Congress is, as usual, hard at work. The House has a bill called the “Taxpayer First Act,” and the Senate has a similar bill. I assumed the title implied that the taxpayer comes first.
I may be wrong. It may instead mean the first thing that will happen is that the taxpayer will pay tax. Notice the difference in the two meanings.
That cynical second view comes from one provision in the legislation that prevents the IRS from ever developing a free e-file program for taxpayers. Forever is a long time.
This has received much attention, at least so far as tax proposals receive attention. It seems to be intended to protect commercial tax return software companies. In the long run it may even be worse than that.
Legislation should act in the public interest. Legislation that provides protection to an industry could still be in the public interest, perhaps if it did so by extracting required behaviors that serve the public.
Let’s say that legislation prevents the IRS from competing for e-file services. Well, maybe that’s OK if commercial e-file companies are themselves required to provide free services to lower-income people. That actually happens.
The problem is that consumer protection people estimate that only 3% of the people who qualify for these free services actually use them. And one reason may be the companies providing the free service use it as a tie-in to other for-profit services they offer.
Perhaps there is no such thing as a free lunch. And perhaps consumers know that and pass on the free lunch offer.
Well, the Taxpayer First Act would ensure that those who choose to pass on the free offer cannot instead get that free service from the IRS. That doesn’t sound like it’s in the public interest.
So how could Congress draft legislation that protects commercial providers of a service from competition from the government? I could not figure that out. Then, by chance, I saw a scene from the great movie “Casablanca.” Let’s go to the video.
Rick: How can you close me up? On what grounds? Renault: I’m shocked, shocked to find that gambling is going on here! Croupier (handing Renault cash): Your winnings sir. Renault: Oh, thank you very much.
Sit down, folks because … private e-file providers have provided contributions to members of Congress. Yes, I too am shocked.
The IRS could actually prepare the tax returns of more than half the people in the U.S. just based on information already provided to the IRS. That is, without any time or effort by the taxpayer. You would not even have to get online to access a free service. The IRS could just do your return.
Most “audits” now are correspondence audits. This means you get a letter from the IRS that says, as an example, there was $127 of interest reported on a Form 1099-INT that did not show up on your return.
IRS then adjusts your return, tells you how much you owe, and gives you the chance to either agree and pay, or explain why the IRS computation is wrong.
These correspondence audits, triggered by document matches against the filed return, help us to see how the IRS could actually prepare your return.
The vast majority of the returns that my firm does could not be done by the IRS because they have items that cannot be matched to a document. They may also have “issues” that do not have clear answers and could be interpreted differently depending on whether IRS or a CPA is doing the interpreting.
But there has been active discussion of the ability of the IRS to complete many returns without taxpayer involvement. This could be good thing for consumers – and you can always challenge them if they get it wrong.
Instead of exploring that filing option, Congress seems to be shutting down even the step before that. If the IRS cannot even offer free e-file then it certainly cannot prepare the return without the taxpayer’s efforts to help.
Imagine that — a law that protects a private industry against government competition. Of all the gin joints in the world that industry had to walk into our country. Again, I’m shocked.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.