Return-Free Tax Filing: On the Horizon for American Taxpayers?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
September 2, 2022
Earlier this summer, President Joseph R. Biden signed into law The Inflation Reduction Act of 2022 (Pub. L. 117-169). Otherwise known as IRA, this legislation was the result a budget reconciliation process (the price tag is approximately $800 billion over a 10 year period). With an effective date of August 16, 2022, IRA is considered by many to be landmark legislation whose goal is to reduce the level of inflation by reducing the Federal budget deficit, lowering prescription drug prices, investing in domestic energy production, promoting clean energy, along with other initiatives.
One of the provisions in the IRA legislation is an allocation of $79.6 billion for the Internal Revenue Service which provides for increased funding for modernization and increased law enforcement. This allocation also includes $15 million for IRS to conduct a study through a task force that would design a government-run free tax e-file system. Specifically, IRS will need to issue a report that would examine the cost, taxpayer opinions and overall feasibility. The deadline for submission of this report is mid-2023.
By way of background, under the Federal Internal Revenue Code (IRC), Title 26 (as amended), returns are classified as either tax returns or information returns. The former are reports of tax liabilities and payments, often including information used to compute the tax—a very common Federal tax form is Form 1040, the report of individual income tax—this is the form many Americans use every year. According to a recent study by the Tax Foundation, in 2019, approximately 148.3 million Americans filed a tax return, representing $11.9 trillion in adjusted gross income, and $1.6 trillion in income tax revenue.
By contrast, information returns are reports used to transmit information about income, receipts or other matters that may affect tax liabilities. As an example, Form W-2 and Form 1099 are used to report on the amount of income that an employer, independent contractor, broker or other payer pays to a taxpayer. Many temporary help employees and consultants get these forms sent to them. A business organization which has paid income to such persons is required to file such a form directly with IRS.
Currently, salaried and other employees have income tax deducted during the tax year by their employers; then, during tax season (for many of us by April 15th), many of us also file a formal tax return with IRS utilizing Standard Form 1040. If too many deductions were made during the year, one usually gets a refund; if not, there is a tax liability of some amount that needs to be paid.
Critics say the current system is very inefficient. Many of us go to a professional tax preparer to have our returns files with IRS; others rely on using a tax preparation software program (such as TURBOTAX) which can cost several hundred dollars to file Federal and state tax returns.
This is because the United States, unlike many other developed countries—such as the United Kingdom, Germany, Japan, Russia, Spain, Norway, Finland, Chile and others—does not permit return-free filing (also called an exact tax with-holding system) for taxpayers. There are some variations of return-free filing in these countries. Britain’s system gives us some insights how it might work in the United States.
The United Kingdom utilizes what is called “The Pay as You Earn” system, instituted in the 1940s and currently used by about 90 percent of taxpayers in Great Britain. Here’s how it works across the pond—tax authorities treat the individual (and not the family) as the unit of taxation. The tax system requires employers to report salary payments in real time, with the goal of withholding errors. Britain’s system also links revenue collection and benefit payments to the same database, increasing efficiency. There is some concern, however, that real-time reporting places a disproportionate burden on small businesses. The United Kingdom has minimized this problem by permitting small businesses to file payments monthly.
Next year, IRS will be required to submit a report to Congress presumably recommending a change to the current tax collection system. Tax experts say a new system could take one of two forms:
– Option 1 (more conservative): adopt a standardized public version of popular commercial software based on companies such as Intuit, H&R Block and TaxAct that prompts users to fill out a digital tax return. IRS already has such an e-filing program in place; however, only 3 percent of eligible Americans utilize it. It is not clear how a new free e-filing system would line up with IRS’ agreements with private tax preparers; some say IRS would simply put its own program in place;
– Option 2 (more dramatic): this option would adopt a system currently used by 36 countries—in essence, this would mean that the Federal government would do your taxes for you, withholding what’s owed and then do its own accounting without requiring forms to be sent annually to taxpayers. There are some problems with this approach—for example, how would one handle tax credits permitted by the Federal tax code (admittedly one of the most complex in the world)? Or, how would this system handle joint filing—if one’s employer knows what your income is, they probably don’t know what your spouse’s income is.
The potential changes represent different approaches and philosophies on tax policy and tax administration. Return-free tax filing probably appeals to advocates of tax simplification for the average person. Would there be any significant impact on the amount of revenue that the Federal government would collect every year? What would the administrative burden on IRS be of these contemplated changes?
Obviously, there are many unanswered questions at this point. We await to see the IRS task force report due out sometime next year. Time will tell.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past Senior National Council Representative. He has served on many association boards. He is a frequent guest commentator on public affairs and political issues affecting the nation and New York State. You can reach him at: [email protected] or [email protected] or 914.441.3399 or 212.237.8000.
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Return-Free Tax Filing: On the Horizon for American Taxpayers?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
September 2, 2022
Earlier this summer, President Joseph R. Biden signed into law The Inflation Reduction Act of 2022 (Pub. L. 117-169). Otherwise known as IRA, this legislation was the result a budget reconciliation process (the price tag is approximately $800 billion over a 10 year period). With an effective date of August 16, 2022, IRA is considered by many to be landmark legislation whose goal is to reduce the level of inflation by reducing the Federal budget deficit, lowering prescription drug prices, investing in domestic energy production, promoting clean energy, along with other initiatives.
One of the provisions in the IRA legislation is an allocation of $79.6 billion for the Internal Revenue Service which provides for increased funding for modernization and increased law enforcement. This allocation also includes $15 million for IRS to conduct a study through a task force that would design a government-run free tax e-file system. Specifically, IRS will need to issue a report that would examine the cost, taxpayer opinions and overall feasibility. The deadline for submission of this report is mid-2023.
By way of background, under the Federal Internal Revenue Code (IRC), Title 26 (as amended), returns are classified as either tax returns or information returns. The former are reports of tax liabilities and payments, often including information used to compute the tax—a very common Federal tax form is Form 1040, the report of individual income tax—this is the form many Americans use every year. According to a recent study by the Tax Foundation, in 2019, approximately 148.3 million Americans filed a tax return, representing $11.9 trillion in adjusted gross income, and $1.6 trillion in income tax revenue.
By contrast, information returns are reports used to transmit information about income, receipts or other matters that may affect tax liabilities. As an example, Form W-2 and Form 1099 are used to report on the amount of income that an employer, independent contractor, broker or other payer pays to a taxpayer. Many temporary help employees and consultants get these forms sent to them. A business organization which has paid income to such persons is required to file such a form directly with IRS.
Currently, salaried and other employees have income tax deducted during the tax year by their employers; then, during tax season (for many of us by April 15th), many of us also file a formal tax return with IRS utilizing Standard Form 1040. If too many deductions were made during the year, one usually gets a refund; if not, there is a tax liability of some amount that needs to be paid.
Critics say the current system is very inefficient. Many of us go to a professional tax preparer to have our returns files with IRS; others rely on using a tax preparation software program (such as TURBOTAX) which can cost several hundred dollars to file Federal and state tax returns.
This is because the United States, unlike many other developed countries—such as the United Kingdom, Germany, Japan, Russia, Spain, Norway, Finland, Chile and others—does not permit return-free filing (also called an exact tax with-holding system) for taxpayers. There are some variations of return-free filing in these countries. Britain’s system gives us some insights how it might work in the United States.
The United Kingdom utilizes what is called “The Pay as You Earn” system, instituted in the 1940s and currently used by about 90 percent of taxpayers in Great Britain. Here’s how it works across the pond—tax authorities treat the individual (and not the family) as the unit of taxation. The tax system requires employers to report salary payments in real time, with the goal of withholding errors. Britain’s system also links revenue collection and benefit payments to the same database, increasing efficiency. There is some concern, however, that real-time reporting places a disproportionate burden on small businesses. The United Kingdom has minimized this problem by permitting small businesses to file payments monthly.
Next year, IRS will be required to submit a report to Congress presumably recommending a change to the current tax collection system. Tax experts say a new system could take one of two forms:
– Option 1 (more conservative): adopt a standardized public version of popular commercial software based on companies such as Intuit, H&R Block and TaxAct that prompts users to fill out a digital tax return. IRS already has such an e-filing program in place; however, only 3 percent of eligible Americans utilize it. It is not clear how a new free e-filing system would line up with IRS’ agreements with private tax preparers; some say IRS would simply put its own program in place;
– Option 2 (more dramatic): this option would adopt a system currently used by 36 countries—in essence, this would mean that the Federal government would do your taxes for you, withholding what’s owed and then do its own accounting without requiring forms to be sent annually to taxpayers. There are some problems with this approach—for example, how would one handle tax credits permitted by the Federal tax code (admittedly one of the most complex in the world)? Or, how would this system handle joint filing—if one’s employer knows what your income is, they probably don’t know what your spouse’s income is.
The potential changes represent different approaches and philosophies on tax policy and tax administration. Return-free tax filing probably appeals to advocates of tax simplification for the average person. Would there be any significant impact on the amount of revenue that the Federal government would collect every year? What would the administrative burden on IRS be of these contemplated changes?
Obviously, there are many unanswered questions at this point. We await to see the IRS task force report due out sometime next year. Time will tell.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past Senior National Council Representative. He has served on many association boards. He is a frequent guest commentator on public affairs and political issues affecting the nation and New York State. You can reach him at: [email protected] or [email protected] or 914.441.3399 or 212.237.8000.
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