Return-Free Filing: What are the benefits?
The primary benefit of a return-free system is the eased burden of tax compliance on taxpayers. Depending on the extent of changes made to the current U.S. income tax structure and administration to accommodate return-free filing, the requirement to file a final tax return could be eliminated for between approximately 8 million and 60 million taxpayers. Secondary benefits include the increased simplification that could accompany such a reform, and perhaps a lessened administrative burden on the Internal Revenue Service (IRS) and correspondingly lower federal expenditure for tax collection.
- For many taxpayers, the burden of filing any tax return may involve significant psychic or emotional costs, in addition to time spent and, for some, the cost of hiring a paid tax preparer. Thus, even if the vast majority of affected taxpayers already face relatively simple tax situations, a return-free system could still provide them significant benefits. However, because state income tax systems piggyback on the federal system, unless states also shifted to a return-free system, the reduction in filing and in psychic costs would likely be minimal.
- Although taxpayers participating in the return-free system would be spared the cost of preparing a final return, the net administrative savings might not be great. Of the 62.5 million taxpayers potentially eligible, over two-thirds (44.2 million) currently file the relatively simple 1040A and 1040EZ returns. Even under a return-free system, these taxpayers would still have to provide, on a regular basis, some of the same information (such as filing status and dependents’ identification) that they do now. Further, some administrative costs would merely be shifted from the taxpayers to their employers, other payers, and the IRS.
- In a 1996 report, the U.S. General Accounting Office estimated that a tax agency reconciliation system could reduce the time spent preparing tax returns by as much as 155 million hours a year for 51 million taxpayers and reduce the IRS’s annual costs by up to $37 million. These estimates, however, do not take into account certain ways in which such a system might increase the administrative burden on taxpayers and the IRS. For example, 1 billion information reports would have to be filed earlier and processed much sooner by the IRS in order to complete returns by April 15 (with refunds to follow somewhat later). State income tax systems would also incur additional costs or delays.