For many Americans, doing your taxes isn’t that complicated. It’s just data entry.
The actual job of doing your taxes usually involves sifting through various Internal Revenue Service forms that you receive in the mail. There are W-2’s that list your wages, 1099’s with miscellaneous income like from one-off gigs, 1098’s with mortgage interest or tuition, etc.
But here’s the thing about those forms: The IRS has them, too. For many people, the IRS has all the information needed to calculate their taxes, send taxpayers a completed return, and have them sign and return to the IRS if everything looks in order.
This one is not a purely hypothetical proposition† Countries such as Denmark, Belgium, Estonia, Chile and Spain already offer this ”pre-filled returns” to their citizens. And a new paper estimates that at least 41 percent of U.S. households — some 62 million tax return units — could have their entire tax returns handled this way without further intervention.
Tens of millions of unnecessary returns
The paper is by four economists: Lucas Goodman and Andrew Whitten of the Department of the Treasury’s Office of Tax Analysis, Bruce Sacerdote of Dartmouth and Katherine Lim of the Minneapolis Fed. Half of the authors who work at the Treasury help explain the data set the paper uses: a randomized, representative sample of actual tax returns filed in 2019. The IRS strictly regulates who can use this kind of detailed tax information (it has to be for tax policy work), but it’s a goldmine for those researchers.
In this case, the IRS data actually allowed the authors to generate “pre-populated returns” for taxpayers, based on information the IRS already knew, and then compare those returns with the returns actually filed by taxpayers. If they match, that means a pre-populated return policy could work for that person.
“A pre-filled return is considered successful if the tax liability calculated is approximately equal to the tax liability actually reported on the 2019 tax return,” the authors explain. This was one of two methods they used; the second sort through the IRS returns looking for complications that would prevent a pre-filled return from being properly compiled. That approach tended to yield higher estimates of the number of returns that could be automatically compounded.
The former, more conservative approach found that 41 percent of returns, representing 62 million tax units, could be accurately prepared by the IRS this way. (A tax unit can be a single person, a single parent with the head of a family, a married couple and their descendants, etc. – whoever is represented by the tax return.) The less conservative approach, counting everyone without complications that prevent an automatic return, puts the number at 73 million returns, or 48 percent.
Pre-filled returns can also help people who are not currently filing tax returns. In the US, many people don’t have to file an income tax return, usually because they don’t earn enough money to meet that requirement or because the money they get comes from a partially exempt source like Social Security. But those people would often benefit from filing a return because of benefits such as earned income and child tax credits. Those credits are refundable, meaning you don’t need to have positive income taxes to receive them; In particular, the Income Tax Rebate (EITC) is aimed primarily at low-income people who do not earn enough to pay income tax.
Despite those benefits, some 22 percent of eligible taxpayers don’t claim the EITC in a typical year; by means of one estimate, two-thirds of those who did not receive the benefit did not receive it because they did not file a tax return. The bundling of assistance programs with a complex tax code Places Significant Burden on Less Wealthy Americans trying to access those programs.
So the authors of the automatic filing document estimate how many non-filers could receive tax benefits under an automatic filing system. They estimate that 7.2 million tax units that do not need to be filed are owed refunds, averaging about $411 each. Those units would likely get their refunds under a pre-populated filing system.
Closing Tax Returns…for Everyone?
For the tens of millions of households for whom pre-populated filing works, it could be a huge leap forward. But 41-47 percent of households are not a majority, and in an ideal world the other 53-59 percent of tax units could also benefit from such a system. So what are the barriers holding them back?
The paper’s appendix table A2 estimates the proportion of returns with various attributes that prevent a pre-filled return from working. The most common, affecting 16.2 percent of returns, is Schedule C, or Self-Employed Income: People have a different estimate of their self-employment or job income than the 1,099 forms sent to the IRS indicate. They may have significant business expenses or jobs that have not activated a Form 1099 that alters their actual taxes owed.
The next most common, hitting 10.9 percent of returns, are itemized deductions. These have been done much less frequently since the standard deduction was increased in 2017 with Trump’s tax bill, but almost everyone who specifies claims the charitable deduction or the state tax deduction. Both rely on information that is not consistently reported to the IRS, so they cannot be included in pre-filled returns.
Both are tricky problems to get around. Especially with the rise of gig economy employers like Uber, Lyft and DoorDash issuing 1099s and treating employees like contractors, more and more low-income people depend on self-employment income where discrepancies can arise that make automatic filing impossible. You could solve the itemized deduction problem by eliminating itemized deductions, but somehow I doubt the people whose taxes you would simplify in the process would thank you for it.
Other problems may be easier to solve. A significant portion of taxpayers had wage incomes different from what their W-2 forms indicated; better payroll reporting requirements for companies can get around that. Difficulties in determining what proportion of retirement income is taxable also emerged quite a bit, which a simpler retirement tax system could remedy. Like a volunteer tax preparer, I’ve had a lot of pension issues and our current system is mind-bogglingly complex. I like to think about taxes and yet, learning the “simplified method” for retirement tax made me want to die.
But even if “only” two out of five returns can be made automatically by the IRS, it’s worth asking: why not? Even if “just” 62 million households benefited, that would still save a tremendous amount of time and anxiety each year and make the tax season run much smoother.
The IRS estimates that the average non-corporate filer spends nine hours a year filing their 1040. Even assuming that auto-complete returns are less complex and take half the time, that adds up to 279 million life hours, or almost 32,000 year of life, not wasted if 62 million filers could file their taxes automatically. Sounds good!