As ProPublica reported recently, the Internal Revenue Service (IRS) already has a lot of the information you need to file your taxes. So why doesn’t the IRS just send out prefilled tax returns for taxpayers to review, correct (if necessary), sign and send back?

Opposition to Prefilled Tax Returns

As Slate’s Matthew Yglesias noted in 2012, and ProPublica recently reiterated, two entities – the tax preparation industry and conservative activists – are opposed to prefilled filings. Despite recent efforts by some in Congress, such as Sen. Elizabeth Warren (D-Mass.), the picture is largely unchanged today. If anything it’s more complicated, thanks to competing legislation. (For more, see Income-Tax Identity Theft: How to Fight Back.) )

The Free File Act of 2016

Legislation known as the Free File Act of 2016 – proposed by Intuit (INTU, the makers of TurboTax), H&R Block (HRB) and others, including Health and Human Services Secretary Tom Price – would make permanent the current free-filing arrangement. In this public-private partnership, 13 tax preparation companies, known as the Free File Alliance, offer free online tax filing to low- and middle-income families, who make up 70% of tax filers.

The legislation would permanently ban the IRS from offering prefilled tax forms or any tax preparation services to the public except through the Free File Act. The legislation would provide “free commercial-type online individual income tax preparation and electronic filing services to the lowest 70 percent of taxpayers by income.” It would also make available a basic online utility providing fillable forms to all taxpayers, regardless of income.

Tax Filing Simplification Act of 2016  

Sen. Warren’s legislation, known as the Tax Filing Simplification Act of 2016, prohibits the IRS from entering into agreements that restrict its ability to provide free tax preparation services, as the Free File Act does. Warren’s proposed legislation also allows the government to offer prefilled tax returns and related information.

The Tax Filing Simplification Act of 2016 applies to all taxpayers without regard to income. Participation would be voluntary. Taxpayers with simple returns could file online with a pre-prepared return; others could download data from the IRS into tax preparation software of their choice. 

Arguments and Counter Arguments

Based on ProPublica’s reporting, Intuit and other industry players argue that government-provided tax preparation services represent a “continued competitive threat to our business for the foreseeable future.” Warren says the Free File Alliance is really “a front for tax prep companies who use it as a gateway to sell expensive products no one would even need if we’d just made it easier for people to pay their taxes.”

In rejecting Warren’s charge, Free File Alliance executive director Tim Hugo says the alliance does not push paid products but does give taxpayers the option to receive additional information from participating tax preparation companies. Hugo adds that allowing the IRS to pre-prepare returns could create “a tremendous and potentially harmful conflict of interest for the American people.”

Stanford Law School professor Joseph Bankman told ProPublica that charges of government overreach are false. According to Bankman, because participation would be voluntary, taxpayers would actually have the upper hand and be able to force the government to “show its hand.” 

The Bottom Line

Neither the Free File Act of 2016 nor the Tax Filing Simplification Act of 2016 made it out of their respective congressional committees last year. While debate continues, taxpayers are left with the same options this year as in years past. You can use the existing Free File service that routes you to a commercial tax preparation software service or to fillable forms, depending on your income level. Alternatively, you can use commercial tax preparation software and do it yourself or hire a professional tax preparer to do your taxes for you. (For more, see 10 Steps to Tax Preparation.)




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