The federal government filling out Americans' tax forms is one possibility as the IRS explores the implementation of an online filing system, The Hill reported.
Tax experts say that a new system could take one of two approaches, The Hill said Monday.
The more conservative option would be a standardized government version of popular commercial software — used by such companies as Intuit, H&R Block, and TaxACT — that prompts users to fill out a digital tax return.
However, a current IRS program that allows low-income Americans to use these products for free has performed poorly, The Hill reported. Although 70% of taxpayers are eligible for the Free File Alliance program, only 3% use it, an April report from the U.S. Government Accountability Office found.
Also, the IRS signed a noncompete clause with commercial providers promising not to make its own free software tool.
The other option is return-free filing, which basically means that the government would do your taxes for you — withholding what's owed and doing its own accounting without requiring forms to be sent in by taxpayers, The Hill said.
The United Kingdom, Japan, and Germany are among countries that use a return-free filing system, known as an exact withholding system. With this system, the IRS would try to withhold fewer taxes from people's paychecks and skip the refunding process made necessary by a self-reported tax return, The Hill reported.
"In most of these countries, taxpayers meet their tax obligations entirely through tax withholding payments made throughout the year," the Treasury Department found in a 2003 report on return-free tax systems.
However, all the tax credits in the U.S. tax code make self-reporting almost necessary from an administrative point of view, according to experts.
"With withholding, the IRS already has that information. So it's kind of annoying that you have to go through and enter it in yourself," Alex Muresianu, tax analyst at the Tax Foundation, told The Hill.
"But in the U.S. we have, for instance, joint filing. So if your employer knows what your income is, they don't necessarily know what your spouse's is. Employer withholding isn't reflective of various credits and tax programs."
Another kind of return-free filing is called agency reconciliation, where "tax authorities prepare tax returns for individuals based on information returns from employers and others, and send taxpayers a completed tax form for their review," the Treasury report said.
Because the IRS is doing all the clerical work without relying on reporting from taxpayers in this kind of system, some studies have shown that the government would lose revenue.
The IRS has about a year to turn in its e-filing report, which is part of The Inflation Reduction Act signed into law by President Joe Biden last week.
The law provides $80 billion in funding for the agency, including $15 million to deliver a report on a free, government-run tax e-filing system that tax simplification advocates have sought.
The agency must figure out how much an online filing system would cost, the design of the system and how taxpayers would feel about using one.
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