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Commentary


The Serious Perils of “Return-Free”

April 18, 2014
By Pete Sepp


Most taxpaying Americans are grateful that another April 15 has come and gone. Yet thanks to a pliant media they were also subjected this past week to what has become another tiresome rite of spring: a fresh set of accusations from the left-wing outlet ProPublica that a corporate conspiracy from one tax software maker (Intuit) is almost singlehandedly responsible for orchestrating resistance to the “return-free” system. The return-free policy, which ProPublica clearly backs, would get the IRS into preparing tax forms, pre-populated with an individual’s income items and tax liability, and sending them to recipient taxpayers for their voluntary approval.

Ryan Ellis of Americans for Tax Reform (ATR) has given seven good reasons why return-free would actually have many unhappy returns. NTU’s own communications to Congress and the White House (see below) provide additional commentary.

But what of ProPublica’s implication, reflected by the choice of sources interviewed for these pieces, that the only forces standing in the way of return-free are Intuit, ATR, and a few dupes? When did opposition to return-free become such a controversial, meritless stance that only a self-interested corporation, supposedly showering loot like fertilizer to the “grasstops,” could possibly espouse it? Since, well … never. Digging just a bit deeper behind this slanted account unearths a rich chronology of principled debate over the issue from a variety of informed stakeholders. Those of us old-timers at NTU know, because we were there when it happened.

A Long-Lived Debate

One example: the rebirth of the return-free push within the Executive Branch. In 1997, President Clinton and Congressional leaders appointed a task force to explore alternatives for fundamental tax administration reform; my predecessor, NTU Executive Vice President David Keating, was named to that panel. The commission spent months gathering expert-witness testimony, data analyses, and other information to recommend a blueprint for a complete overhaul of the IRS, which included improvements to customer service, information technology, and taxpayer rights.

This author recalls vibrant debate at that time over numerous proposals, including whether to plow ahead with a return-free program. Cogent arguments were raised on both sides of the question, from learned people in fields that were not just confined to tax preparation. Ultimately, the legislative package incorporating many of the commission’s findings – known as the IRS Restructuring and Reform Act of 1998 – included a directive to the Secretary of the Treasury for a return-free program. Opponents did not carry the day. In a 2011 letter to Members of Congress, I wrote retrospectively:

"As with any comprehensive package subject to the legislative process, the 1998 bill  could, in NTU’s opinion, have benefitted  both from additions of salutary provisions and  deletions of harmful ones. Sitting squarely in the ‘harmful’ category is Section 2004 of  the RRA, which  authorizes the Secretary of the Treasury to ‘develop procedures for the implementation of a return-free tax system under which appropriate individuals would be permitted to comply with the Internal Revenue Code of 1986 without making the return   required under section 6012 of such Code for taxable years beginning after 2007.’"

What has prevented the adoption of return-free since that time? I would contend it is not some spell that one software manufacturer has cast over the political establishment; rather it is hard-won experience earned from practical failures and ongoing public perceptions of the tax system.

Practical Considerations

As one illustration, defenders of return-free say that the idea has long had traction in conservative circles – including Ronald Reagan, who referred to it as part of his Administration’s tax reform proposal in May 1985.

It’s quite true that some fiscal conservatives – and tax administrators appointed by them – have sought return-free programs over the years. But many taxpayer advocates, including NTU, have become increasingly skeptical of the entire venture. One warning sign arose, ironically, in the year Reagan gave his May 1985 address to the nation. Known as “The Great Tax Meltdown” or “The Filing Season from Hell,” the computer malfunctions, “lost” returns, and managerial incompetence surrounding the 1985 tax-filing process exposed the tax agency’s persistent problems with information technology. (Note: Those interested in further reading on this formative experience should consult Unbridled Power, authored by the IRS’s former historian Shelley Davis.)

And by persistent, I mean recent. For example, it took until 2013 – after years of trials and tribulations – for the IRS’s Business Systems Modernization to finally be removed from the Government Accountability Office’s (GAO’s) “High Risk” list for failure due to waste or mismanagement. But the agency is hardly out of the woods; just a month after leaving the High Risk list, GAO noted that over one-fifth of the 58 information security upgrades the IRS needed to implement remained unresolved.

Even now, the IRS is faced with unprecedented challenges in implementing the Affordable Care Act, such as “wiring” a new definition of household income into its processing systems, and interacting with private insurers at basic levels. Some say these massive undertakings, which have aroused major doubts over their workability, are far greater than any technical hurdles to implementing return-free. The trouble is, the current IRS Commissioner, John Koskinen, is not interested in sorting out the differences. As he told Politico earlier this week, "We're challenged enough with the things we have to do now, so there's no work going on here at the IRS in that direction."

Indeed, these realities constitute one reason why many taxpayer advocates today support the Free File Alliance instead of return-free. This consortium of companies, which offers free online filing to about 70 percent of the taxpaying population, is a public-private partnership that functions effectively, at virtually no cost to taxpayers. Although the actual number of Free File users each year is smaller than 70 percent, there are many reasons why middle- and lower-income filers don’t avail themselves of the service, such as engaging paid tax preparers.

Furthermore, ProPublica’s suggestion that an alternative government-run system would allow millions more Americans to file returns “for free” is dubious on its face. Every government service is, by definition, funded by users directly or taxpayers generally (or by unborn Americans saddled with federal debts). Even if return-free were relatively inexpensive to administer, advertising and promoting its existence – something the Free File Alliance currently helps to fulfill – would still be a significant federal cost.

Impediment to Tax Reform?

But there are other long-articulated policy-based grounds upon which advocates of limited government oppose return-free. One has to do with the idea that government should not compete with the private sector in providing services. In an issue brief published almost 10 years ago arguing against a state-level return-free program in California, my colleague Jeff Dircksen cogently observed, “If other agencies adopted this model, the DMV could arrange auto loans, state wildlife employees could run pet stores, and of course the Governor [then Arnold Schwarzenegger] could freelance as a personal trainer.”

Equally important, return-free could actually mitigate against attempts to simplify a tax system whose complexity NTU has methodically documented in its annual Taxing Trend survey. There readers will find examples of everyday tax compliance headaches (including, in the interests of fairness, commercial tax software problems), along with a repeatedly expressed warning about return-free:

"One overarching goal of fundamental tax reform should be a system that allows all Americans to understand how their individual tax liabilities are calculated and allows them to hold their elected officials accountable for such liabilities. Return-free subverts the concept of transparency by further placing the machinery of the tax laws away from public view – in the process condemning informed debate over the proper size of government to an obscure periphery of the public square."

The precept of everyone participating in the rituals of civic life, and as a result building our collective will to change what needs fixing, was something the Left once espoused as a way to strengthen our social fabric. Apparently, however, when it comes to underwriting the vast money machine of the federal government, the message is a little less prosaic: pay what Washington thinks you owe right now unless you really feel like arguing about it later.

The Human Dimension

And who would argue about it? According to supporters of return-free, lots of people, since they would be under no obligation whatsoever to accept the IRS’s judgment. But this contention too casually dismisses the intimidation factor of the tax agency throughout its history.

One of our proudest moments was forming the transpartisan coalition that finally secured passage into law of the first Taxpayer Bill of Rights in 1988. Members of that group included the American Civil Liberties Union and the National Council of La Raza. All of our partners recognized that the fear of the IRS, among Americans from all walks of life, was a palpable ailment in the body politic. Those who believe that IRS “horror stories” were little more than exaggerations or falsehoods should consult works such as A Law Unto Itself by New York Times investigative reporter David Burnham, or Power to Destroy by John A. Andrew (as well as Davis’s book).

Although the 1988 law, and its successors in 1996 and 1998, helped to alleviate a great deal of suffering, the pain – and the fear – is never far from the public’s impression of the IRS.  This discussion deliberately avoids any examination, however legitimate, of the IRS’s scandal over exempt organization applications, which the Left disputes anyway.

Instead, this author remembers well a McKenna Research Poll of 600 adults taken in November 2001, which reported that by a 50-32 percent margin, more respondents feared “receiving an audit notice from the IRS in the mail” than “receiving anthrax in the mail.” Through the decade that followed, dealing with the IRS has been put up against dreaded events like getting a root canal procedure or speaking in public, and the tax agency often came out the “winner.” Late last year, a Gallup poll reported that 72 percent of Americans viewed Big Government as “the biggest threat to the country in the future” – a “record high in the nearly 50-year history of this question.” By contrast, 21 percent identified Big Business as the number one threat, while 5 percent cited Big Labor. This is hardly an indicator that a typical recipient of a government-prepared tax return would view the whole matter with benign indifference.

In the final analysis, American society’s relationship with the tax collector is different from, say, those in Sweden, Spain, or Denmark, which have implemented return-free. Although these countries are not without their share of disgruntled taxpayers, at a recent forum this author attended, the IRS’s National Taxpayer Advocate Nina Olson spoke of how certain taxpayer rights and compliance procedures abroad may not have the same cultural moorings that are present here. In her annual report to Congress, from December 2013, the Advocate also pointed out the need for a new Taxpayer Bill of Rights, precisely because Americans still are unclear over the protections they have from unfair or improper treatment at the hands of the IRS:

"The Internal Revenue Code (IRC) provides dozens of real, substantive taxpayer rights. However, these rights are scattered throughout the Code and are not presented in a coherent way. Consequently, most taxpayers have no idea what their rights are and therefore often cannot take advantage of them.

Not surprisingly, in response to a survey of U.S. taxpayers conducted for the Taxpayer Advocate Service (TAS) in 2012, less than half said they believed they have rights before the IRS, and only 11 percent said they knew what those rights are."

So this is the atmosphere in which return-free proponents believe taxpayers would feel empowered to dispute the tax bill the federal government has worked out for them? Who benefits from this act of “compassion” to low- and middle-income filers, many of whom might be led to conclude it’s better to just pay than fight back? Hint: it isn’t the little guy.

If the real aim here were to make paying taxes more convenient for everyone, left-leaning groups could of course join with NTU and many other organizations in endorsing systemic tax reform.

To offer just one option, the FairTax proposal would abolish the current income and payroll tax in favor of a consumption tax with a built-in “prebate” that would protect lower-income households from excessive financial burdens. Citizens would pay for government every time they went to the cash register – what type of system could possibly be more “return-free” for an individual? A flat-rate income tax (again with suitable exemptions for low- and middle-income households) would, instead, entail a return that is quite simple and comprehensible to every American. Somehow I don’t expect a chorus of liberal voices to erupt in support of either approach.

One of the biggest liberal icons in modern Hollywood political films is Michael Douglas’s character in The American President, who in his climactic White House news conference declared, “We’ve got serious problems to solve, and we need serious people to solve them.” So it is with our nation’s tax laws and how they are administered. “Follow the money” stories may be easy distractions from the genuine work of making better tax policy, but they’re not serious substitutes for reasoned deliberation over how (or even whether) Americans should file income tax returns.

Pete Sepp is Executive Vice President for NTU.