April 18, 2022, was a significant day for over 160 million Americans who filed a 2021 federal income tax return. Collectively, taxpayers spent approximately 2 billion hours and over $30 billion in the process of preparing these tax returns.
The National Bureau of Economics Research has determined that the IRS could calculate taxes due and provide prepopulated returns to nearly half of U.S. taxpayers. Each taxpayer could accept the prepopulated return or choose to file his or her own return.
Because the IRS now receives electronic Forms W–2 and 1099 from employers and financial institutions, it has the basic information needed to create a tax return for individuals whose income is primarily wages and interest. An automated IRS electronic return would greatly simplify the tax filing process. There are several nations who already implement a prepopulated tax return system for basic returns.
Approximately 90% of taxpayers now file an electronic tax return. This still requires the taxpayer to use tax software or pay a tax preparer. A prepopulated tax return would enable many taxpayers to simply accept the income reported to the IRS. This is particularly attractive for low–income, non-itemizing taxpayers.
A benefit for the IRS is that it would not have to provide customer service or other types of assistance for most of these taxpayers. The IRS has struggled in the past two years to provide individual taxpayer assistance. If approximately half of taxpayers used a prepopulated return, the IRS could use its scarce support resources to assist the remaining taxpayers.
A prepopulated return would replace the Free File program that involves several commercial tax return companies who provide free tax software to individuals with moderate or low incomes. However, only 4% of taxpayers who were eligible for Free File used the program for their 2021 tax returns.
As technology improves and wages and financial data are transmitted electronically to the IRS, it would be possible to provide prepopulated tax returns to nearly half of all taxpayers. This process would save both taxpayers and the federal government substantial funds.
Editor's Note: There are several companies who work with nations to provide prepopulated tax returns. Congress has been reluctant to permit the IRS to develop tax-preparation software, but it may make sense for members of Congress to consider an automated system. This would be a substantial benefit for non-itemizing individuals and low–income taxpayers who often have fairly simple returns.