In recent weeks, a debate has begun anew in Washington over the wisdom of government tax preparation. This time, proponents have criticized an existing program known as Free File that provides free tax preparation services to low-income Americans, as a way to move toward a government-run system. I’m not an expert on Free File, but I have long opposed the idea of the government taking over tax preparation. Giving the IRS the job of managing millions of taxpayer returns – otherwise known as Government Populated Return – would be disastrous.
First, under Government Populated Return, the liability for an incorrect filing would fall on the taxpayer. In other words, when the IRS makes a mistake on a tax return, the taxpayer is on the hook. This – plus the reality that Government Populated Return does not guarantee that tax returns would be any more accurate than they are now – is a recipe for disaster. In fact, Government Populated Return would create even more opportunities for error. For example, what happens when a taxpayer moves and doesn’t receive their return? Or what if a taxpayer sells their house, has a child, or gets divorced? Will the IRS reflect these changes in the return it prepares? Chances are slim.
The second reason is perhaps even clearer: The IRS simply does not have the capacity to run a program like this. Requiring the IRS to carry out all the responsibilities of Government Populated Return would require significant resources that the IRS does not have. If a system like this became operational, what happens if a taxpayer finds a discrepancy in their return? Would the IRS have the resources necessary to tend to each individual need and change the inaccurate data on returns that are already in the system? In today’s world, the IRS sends notices if there is a mismatch in information, and already far too many of these automated notices are incorrect. Government Populated Return would only make this worse.
The IRS’s inability to effectively manage Government Populated Return could also subject taxpayers to identify theft and other security issues. Think about it: The IRS would be collecting significantly more information than it does now – including taxpayers’ financial accounts, cleared checks, credit card statements and membership information, among other records. This sensitive information would then be stored in an IRS database that hackers are looking to attack. Unfortunately, the IRS track record in protecting taxpayer information is not reassuring.
Underscoring all of this is the significant conflict of interest between the taxpayer and the IRS, which is obligated to maximize the government’s tax collection. Under Government Populated Return, however, the IRS would need to act as the taxpayer’s accountant, and in an ideal world, file in their best interest and reduce their tax burden. It’s impossible for the IRS to do both. Moreover, many taxpayers would likely accept the IRS’s conclusions, either from a lack of understanding or from fear of challenging the IRS.
We should take the lessons learned from California’s ReadyReturn, a program similar to Government Populated Return. Under ReadyReturn, California provides pre-filled returns to state residents. ReadyReturn was piloted for the 2004 tax year and has been plagued with problems and extremely low uptake rates ever since.
According to research conducted by David Binder Research, 81 percent of voters surveyed said they trusted independent tax preparers more than a state agency to calculate their tax returns. So why would California want a government tax preparation program? Because if enough mistakes are made on residents’ returns, and those mistakes are not noticed, the state’s revenue will increase. It also would be easier to increase tax rates or remove deductions without taxpayers being aware of the changes. Government Populated Return increases the risk of these things happening.
As the debate over this concept continues, Congress should take note: Government Populated Return would not be good for taxpayers. It would put a massive mandate in the hands of a government agency that neither has the capacity nor or the self-interest to serve the taxpayer. This idea had its chance – on the grand stage of the state of California no less – and it failed. There are legitimate ways to improve the tax system for the American people, but this is not one of them. It’s time to put the idea of a Government Populated Return in the archives where it belongs.
James Edward Maule is a Professor of Law Emeritus at the Villanova University Charles Widger School of Law.
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