The IRS may have the ability to automate nearly half of tax returns, according to a working paper from the National Bureau of Economic Research.
The agency could correctly auto-fill an estimated 62 million to 73 million returns with information it already has, covering 41% to 48% of taxpayers, researchers from the U.S. Department of the Treasury, the Minneapolis Federal Reserve and Dartmouth College found.
“Our results suggest that pre-populated returns would be accurate for a substantial share of U.S. taxpayers,” the authors wrote.
Based on a random sample of 344,400 individual returns from 2019, the paper says accuracy is “much higher for low- and moderate-income taxpayers,” with errors more likely to occur as itemized deductions increase.
Former President Donald Trump’s signature tax overhaul nearly doubled the standard deduction, reducing the number of filers who itemize. In 2019, almost 90% of taxpayers used the standard deduction, according to the IRS.
“I absolutely agree with these findings,” said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, pointing to other countries with automated tax filing systems. “It would save so many people the stress and headache of figuring out what documents they need, or how they are going to pay for their return to be done.”
Indeed, 36 countries have return-free filing as of May 2020, including Germany, Japan and the United Kingdom, the Tax Policy Center estimates.
Countries with return-free filing may use either “exact withholding,” where employers try to set aside precisely what employees owe, or “tax agency reconciliation,” involving a tentative pre-filled return for the taxpayer to approve, according to the Tax Foundation.
However, it may be more difficult in the U.S., which relies on the tax code to deliver social programs, taxes households “as one unit” and charges regular income taxes on some investments that aren’t subject to withholding, the Tax Foundation argues. Still, the paper suggests automated returns may save time and money for those with simple filings.
“Pre-population is particularly successful for taxpayers who are single, young and lack dependents,” the NBER authors wrote.
What’s more, auto-filled returns may be helpful for non-filers, including those due to receive the earned income tax credit or child tax credit, “potentially nudging them into claiming refunds or paying taxes due.”
“The first thing that stuck out to me was that $9 billion of refunds were due to 12 million Americans due to non-filing,” Lucas said.
Some of those may include high school or college kids working a part-time job making less than the income threshold required to file, or low-income Americans without the resources to process returns, he said.
Although roughly 70% of Americans — those with an adjusted gross income of $73,000 or less — are eligible for IRS Free File, only 2.6% used it in 2019, according to the IRS.