Of the many government bureaucracies Americans must confront regularly, none is more reviled than the Internal Revenue Service (IRS). Why? Start with the approximately 35 million unprocessed tax returns that had piled up in its offices by the end of last year, dashing hopes of speedy refunds for countless individuals, or the 73 million phone calls from taxpayers seeking help or guidance during the 2022 filing season, of which a dismal 10 percent actually reached an IRS agent.
It can safely be said that the IRS is not about to win a customer-service award. Making matters worse, only $3 billion of the $80 billion infusion to the IRS as part of President Biden’s Inflation Reduction Act is earmarked for improving taxpayer service. Nearly half the outlay will instead be channeled into beefing up enforcement, and a portion of the remainder will upgrade technology.
New IRS head Danny Werfel should focus on a tiny $15 million component of the new funding package that could hold the key to the future of the sprawling, 75,000-employee agency. That money will underwrite a study on a program which, if implemented, could transform how Americans pay their taxes, and how the IRS functions. Known as return-free filing, the program would permit a significant proportion of the population not to fill out a federal tax return. Instead, the government would do all the paperwork based on information it already retains on each taxpayer and the taxes that it has withheld throughout the year from their paychecks.
The “exact withholding systems” used in other countries, in which authorities try to minimize withholdings to eliminate the need for a costly and time-consuming refund process, could serve as a model. Indeed, dozens of countries—including the United Kingdom, Germany, Japan, Spain, Denmark, and Sweden—have implemented return-free filing for their taxpayers. The U.K.’s Pay as You Earn system, in operation since the 1940s, taxes around two-thirds of its taxpayers at the same basic marginal rate. That system was revised in 2013 to require employers to report salary payments in real time, with the goal of reducing costly withholding errors. The change also linked revenue collection and benefit payments to the same database, increasing efficiency.
In 1985, the Reagan administration mapped out a return-free system that would spare about half the population from having to fill out a tax return. Under that blueprint, taxpayers with simple returns would receive at the conclusion of each tax season either a refund or a notice detailing taxes owed. Those with more complex returns could continue to use the existing system. In 2006, Austan Goolsbee, who went on to become Barack Obama’s chief economist when he became president, picked up the idea, suggesting a “simplified” process where taxpayers would receive each year an already-completed tax return for their review or correction. This overhaul of the business-as-usual system would save taxpayers an estimated $2 billion annually in tax-preparation fees.
Stout resistance and unrelenting lobbying from the tax-preparation industry stands in the way of the proposal. Yet the U.S. has offered, free of charge, some form of basic tax-return preparation for more than 50 years to low-income individuals, the elderly, and people with disabilities. A report by the Government Accountability Office last April noted that while 70 percent of taxpayers were eligible for free-filing programs, only 3 percent actually took advantage. Those programs consist of a public–private partnership of tax software companies that offer free-of-charge tax-preparation services outside the IRS website.
Countries around the world have demonstrated conclusively that return-free filing works. Ideally, such a venture would be coupled with a sweeping overhaul of U.S. tax law, famously riddled with loopholes and inequities. But even absent that more ambitious goal, the nation should embrace an elegantly simple and uncluttered system of tax reform that promises historic benefits for taxpayers and the IRS alike.