April 15 will soon be here. Have you filed your taxes yet?
That question causes a lot of Americans to break out in a cold sweat this time of year. Saving and filing documents and filling out forms, knowing that if it’s done wrong, if they make just one mistake, they could wind up paying a penalty. Perhaps even more stressful than the prospect of making a mistake is the hours of time Americans need to dedicate to completing their federal and state returns.
American taxpayers spend more than $100 billion and more than 7 billion hours doing their taxes every year, all of which only adds to the stress and anxiety.
For most taxpayers, all that stress and expense is unnecessary. Economists estimate that for nearly half of U.S. taxpayers, the IRS has the necessary information to complete their returns from third-party sources, such as banks, brokerages, and employers.
But it doesn’t have to be that way. An opt-in system often called ReadyReturn, widely used in more than 30 countries, prepares taxes automatically for free, and most U.S. taxpayers can benefit from something like it.
ReadyReturn is used in many European countries — like the UK, Denmark, Sweden, and Spain — where the government prepares a draft of your tax return for you. They mail (and in some cases text) the completed return to you and, if you agree with what the government says you owe, all you have to do is sign off on it.
It’s easy and it costs nothing.
The United States has no similar options, despite occasional efforts of some presidents and Congress to develop something like it over the decades. Various commercial tax preparation companies offer a free option, but only for qualified taxpayers.
A ReadyReturn system would not be without limitations. More complicated returns, such as those with certain types of deductions, capital gains, or real estate sales, would still need to be completed by a professional. And since the service is opt-in, those who don’t trust the government to do their taxes for them will still be able to file their own return. It is important to note that for better or worse, the U.S. has a significantly more complex tax code than many of the countries that have already implemented a ReadyReturn system, making the number of taxpayers who would need to opt out of the system due to complexity greater than in many other countries.
One of the big questions around a ReadyReturn system is compliance. Specifically, under this system, the IRS would be tipping its hand about the third-party information it had available. This raises the question of whether taxpayers would then voluntarily provide additional information in cases where the IRS made a mistake — particularly if that mistake or omission resulted in a higher tax bill.
However, for many Americans who have relatively simple returns, especially older and younger taxpayers, the government already has all the information needed to prepare them. There’s little point in taxpayers submitting W-2s and other tax paperwork to the IRS when the agency already has it. Imagine the relief of so many busy taxpayers knowing this archaic obligation is no more.
ReadyReturn also reduces the risk of error by a taxpayer completing their own return or losing a document, and can save them the hours or days they spend sweating over it.
Adopting a ReadyReturn program would not make the annual tax return process more enjoyable. But it would at least make it far less costly to millions of Americans in both time and money.
Ryan Wilson is a professor of accounting at the University of Iowa Tippie College of Business.
