Tuesday is the deadline by which Americans have to send the IRS their income tax returns after having spent, according to the Tax Foundation, a cumulative 2.6 billion hours completing them. That time gets spent on keeping good records, scrounging together paperwork, and then filling out the actual forms.
This time suck is not necessarily because the tax code is complicated, however. It’s because of the way Americans have to complete their taxes — something that could be much simpler if the tax preparation industry would get out of the way.
And it’s a process that Elizabeth Warren wants to change.
In many other countries, the government essentially prepares tax returns for citizens. In Japan, for example, the tax agency sends out a document that states how much each person earned, how much was withheld, and how much is owed in taxes. If someone wants to dispute the numbers, he can go to a tax office to do so, but everyone else simply signs off on the numbers. The same thing happens in Chile, Denmark, Estonia, Finland, Iceland, Norway, Sweden, and Spain.
Employers and banks already have to send the IRS details of how much they paid Americans and how much Americans paid them. The government has almost all of the relevant information, such as W-2s and interest earned. The IRS could then take the data and fill out every taxpayer’s form for her. This is what’s known in other places as pre-populated tax returns or return-free filing.
Anyone is still free to either dispute the numbers or further itemize their deductions. But for most, it would simply be a matter of signing off. In many of these countries, taxpayers don’t even have to do anything for that last step — if they take no action, they are deemed to have accepted the government’s pre-populated return.
Such a system would save Americans a collective 225 million hours in preparation time and $2 billion in costs, according to one estimate.
The idea has regularly cropped up in the United States. Even President Ronald Reagan called for Americans to “not even have to fill out a return” in 1985 and included the idea in his Tax Reform Act.
More recently, Sen. Elizabeth Warren (D-MA) has introduced legislation that would finally make this a reality for many Americans. Last week, she said she will soon re-introduce the the Tax Filing Simplification Act, which would have the IRS develop a return-free filing option. It would consist of a free online tax filing service that would allow taxpayers to download all the information they need that the agency already has and fill out their form that way. The legislation has a number of cosponsors already: Democratic Sens. Jeanne Shaheen (NH), Tammy Baldwin (WI), Al Franken (MN), Tom Udall (NM), Sheldon Whitehouse (RI), Edward Markey (VT), Tammy Duckworth (IL), Maggie Hassan (NH), and Independent Bernie Sanders (VT).
But a similar bill Warren introduced last year didn’t even make it out of committee.
Efforts have been stymied over the years thanks to the deep pockets of the tax preparation industry. Last year, H&R Block lobbied against Warren’s bill and spent a total of $3 million lobbying the government, in part against such return-free efforts. Intuit, the maker of TurboTax, spend over $2 million lobbying last year, with much of it spent in favor of legislation that would permanently block the government from offering these services.
Intuit has lobbied against a number of past bills that would have allowed pre-prepared tax returns for many Americans — and in favor of others that would have blocked the Treasury Department from starting return-free filing.
Intuit has made it clear that any government filing option would threaten its business. “We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future,” it said in its latest corporate filings. Its lobbying disclosures state that it “opposes IRS government tax preparation.”
But the whole industry has chipped in: Major tax preparers have spent nearly $28 million on lobbying since 1998.
Little wonder that it’s lucrative. As things currently stand, about 80 percent of taxpayers rely on a preparer or software to file their taxes, while they pay an average of $200 to tax preparation services a year, which eats up nearly 10 percent of the typical tax return. That makes a tidy profit for companies like Intuit and H&R Block: TurboTax made up more than a third of Intuit’s revenues in 2012.