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The IRS can have the flexibility to automate nearly half of tax returns, in keeping with a working paper from the National Bureau of Economic Research.
The agency could appropriately auto-fill an estimated 62 million to 73 million returns with information it already has, covering 41% to 48% of taxpayers, researchers from the U.S. Department of the Treasury, the Minneapolis Federal Reserve and Dartmouth College found.
“Our results suggest that pre-populated returns could be accurate for a considerable share of U.S. taxpayers,” the authors wrote.
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Based on a random sample of 344,400 individual returns from 2019, the paper says accuracy is “much higher for low- and moderate-income taxpayers,” with errors more prone to occur as itemized deductions increase.
Former President Donald Trump’s signature tax overhaul nearly doubled the usual deduction, reducing the variety of filers who itemize. In 2019, almost 90% of taxpayers used the usual deduction, in keeping with the IRS.
“I absolutely agree with these findings,” said Tommy Lucas, a licensed financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, pointing to other countries with automated tax filing systems.
It will save so many individuals the stress and headache of determining what documents they need, or how they will pay for his or her return to be done.
Tommy Lucas
Financial advisor at Moisand Fitzgerald Tamayo
“It will save so many individuals the stress and headache of determining what documents they need, or how they will pay for his or her return to be done,” he said.
Indeed, 36 countries have return-free filing as of May 2020, including Germany, Japan and the UK, the Tax Policy Center estimates.
Countries with return-free filing may use either “exact withholding,” where employers attempt to put aside precisely what employees owe, or “tax agency reconciliation,” involving a tentative pre-filled return for the taxpayer to approve, in keeping with the Tax Foundation.
Nonetheless, it might be tougher within the U.S., which relies on the tax code to deliver social programs, taxes households “as one unit” and charges regular income taxes on some investments that are not subject to withholding, the Tax Foundation argues.
Still, the paper suggests automated returns may save money and time for those with easy filings.
“Pre-population is especially successful for taxpayers who’re single, young and lack dependents,” the NBER authors wrote.
What’s more, auto-filled returns could also be helpful for non-filers, including those because of receive the earned income tax credit or child tax credit, “potentially nudging them into claiming refunds or paying taxes due.”
“The very first thing that stuck out to me was that $9 billion of refunds were because of 12 million Americans because of non-filing,” Lucas said.
A few of those may include highschool or college kids working a part-time job making lower than the income threshold required to file, or low-income Americans without the resources to process returns, he said.
Although roughly 70% of Americans — those with an adjusted gross income of $73,000 or less — are eligible for IRS Free File, only 2.6% used it in 2019, in keeping with the IRS.
