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Every year, Americans spend an estimated 225 million hours and $2 billion preparing their taxes. It doesn't need to be this way. Wouldn't it be great if your taxes were done for you free of charge, and all you had to do was make sure nothing was wrong with them? That's the idea behind "pre-populated filings," where the IRS would prepare your tax filing for you. In the recently released "Tax Reform Act of 2015," however, the bill includes a section that prohibits the IRS from starting such a program. Read on to find out more, including the company that has spent millions lobbying against "pre-populated filings."
Pre-populated filings
The government already collects most of the data it needs from employers and brokerages for those with simple tax filings. The idea behind "pre-populated filings," also known as "return-free filings," is that the IRS would use the data it already collects to send you your tax forms with all the information already filled out. If it were correct, you wouldn't have to do anything. If not, you would send back corrections. While not everyone would qualify, those with simple taxes wouldn't have to go through all the hassle that comes every tax season. This isn't an unrealistic idea, either; Spain, Chile, and some Nordic countries have been doing this for nearly a decade.
Simpler taxes
Two weeks ago, Rep. Dave Camp (R-Mich.) released the first draft of the "Tax Reform Act of 2015." The bill, which took three years to compile, proposes to simplify the tax code by 18,000 pages, or roughly 25%. To make this happen, the bill simplifies income taxes brackets from seven brackets to three, repeals the Alternative Minimum Tax, repeals numerous small deductions, and significantly raises the standard deduction. You can read about what the Tax Reform Act of 2015 could mean for individuals here.
Ban on pre-populated filings
While the Tax Reform Act of 2015 proposes to make the tax code itself simpler, the bill includes one specific provision to make sure the government cannott make preparing your taxes simpler. Section 6103 of the "Tax Reform Act of 2015" specifically prohibits pre-populated returns. The summary reads (italics mine):
Provision:Under the provision, the IRS would be prohibited from instituting any program under which it prepares or otherwise provides taxpayers with proposed or final returns or statements intended to be used by the taxpayer to satisfy his reporting obligation under the Code. Thus, the IRS would not have authority to implement a broad-based program under which it pre-populates a return with third-party information supplied to the agency (e.g., Form W-2 wage statements, Form 1099s for interest, dividends or capital gains) and provides such return to a taxpayer for filing.
Leading the charge against simpler taxes
The above section of the bill is a handout to the tax prep industry, which would take the biggest hit from such a program. Last year, an investigation by ProPublica found that one of the groups leading the charge against "pre-populated filings" is Intuit (INTU 0.28%), maker of the popular tax-preparation software TurboTax. ProPublica's investigation found that Intuit had spent $11.5 million over the past five years lobbying congress on the tax prep issue.
It shouldn't surprise anyone that a company will fight to preserve a problem that only that company can solve. Intuit even singles out in its annual report the risk that the government will offer free returns to taxpayers:
Our consumer tax business also faces significant competition from the public sector, where we face the risk of federal and state taxing authorities developing software or other systems to facilitate tax return preparation and electronic filing at no charge to taxpayers. These or similar programs may be introduced or expanded in the future, which may cause us to lose customers and revenue. Although the Free File Alliance has kept the federal government from being a direct competitor to Intuit's tax offerings, it has fostered additional online competition and may cause us to lose significant revenue opportunities. The current agreement with the Free File Alliance is scheduled to expire in October 2014. 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.
Bottom line
The overall changes to the tax system would be a net positive if adopted, but either way, you'll still have to spend hours preparing your taxes. In 2002, the tax software industry and the IRS started a public-private partnership to offer some taxpayers free online tax-filing. The agreement expires later this year and has not yet been replaced.
In both the public and private sectors, governance functions best when stakeholders educate themselves, take an active interest in what's going on, and hold their representatives accountable. So take a moment to let your representative know what you think of the Tax Reform Act's restriction on "pre-populated filings" or write directly to the House Ways and Means Committee at TaxReform.gov.
No matter what happens in Washington with the tax code, it shouldn't change your investing strategy. When it comes to your investments, you should continue to educate yourself, find great companies, and invest for the long term.
