Simplified direct tax filing would save Americans time, money, UI professor says

Last Thursday marked the start of tax season, when Americans will spend a cumulative $31 billion and 1.7 billion hours to provide documentation of their income and earnings to the government — information the government already has.

“The government already has all the information needed to prepare the returns,” said Ryan Wilson, professor of accounting at the University of Iowa’s Tippie College of Business.

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Wilson estimates a system like ReadyReturn, used in several European nations, could quickly and accurately prepare and file returns for 90 percent of Americans. For free.

“Over 40 counties have it,” he said. “They’ll send you a hard copy and you approve it” before it’s filed. “If you have additional information to submit, you can add that.”

The system, whose users include the UK, Denmark, Sweden, and Spain, could handle returns for “a lot of us who have a job, maybe a mortgage and some savings,” Wilson said. “Wealthy individuals, estates and trusts and partnerships, they’re still going to spend (on tax preparation). To some extent that’s probably not avoidable.”

Wilson said the average taxpayer spends about $210 and 11 hours to prepare their own return.

“Young people spend a disproportionate amount of time and money on their taxes, which doesn’t make any sense,” he said.

Simplified direct filing isn’t a new idea.

“This is something that was proposed by Ronald Reagan in the '80s and has not been successfully implemented,” Wilson said. “George W. Bush tried to get free private tax prep. That kind of fizzled out. Congress has proposed a simplification act 45 times, starting in 2016.”

Who could oppose a simplified, more automatic tax-return system?

“The headwind is the software companies,” Wilson said. “They have millions of dollars to spend on lobbying against this.”

In 2002, the IRS launched Free File, a free online filing program for lower-income taxpayers administered by commercial tax-prep services in exchange for the IRS’ pledge not to create a full government-run system. One of those commercial providers, Intuit, added code to its Free File landing page that hid it from search engines such as Google, making it harder for would-be users to find.

Prodded by some in Congress, the Internal Revenue Service has taken steps toward free online filing. The Inflation Reduction Act included a requirement that the IRS study the feasibility of a direct e-file program; the agency is launching a pilot program, Direct File, this year for taxpayers in 12 states with an annual gross income of $79,000 or less. The median U.S. household income is about $75,000.

“Even if they could pre-file returns automatically for 30 percent of Americans, that would be incredible,” said Wilson. “I use Turbo Tax and that’s fine, but I don’t like spending the six hours I spend on it. That’s when I have all the documents in front of me. I know the government has all that information.”

Direct File advocates also base their appeal on several recent lawsuits accusing Google, Meta and tax-prep services H&R Block and TaxAct of unlawfully collecting confidential information from online filers.

Wilson doesn’t discount the cost and complications of developing an e-file system.

“There’s some legitimate concerns,” he said. “They would have to invest a lot to provide the service. There are some behavioral studies that show that if the government makes a mistake, individuals are less likely to correct it. It’s very important that if they do this, what they do pre-file is accurate.”

Still, the IRS has other nations’ examples to draw on.

“Some countries have exact withholding,” Wilson said. “They tax at the individual rather than at the family level, so they can very accurately withhold the right amount from wages. You could set up a system where they could potentially get things like charitable contributions automatically. That would be nice — people often make contributions and forget about them during the year.”

Despite the political and practical considerations, Wilson expects a simplified filing system to happen, eventually.

“I’m naively confident we’ll get to this point where we’ll have this system, but it’s taking a long time,” he said.