How happy would you be if the IRS announced tomorrow that you were no longer responsible for filing a tax return by April 15? Mildly happy? Exceedingly happy? My guess is "overwhelmingly happy." Tax time is an awful time of year when all of us struggle with memories, receipts, forms, numbers, and other extraneous piles of paper.
That's why I was intrigued by the minutes of the May 17 meeting of the President's Advisory Panel on Federal Tax Reform, where the topic was return-free filing.
Under a return-free system, individual taxpayers would no longer be responsible for filling out the dreaded 1040 form and sending it to the IRS. Instead, the IRS would generate an itemized liability form using an individual's W2, 1099, and other relevant data, then send it to the taxpayer. The taxpayer would then accept or contest the IRS assessment, with refunds or further payments made accordingly. Ideally, such a system would reduce the burden on taxpayers; the IRS estimates that complying with the tax code cost citizens $156 and 26 hours of their lives in 2002.
I don't think any of us would mind having that time and money back, but the question is: Do we trust the IRS?
Grover Norquist, president of Americans for Tax Reform, does not. His presentation at the meeting argued that a return-free system would essentially audit every citizen, help the government increase revenues, and keep taxpayers unaware of their growing tax burden. Uninformed taxpayers might also be wary of challenging government-generated numbers and end up paying too much.
Joseph Bankman of Stanford Law School took a more positive view. He compared filing taxes to paying a credit card bill, with the government standing in for the card issuer. The government already knows all of your transactions -- why shouldn't it just send you that information and let you check it for errors?
The system took a test drive under the name ReadyReturn in the Governator-led state of California this past February. Approximately 20% of California taxpayers filed through ReadyReturn, and Bankman's data suggested that 99% of them enjoyed a positive experience. His presentation included quotes like this one from satisfied users: "Wow! Government doing something to make life easier for a change."
Although this debate is in the very early stages, preparers such as H&R Block (NYSE:HRB) and Jackson Hewitt (NYSE:JTX) have generally opposed any return-free plan, fearing it would adversely affect their businesses. I can also imagine that tax software companies such as Microsoft (NASDAQ:MSFT) or Motley Fool Inside Value pick Intuit (NASDAQ:INTU), whose TurboTax software generates so much of its revenue, would be wary of a change. It's not clear whether taxpayers would abandon software helpers and tax preparers to go it alone in a return-free system or stick with trusted third-party businesses out of distrust for the IRS. Challenging the government could prove to be even more daunting than generating a tax return from scratch.
Until Uncle Sam decides to ditch the dreaded 1040, the Fool's Tax Center can help you make the best of your yearly date with the IRS. Need more bright ideas? Tap the knowhow of fellow Fools on our Tax Strategies message board.
Fool contributor Tim Hanson likes talking about taxes much better than paying them. He does not own any of the companies mentioned in this article.
