IRS has our tax data, so why can’t it prefill returns?

Americans will have the chance to file their taxes in a new manner this year. They can do it directly on the website of the Internal Revenue Service.

They’ll need to enter their wages as they would with another service like TurboTax. This raises the age-old problem: Why doesn’t the IRS automatically file my tax returns if it knows how much money I owe or will receive?

A 2022 study addressed the question and found that the IRS can accurately tally 45% of tax return without the taxpayer’s input.

Why it does not already do this is a little complicated.

Insufficient funding

The IRS will need to spend money to create a permanent filing portal that offers prefilled returns.

Direct File, which is available for this year’s tax season in 12 states, was never authorized by Congress. The Inflation Reduction Act, instead, allocated $15 million to the aforementioned research, and the IRS has used a part of that money to create the platform.

This move angered Republicans. Some wrote to Treasury Secretary Janet Yellen in a letter last week, urging her shut down the Direct File Program.

The funding of the agency is constantly threatened. The debt ceiling and budget reduction deal reached between Republicans and White House last year resulted in $1.4bn being refunded from the original $80bn allocation to the agency through the Inflation Reduction Act. Congress passed a separate deal to divert $20 billion in IRS funds over the next two-years to non-defense programs.

According to the Washington Post , the IRS estimates that it would cost between $64 and $249 millions per year to operate its own system depending on how many users there are.

A IRS advisory committee warned in June 2023 that a permanent program would not be a good idea. Instead, they advocated for more publicity for the current free file program which offers resources about filing taxes for free by using software from commercial companies.

Commercial companies are a source of competition

Direct file is not liked by commercial tax preparation software companies that charge people for their software. They have made billions.

Tania Mercado is a representative of Intuit (the company that produces TurboTax) and she said that the program may end up wasting millions of dollars in taxpayer money when there are other free options for tax preparation available.

She described it as “a thinly-veiled scheme in which billions of dollars of taxpayer money will be used unnecessarily to pay for what is already provided free of charge.”

Some consumers have complained that commercial companies charge for software after advertising it as being free.

Intuit has recently been the subject of an order from the Federal Trade Commission that prohibits the company to advertise free services without specifying the people who are eligible.

Tax situations that are complicated

Tax situations can get more complicated as people make more money, invest or start their own business.

Direct File is only for those in “simple tax situations” where the income source is W-2 wages or Social Security income, unemployment compensation, or interest income that does not exceed $1,500.

Individuals who itemize deductions or who have their own business or earn income from gig work do not qualify.

Some people are excluded because of their income. For example, individuals who earn more than $200,000. Or couples filing jointly with more than $250,000.

Davidson Gillette is a professor at East Carolina University who has studied pre-filled returns in other countries. He told the Washington Post that he believes the American practice to be the biggest obstacle for implementing a government filing system. The government may have a harder time determining who owes money if they use joint filing.

He told the newspaper that it was unclear whether the IRS could handle the additional burden, given the funding available.

This report was contributed by The Associated Press.

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