Pre-filled tax returns may be possible, research suggests

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The IRS is preparing to test a free online direct deposit system for some taxpayers — and while pre-populated returns with some details already filled in aren’t part of the initial plan, research shows it may be possible for some declarants.

In accordance with instructions from the U.S. Department of the Treasury, the pilot program will launch in the 2024 filing season for select taxpayers to gauge the broader viability of the platform.

“We don’t expect pre-population or pre-determination tax obligations to be part of that,” IRS Commissioner Daniel Werfel told reporters during a press call Tuesday, noting the limited scope of the project.

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However, the IRS may have the future ability to pre-fill nearly half of tax returns, according to a 2022 National Bureau of Economic Research working paper.

It’s possible the agency could correctly auto-fill about 62 million to 73 million returns with the information it already has, which would cover 41% to 48% of taxpayers, researchers from the Treasury Department, Federal Reserve, have found. of Minneapolis and Dartmouth College.

The document was based on a random sample of about 350,000 2019 personal tax returns, and accuracy was highest among low-to-moderate income filers. Errors were more likely to occur as itemized deductions increased.

Pre-filled tax returns are common overseas

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Bruce Sacerdote, an economics professor at Dartmouth College and co-author of the NBER paper, said he was “impressed” to learn how successfully other countries are using pre-populated individual tax returns.

As of 2021, more than 45 countries, including Germany, Japan and the UK, are at least partially pre-filling personal tax returns.

Some countries use “reconciliation of tax agencies” where residents can choose to have the tax authorities complete the data automatically and before filers approve the declaration. Others may use an “exact restraint system” where employers try to set aside precisely what workers owe.

Possible “pitfalls” of pre-filled tax returns

If the IRS wanted to use pre-populated tax returns, Sacerdote said there would be a few “gotchas” to resolve, such as the third-party tax forms, called information returns, that the IRS receives each year for taxpayers.

“If we still need to get statements before April 15, you might need employers and reporters to send information statements sooner,” Sacerdote said.

You certainly fear taking people away from their true responsibility.

Bruce Priest

Professor of Economics at Dartmouth College

Another possible issue is capturing a taxpayer’s filing status correctly, which may affect tax liability or a refund. However, this could potentially be reviewed and corrected by taxpayers before filing, he said.

And pre-filled returns could raise questions about taxpayer compliance. Sacerdote added: “You certainly fear diverting people from their true responsibility.”

Of course, it’s still too early to tell if the IRS Free Online Direct Deposit Test will be successful.

Ayushi Roy, The New America deputy director, who led the independent third-party task force to review the IRS’ feasibility report, said there are also organizational and operational challenges to consider for any new project.

“Any technology you build is only as good as the organizational design, bureaucracy and communication of that organization,” she said.

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