Let the IRS do your taxes for you

Yeah, right. Like that's going to happen any time soon. 

But that's how some folks think our tax system should work. They contend that it would save us taxpayers time and the IRS money if the tax agency just took the info it already gets about what we make and filled out our returns for us.

In the New York Times piece Why Can't the I.R.S. Help Fill in the Blanks?, Randall Stross says:

"In the digital age, filing income tax returns should be a snap. The important data from employers and financial institutions have already been sent to the government's computers. Yet taxpayers are still required to perform the anachronistic chore of preparing a return from scratch. And, in many cases, they pay a software company for the privilege."

Instead, argues Stross, when we prepare our returns, we should be able to "first download whatever data the Internal Revenue Service has received about you and, if your return is simple, learn what the I.R.S.'s calculation of your taxes would be."

Presidential support, sorta: Even the president thinks it's a good idea. Or at least he did when he was campaigning for his current job.

In Obama's economic agenda issued back in '08, the then-candidate said he would direct the IRS to "give taxpayers the option of a pre-filled tax form to verify, sign and return to the IRS or online. This will eliminate the need for Americans to hire expensive tax preparers and to gather information that the federal government already has on file." 

Since he's moved into the White House, however, other matters have occupied Obama's time. 

But Stross, a business professor of at San Jose State University, says Uncle Sam doesn't have to reinvent the tax wheel. There's a model out there we can use as the IRS filing for us foundation.

California tax-file dreamin': Stross cites California's Ready Return filing system as an example the IRS should follow. Really. He wants us all to follow California's lead here.

Although it is much maligned for its fiscal troubles, the Golden State apparently has hit upon something that works well for its tax division, as well as the few residents who use it. The state provides eligible taxpayers (there are limitations on who can participate) a pre-filled state tax return.

Note the word "few." That's the problem. Around 2 million folks qualify for California's program, but only 60,000 of them used it last year. The state doesn't have a big marketing budget to get the Ready Return word out. Stross thinks that lack of money is reflective of the political opposition to the program, notably from the major tax software manufacturing companies.

A cyber-discussion has been going on about this matter on Twitter. Julie Miller of California-based Intuit, maker of the popular TurboTax program, said, "We believe Free File is a better alt. for CA, costs taxpayers & the state $0."

Since she was limited to 140 characters, Miller referred folks to Intuit's position paper on the IRS partnership with software manufacturers, which kicked off its 20th year a couple of weeks ago.

As for the IRS' stance on taking on more filing responsibilities, the agency has long said it has no desire to get into the tax software business. That's understandable. IRS folks have a lot to do already.

Plus, Congress would have to loosen its tight grip on the agency's purse strings to allow it to hire the programmers necessary to do this major job effectively and accurately.

IRS auto-file obstacles: So right now, there are lots of practical obstacles to the proposal that the IRS just do our taxes for us. In addition to the technical considerations, a lot of folks still would be left out of any such IRS-direct program.

Self-employed folks, for example, don't get a W-2 or even a 1099 for every bit of income they earn.

Most folks claim the standard deduction, but some of us itemize. We'd still have to do work to make sure the IRS knew about those write-offs.

And, of course, there are the psychological barriers. Folks already raise their eyebrows when the IRS is mentioned. I doubt that many, despite how logical an argument could be made, would like to turn what is essentially total control of their tax filing over to Uncle Sam.

IRS tax computation already in place: You can, however, have the IRS do some of your tax filing work for you if, as an agency recording says, "you qualify and so choose."

Yep, the IRS will figure your tax and certain tax credits -- the credit for the elderly or the disabled, the Earned Income Tax Credit (EITC) and the Making Work Pay credit -- that might reduce your bill.

This option is available regardless of whether you file a 1040EZ, 1040A or 1040. But to put the IRS to work making your tax computations, you do have to get them your return by April 15.

When the Uncle Sam does figure you tax amount, he says, "If you paid too much, we will send you a refund. If you did not pay enough, we will send you a bill for the balance. To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later."

You can get a preview of this service from the IRS' TeleTax Topics; just call 1-800-829-4477 and punch in 552.

Complete details on letting the IRS figure your tax (and certain credits), along with the limitations on this offer, are available in IRS Publication 967.

Of course, this isn't exactly what Stross and others want. In this case, you still have to fill out most of the tax return's lines and attach certain documentation.

But just in case you want to let the IRS instead of tax software or a tax pro have a go at your tax bill, I wanted to make sure you knew you had the choice.

Related posts:

• Are you ready to file your taxes?
• E-filing 2010 is here ... except for homebuyer credit claimants
• Picking a tax pro

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Comments

[Henry G. Huestis]

Does sound like a novel idea (pre-filled tax forms from the IRS). I would like to see it, for I am an American working overseas, and even with the Internet, financlal institutions and other entitities still send out 1099's, W-2, and other tax data that gets notoriously lost in the mail from the States to my current foreign posting.

About 10 years ago, I filled out my US income tax return while working in Saudi Arabia, and about 15 months after I filed the return, I get a notice from the IRS requiring additional back taxes, interest and penalties for income that the IRS claimed that I did not report on my tax return.

Tracing the problem down, and with the amount indicated in the IRS deficiency letter, I found out that a 1099 which was mailed from my credit union in the States where I had a number of accounts never got to me for one of the accounts that I had with the Credit Union (with the amount indicated on the 1099 reported to the IRS, but not me). As a result of this, I had to pay the additional tax, plus about $ 500.00 in interest and penalties, which sucked. But what can I do, I was overseas at the time.

[used car loans]

The problem with this is that the government will have to spend more on the data infrastructure and information technology, which can be a possible cause of tax increase.

[Wes Masters]

To back up your point, Kay: I have lived in CA for almost 10 years and this is the first time I have ever heard of Ready File.

[Elizabeth R.]

Poor IRS! Apparently we think this agency has a lot of time and money on their hands. I know they are working hard to bring their computers up to date (we have already witnessed some of the modernized e-filing rewards!) and now they want to add pre-filled forms to this agenda?

I think other issues have more priority:

1. Customer service first!
2. Faster turn around of refunds.
3. Better screening of tax returns.
4. Pay more attention to the 3949A's submitted.
5. Find more ways to close the tax gap and create greater compliance.

I could go on further but I think all of those issues are much more important than sending out pre-filled forms. Honestly, that seems like we would be filling our taxes out a year later (so filling out 08's info in 2010) because it takes so long for the IRS to receive and document the employer's tax returns. This is evident by the fact that it takes about a year for letters to start showing up if there is something wrong.