturn program.
And the industry maneuvered the Treasury Department into sidestepping its 1998 congressional mandate by allowing the IRS to contractually agree not to develop a return-free filing system. This came about in 2002 with the launch of the IRS Free File program for low-income participants, which an industry alliance agreed to fund and manage and for which it extracted the IRS non-competition agreement.
What has the industry delivered? For the most recent 2015 filing season, only 2.8 million taxpayers used the Free File program — a puny 2 percent of those eligible. A Treasury Department inspector general unabashedly stated as early as 2006 that the “primary goal” of the Free File Alliance was not to assist low-income taxpayers but “to keep the Federal Government from entering the tax preparation business.”
“Drain the swamp” is a popular mantra of the president and his surrogates, and here it seems appropriate that the interests of the tens of millions of taxpayers annually dragged into the 1040 swamp should trump those of the tax-preparation industry. EZReturn could also help drain another swamp: growing industry fraud and predatory practices aimed at lower-income households; tax refund fraud alone is estimated to hit $21 billion this year.
Albert Einstein famously said, “The hardest thing in the world to understand is the income tax.” Let’s have Congress instruct (again) and fund the IRS to develop and implement a comprehensive program to assume the role of the nation’s tax-return preparer and make things as simple as possible for millions of taxpayers.
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