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The IRS as Tax Preparers?

When conservatives and liberals advocate tax reform they are referring to radically divergent concepts.  Conservatives desire a low, flat, and universal tax code, while liberals desire reform that would result in increased revenues.  The obvious way to achieve that goal is to impose radical redistributive tax increases, such as the ones Obama has recently proposed.  However, there is a more subtle way that is beginning to percolate into the liberal mainstream.  Liberals envision a future in which the IRS would automatically pre-file your tax returns for free, sending you the bill.

Earlier this year, Tennessee Democrat Rep. Jim Cooper introduced “The Simple Return Act,” a bill that, according to Cooper’s assessment, would “get the IRS to do your taxes for you” using “the financial information it already receives from each taxpayer’s employer and financial institution: W-2 and 1099.”  Cooper asserts that roughly 40 million Americans file tax returns that are simple enough for the IRS to pre-file.  This idea was originally floated by Obama’s former Chairman of the Council of Economic Advisers Austan Goolsbee.  In a 2006 op-ed for the New York Times, Goolsbee cited Denmark and Sweden as success stories for government-run tax preparation.

Although this bill has failed to garner any co-sponsors, there is some concern that Max Baucus, a member of the super committee, will try to push the simple tax return as part of a ‘benign’ means of raising revenue.  In the past, he has been a vocal advocate for finding innovative ways to close what he refers to as “the $345 billion annual tax gap,” the amount of taxes owed that go unpaid each year.

Moreover, Obama has already expressed support for the concept of the IRS serving as tax filer and tax collector.  In 2007, in a speech at the Tax Policy Institute, Obama promised to establish a simple return system during his presidency.  He opined that “the government already collects wage and bank account information, so there’s no reason the IRS can’t send Americans free file tax forms to verify.”

Well, I can think of a couple of reasons.

Even though the government already knows how much you earn, they lack information on other specifics, such as payments for tuition, charity, or child care.  What Obama fails to mention is that many of these Americans are eligible for credits and deductions that would be omitted from the IRS’s tax form, due to missing information.  Even if they opt for the standard deduction, the IRS would not necessarily have enough information to award them the requisite credits.  After all, there are very few truly “simple returns.”  This is nothing more than a surreptitious effort to squeeze more money out of taxpayers by luring them in to “free” tax filing.

A few years of revenue raising pre-filed tax returns on the part of the IRS will lead to the other side of the double-edged sword.  Once such a system is established, and people inevitably protest their higher tax liability, the IRS would be forced to gather more information about the tax filer in order to accurately factor all credits, deductions, and exemptions.  While such a system would remain optional in its incipient years, it would invariably fall victim to mission creep, requiring the IRS to gather more and more financial information about everyone.

So what could go wrong with such a scenario?

Aside for the obvious vices of having the IRS accurately track the lifestyle changes of 40 million Americans, there are serious security concerns.  Last week, the Government Accountability Office (GAO) released a report (see page 12) citing “information security deficiencies” at the IRS, which “limit its ability to provide reasonable assurance that the financial statements are fairly presented.”  The report concluded that “these issues increase the risk of inappropriate access, alteration, or abuse of proprietary IRS programs and electronic data and taxpayer information.”

Do we really want to entrust these bungling bureaucrats with enough information to properly prepare our income taxes?  As the tax code is currently constituted, such a proposition would necessitate the collection of a plethora of personal information – information that would be vulnerable to abuse and fraud.

Unfortunately, this IRS simple return plan has also found a Republican supporter.  During an Appropriations Subcommittee hearing in June, Senator Mark Kirk (R-IL) implored the IRS Commissioner to develop online technology for his agency to process tax returns, in lieu of private organizations like TurboTax.  Although most Republicans intuitively distrust the IRS, there is concern that in their newfound willingness to raise revenue, they might consider simple return as an innocuous way to evince bipartisanship.  This is why we should nip the plan in the bud and support Sam Johnson’s Taxpayer Freedom to File Protection Act (HR 2528), which prohibits the IRS from developing or implementing a return-free tax system.  Unlike Cooper’s bill, this one already has 27 cosponsors.

This meretricious idea of transforming IRS tax collectors into tax preparers is being sold as a means of saving you time and money.  In reality, it is a classic deceleration of what Reagan mocked as, “I’m from the government and I’m here to help.”  Why don’t we just have the fox guard the hen house?

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