The Inflation Reduction Act requires the IRS to issue a report within one year on how it would implement either “Free E-filing”, or the more dramatic “Return-Free Filing”.
Return-Free Filing is the system favored by many developed nations that use science and arithmetic to inform public policy.
In “Return-Free Filing”, the tax authority would mail each taxpayer a completed form with his W-2 income, banking, and brokerage information already populated in the form. If the taxpayer doesn’t have any changes, or a desire to itemize deductions, he would just sign the tax form and be done.
The IRS estimates that about 70% of taxpayers would use the “Return-Free Filing” option and save considerable time in completing a tax return on their own.
Imagine the increase in productivity and the reduction in mental stress around April 15th.
This would be a boon for the Macro economy as well as individual taxpayers. Many working-class households qualify for the Earned Income Tax Credit. A computer will know and calculate it but a person who prepares their own tax by hand may not know they qualify. An estimated 20% of workers who would qualify don’t apply for the EITC.
Our tax system is awful, the work of generations of special interests. I don’t think those special interests will ever let us have a reasonable tax system, just as I don’t think the entrenched health insurance industry will ever let us have universal health care.
In “Return-Free Filing”, the tax authority would mail each taxpayer a completed form with his W-2 income, banking, and brokerage information already populated in the form. If the taxpayer doesn’t have any changes, or a desire to itemize deductions, he would just sign the tax form and be done.
I think the rules surrounding how options trading, and trading of equities would certainly need more clarity so that all broker/dealers report data the same way. Also needed would be integration with past returns regarding depreciation.
How would the crypto/defi/NFT reporting be handled?
Would non-qualified beneficiary accounts present any cost-basis problems? Tracking qualified account BDAs rules and depletions (withdrawals) definitely would need clarity in the age wave of older Boomers.
Large amount of effort that would definitely pay off. Perhaps even use the current major tax software companies as outside contractors to assist, may lessen some of their negativity.
Remember the person who was promising a tax return on a post card in the 80s?
Too many vested interests, including the ones that profit from selling tax preparation services and software.
The crazy part is that for many Americans, most of their pertinent tax information actually does fit on a post card. Obviously, a post card sized return would never work because you need room to fill out your name, address, SS number, occupation, and signature. But if you have only W-2 and 1099 income the information easily fits on one page.
Thing is, the IRS already has your W-2 and 1099 statements. It is the height of stupidity that Congress makes us fill out that same information and give it back to the IRS. It is citizen abuse.
The vast majority of taxpayers have very simple tax returns. W-2, maybe a few 1099-INT and DIV and standard deductions. Most peoples’ itemized deductions are less than their standard deduction.
Perhaps 20% of tax returns are more complex than that, probably fewer. Probably many METARs, but not most ordinary people. We would receive an IRS-constructed tax return and say, “Thanks, but sorry – I have to do it myself.”
The vast majority would benefit with no problems. The rest would carry on as usual.
< Perhaps even use the current major tax software companies as outside contractors to assist, may lessen some of their negativity. >
That’s the same approach that led to Medicare Advantage and the ACA (instead of single-payer health insurance). The IRS doesn’t need outside contractors.
The IRS computer already calculates the tax anyway. Anyone can go to the www.irs.gov and download their detailed tax return from the IRS computer. I did it last week. It would be dead simple for the IRS to mail each household a filled in 1040 every year. Most would not have any changes to make.
The vast majority of taxpayers have very simple tax returns. W-2, maybe a few 1099-INT and DIV and standard deductions.
We filed our 2021 return in a timely manner this year. A few weeks later we received a letter from the IRS wanting backup for our federal withholding taxes.
I sent then copies of our 2 1099-SSA forms, a 1099 from a NYS pension, and a 1099 from Fidelity. I’m pretty sure the IRS had all of these on file already. I assume it was a delay tactic because we were owed a refund.
I also received a letter from the IRS demanding a rather large sum (taxes + interest + penalty) for my uncle’s estate (I’m the executor). Of course, the amount was paid already, so I sent them a copy of the check (both sides) showing that the IRS deposited the check a month before they sent out the letter. I got back a letter last week saying they were looking into it. Stay tuned.
It does cause a moment or two of panic getting a letter from the IRS, though.
Left hand, I’d like to introduce you to your right hand. Sigh.
<<<In “Return-Free Filing”, the tax authority would mail each taxpayer a completed form with his W-2 income, banking, and brokerage information already populated in the form. If the taxpayer doesn’t have any changes, or a desire to itemize deductions, he would just sign the tax form and be done.>>>
I think the rules surrounding how options trading, and trading of equities would certainly need more clarity so that all broker/dealers report data the same way. Also needed would be integration with past returns regarding depreciation.
How would the crypto/defi/NFT reporting be handled?
Would non-qualified beneficiary accounts present any cost-basis problems? Tracking qualified account BDAs rules and depletions (withdrawals) definitely would need clarity in the age wave of older Boomers.
Large amount of effort that would definitely pay off. Perhaps even use the current major tax software companies as outside contractors to assist, may lessen some of their negativity.
All of the extras you list describe the 30% of the population who have a tax return too complicated for “Return-Free Filing”. Return Free Filing isn’t going to put TurboTax out of business. It just that fewer people will need to use it.
The IRS computer already calculates the tax anyway. Anyone can go to the www.irs.gov and download their detailed tax return from the IRS computer. I did it last week. It would be dead simple for the IRS to mail each household a filled in 1040 every year. Most would not have any changes to make.
I agree that the IRS should do this, thus simplifying tax filing for many.
But I would have to disagree that this is dead simple only because of the law of unintended consequences. Imagine the vast number of people who would end up with identity theft when the mail gets stolen.
OK, so maybe people would need to be able to opt in or out.
Get it sent via email instead or get an unlock code to be able to retrieve from the web site (like you did).
Or send the mail out with some critical info redacted that the taxpayer knows but would make ID theft much more difficult.
I think the rules surrounding how options trading, and trading of equities would certainly need more clarity so that all broker/dealers report data the same way.
That’s just a bit of regulation away. Define the reporting requirements, allow a bit of time for implementation, and off you go. Brokers already report stock, bond, and mutual fund trading - including costs - to the IRS in a defined electronic format. Just need to add options to the list of reportable transactions.
Also needed would be integration with past returns regarding depreciation.
That would be something that would fall outside of the return-free system. If you need to claim depreciation, you’d have to prepare your own return.
How would the crypto/defi/NFT reporting be handled?
See above re: options. The IRS is already requiring a checkbox to indicate if you have engaged in crypto transactions. If they decide there is sufficient transaction volume to make it worth while, they’ll probably adopt some reporting requirements even without a return-free system.
Would non-qualified beneficiary accounts present any cost-basis problems?
Again, that’s going to be outside of the return-free system.
The idea of such a system is not to get ALL returns into that system, it’s to get the simpler returns into the system. Make it easy for the vast majority of folks to comply with the income tax laws. That leaves more people at the IRS free to deal with the harder stuff and the exceptions.