The cost of complying with the federal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. —that is, the cost of filling out paperwork, hiring accountants, and gathering documentation—rose to over $265 billion in 2005, amounting or a 22-cent taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. compliance surcharge for every dollar the income tax system collects.
The California Franchise Tax Board is attempting to address this problem at the state level with a pilot program called ReadyReturn. California prepared 50,000 of the simplest tax returns—for single, childless, low-income taxpayers with no special deductions or credits—and mailed them to the taxpayers, giving them the option of signing the returns or redoing them. Only 11,523 taxpayers used the “ready returns”; most of the recipients just threw them away and calculated their tax liabilities on their own.
Congress is keeping an eye on California, wondering if such a program could work at the federal level. There is, however, quite a bit of well justified opposition.
“Who would believe the IRS would strive to get your lowest possible tax?” said John T. Hewitt, chief executive officer of Liberty Tax Service, a nationwide tax-preparation company.
Treasury Secretary John W. Snow told Congress this month that government-prepared tax returns could create a conflict of interest.
“We aren’t tax-preparation people,” Mr. Snow said. “We’re not software-development people. There is a private market out there that does that and does it well.”
IRS officials said a better option might be to use the money needed for government tax preparation to hire more auditors and increase enforcement. The agency has no estimate of how much such a program would cost or how many employees would be required to administer it.
Federal legislation was introduced two weeks ago by Rep. Melissa A. Hart, Pennsylvania Republican, to prevent the federal government from getting involved in tax preparation.
Former IRS commissioner Charles Rossotti has studied the issue and believes such a program is not feasible. He explained his opposition in The Wall Street Journal last week, stating, “[T]here are some very significant practical problems that rule it out.”
Would taxpayers—especially those with high incomes or numerous deductions—trust the IRS to calculate their tax liabilities? While this would, on the surface, reduce compliance costs, any task that increases IRS employees’ workload would ultimately be borne by taxpayers. A better way to reduce compliance costs is to simplify the tax code through fundamental tax reform.
For more on compliance costs, click here, here and here.
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