As the tax season closes, there is a heated debate on Federal tax code, especially concerning tax rates, deductions, and exemptions. Congress is also expected to debate wholesale tax reforms to cover taxpayers’ arguments of deficiencies in the tax code.
However, these complaints are being used to create a new system where tax preparation will be the IRS’s job. You will only receive pre-filled forms and bills at the end of the tax year instead of filing on your own. This is definitely bound to cause conflict of interest.
The IRS’s job is to maximize and collect revenue, not prepare returns. To maximize the revenues, it is therefore, possible that the agency would not inform taxpayers of all the deductions and tax credits they could enjoy. The CCIA’s study in 2010 found that with the proposed new system, the eligibility and participation rates would be lower than what is estimated. There would be significant implementation costs, but it is not clear if the system will reduce under-reporting, or narrow the tax gap.
It is not the first time such a system has been used to prepare taxpayers’ returns. Perhaps the IRS should learn from the pitfalls faced by previous proposed systems, like the California’s 2005 pilot program. Last year alone for instance, out of the two million eligible taxpayers, only 83,000 chose this method thus, stressing the fact that Americans prefer the current voluntary compliance model.
The “Pay as You Earn (PAYE)” system in Great Britain is similar, but highly ridiculed for its many errors and inefficiencies. In 2010, for instance, the British taxpayers suffered a huge loss due to the government’s miscalculations that left them repaying the Treasury an average equivalent of $2,200. Imagine if this scenario were to happen in the U.S., where tax errors are common? It would be disastrous. Still, even if the IRS were to update its technology, this information would still be too much and way too sensitive to entrust one agency with it.
The agency will also need new mechanisms for easier tracking of taxpayers and their wages. Already, the IRS has proposed a Real Time Tax System aimed at addressing this issue, though it has its own downsides. It is the first step towards preparing taxpayers’ returns and it will ultimately rub small businesses the wrong way; with arduous reporting requirements and shorter periods for processing W-2s and 1099s (from 3 months to one month). Though tax reforms are inevitable, taxpayers need not hand over so much power to the IRS; taxpayers need to retain their tax rights and responsibilities – including voluntary tax preparation and filing.