Each year hundreds of millions of Americans file their personal income tax returns using a form 1040.
The average American spends eight hours and US$110 doing so. Much of that money goes to professional tax preparers and software companies. Much of that time is spent entering information that the IRS already has, such as salary and wage data found on W-2s.
While helping low-income Americans file their taxes this year as part of the IRS’ Volunteer Income Tax Assistance program, I’ve been struck by just how much of the effort that goes into tax preparation is unnecessary.
So why do we still have to do it?
The common wisdom is that it’s the IRS’ fault, and that it is only thanks to the helpful tax preparation companies that the filing process is manageable.
However, the opposite is true. There is a way to make tax filing easier and cheaper – and even unnecessary for many – but it’s the tax preparation companies that are keeping it from happening, with some help from conservative anti-tax activists and even lawmakers.
An easy way to simplify taxes
Even though the tax code itself is quite complicated, it is not difficult to make the tax return filing process simpler.
For a large percentage of filers, the IRS already has all of the information needed to file their taxes. The agency has your income and withholding information from W-2 and 1099 forms and details about your household such as dependents and filing status from the previous year’s return. Even for those who itemize, the IRS already knows things like how much you paid in mortgage interest.
Thus there’s nothing, technically, stopping the IRS from – at a minimum – doing a first draft of a tax return for you – known as a “pre-populated return.” Then, if you have changes to make, you could modify it. For example, if you had another child, got married or had some deductions to itemize that weren’t reported to the IRS.
A simpler return process like this could apply to up to 40% of tax filers, saving them up to the equivalent of $44 billion over a decade.
What’s stopping easier filing
There are two special interests that block these reasonable solutions to reduce Americans’ tax filing burden.