January 2009

‘Bama has made a proposal that the IRS pre-fill your tax return with the information it already has access to.  Now the IRS is the tax preparer.

Many forms of information are mailed to the IRS each year from companies, employers and individuals.  The W-2s and 1099s you get in the mail are also accumulated by the companies that sent them to you, and sent to the IRS and Social Security Administration as well (so they’ll make sure you actually put them on your return!).  ‘Bama wants the IRS to use this info to pre-fill your tax return, and all you have to do is “verify, sign and return.”   Scary.

I found this blog which reported on this proposal back in February of 2008.  The blog mentions some great responses from a reader named Andrew, and I’ve listed a few here:

1) If you get one of these forms offering to calculate your taxes for you, and you sign it and send it back, does that make you immune from an audit? Whichever way you answer, you’re wrong.  Because if the form does not confer immunity, it’s going to get an awful lot of people very angry.  And if it does, it opens a whole can of worms.  See below.

2) If the form does come with an offer of immunity, the IRS has just told you everything they know about your income.  Which means that if you have a source of income they don’t know about, you have just learned that you can get away with not reporting it.

3) There will certainly have to be limits beyond which you can’t use this service. For example, form 1040-EZ excludes people with more than $1,500 in interest. There will thus be a great incentive to avoid behavior that might push one out of the pre-prepared tax return category.  As a simple example, would owning shares of stock kick one out of that category?  What about mutual funds?

4) If this program is successful, it will greatly increase the burden on people who don’t participate in it.  Every time the tax code becomes more complicated, Congress will argue that it doesn’t matter because the IRS figures out so many taxpayers’ taxes for them.

5) It will also increase pressure on businesses to report data to the IRS, so that they can improve the accuracy of their calculations.  How long do you think it will be before eBay is required to report every auction to the IRS?

6) There is an implicit assumption behind this program that it is a good thing to make taxes easier to file.  The conservative argument would seem to go in the other direction: Anything that hides any part of the burden of paying taxes is a bad thing.  For that matter, I think we should do away with payroll tax withholding.  Every taxpayer should be required to send in estimated taxes every quarter.  That way people won’t forget what they’re paying, as they do now.

Good stuff from Andrew.  What do you think?  Are you going to exchange the service of our firm for the IRS as your new tax preparer?

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) if you are not the original addressee of this communication, you should seek advice based on your particular circumstances from an independent advisor.

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