IRS Prepared Tax Returns: Are They a Good Idea?

Recently, I have been asked for my thoughts on the IRS’ proposal to pre-filled tax returns. Under a proposed system, the IRS would pre-fill taxpayers’ returns with the data employers and financial institutions have already reported. I came across a Forbes article titled: “Are IRS Prepared Tax Returns the Solution to our Tax Woes?“ that presented a decent overview of what such a system would mean for taxpayers, tax preparers and tax revenue in general.

Here are some of the benefits the article highlights:

  • The “return-free” system would allow taxpayers to accept or correct their IRS-prepared returns before paying any tax due or requesting a refund.
  • This system could be good for someone with a simple W-2 who takes the standard deduction and has no asset transactions. These taxpayers could save money because of not having to purchase tax software, hire an accountant or spend hours preparing a return.

Here are some of the downsides of this system the article mentions: (notice the longer list)

  • The IRS is prone to errors and that are difficult enough to correct using the current system.
  • The complexity of the tax code and a simplistic IRS prepared returns system could create major tax problems, especially for those with more complicated tax returns.
  • Some taxpayers could see their marginal tax rates changing and find themselves paying more taxes if the IRS prepared their returns due.
  • The IRS may need to hire additional staff to prepare returns. If that’s the case, the government may need to raise taxes to cover this expense.
  • Under-informed taxpayers may not know they would be able to calculate their own tax bills. According to Forbes, if the IRS calculation doesn’t factor in every exemption, deduction or credit a taxpayer is entitled to, those taxpayers could pay more.

As the Forbes article states, the IRS already has a system for filing returns on behalf of taxpayers – it’s called an “SFR” (Substitute for Return). However, SFR’s are prepared with the government’s interests in mind, not taxpayers. Meaning they will overstate what taxes, IRS penalties and interest owed and will only take one standard deductions and one personal exemption. The concern is that if the voluntary IRS-prepared returns were similar to the Substitute for Return (SFR) system, it could create IRS problems by overcharging taxpayers who accepted their pre-filled returns instead of adjusting them to account for the exemptions, deductions and credits they were entitled to but that the IRS didn’t know about.

The IRS has been throwing around this idea for few years and it seems that this recent press, is just a way for them to to receive support of this new system’s decrease of audits. This idea of “fill in all the line items received from third party and self-accept the way it comes across” just does not sound like a viable solution any way you look at it.

This proposed system looks like a way to raise an inordinate amount of money because the government needs it.  Collecting money based on inaccurate tax returns, however, is the worst “solution” especially since the IRS thinks they can do more with less from government standpoint. Trying to straighten out any and all tax issues would be a nightmare.

Sadly, the American taxpayer will be the ones who suffer and experience the setback of this “system,” not the benefit.

More Tax Help, IRS News and Tax Relief Tips:

  1. Tax Help Tip-Avoid the Delinquent Tax Return Trap
  2. IRS Tax Help Basics for the Self-Employed
  3. Michael Rozbruch Interviewed in Opportunist Magazine
  4. TaxMan Speaks About IRS Red Flags on Big Biz Show
  5. Tax Relief-Bankruptcy and Tax Debt

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