Why doesn’t the IRS just send me a bill for the taxes I owe based on the info they already have?

Question

So it's time to file taxes in the United States and it occurred to me that I am required to provide a lot of information that the government already knows. For instance, I have to provide the contents of my W-2 form, but my employer already sent the Internal Revenue Service a copy of that document. Indeed, if I don't accurately report my income, the IRS will know because it differs from the information that they already have.

Why doesn't the IRS just save me the trouble of submitting information it already has and just send me a "bill" telling me what I owe (based on the information it already has)?

Obviously, there is some information I would still need to fill out, like self-employment income. But wouldn't it be easier, and save more money for everyone, to just have the IRS tell me the information it knows and, if I don't have any corrections or additional information that I need to report, just ask me to write a check and send it back?

EDIT: I'm interested in the political rationale for the IRS not doing this. As some commenters have noted, countries in Europe already have a system very similar to this where the IRS-equivalent discloses their known information and the individual fills in unknown information (such as self-employment income), so I am aware that it is technically feasible.

Answer 1

It's certainly possible, and plans have previously been made to do it, but then what would happen to the tax preparation industry?

That may seem like a silly question, but for the capitalist tax prep industry, automating away a large portion of their industry is a huge problem, so naturally they would lobby against it.

ProPublica has an article from last year that covers the issue.

Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It.

Here’s how preparing your taxes could work: You sit down, review a prefilled filing from the government. If it’s accurate, you sign it. If it’s not, you fix it or ignore it altogether and prepare your return yourself. It’s your choice. You might not have to pay for an accountant, or fiddle for hours with complex software. It could all be over in minutes.

It’s already like that in parts of Europe. And it would not be particularly difficult to give U.S. taxpayers the same option. After all, the government already gets earnings information from employers.

But as ProPublica has detailed again and again, Intuit — the makers of TurboTax — and H&R Block have lobbied for years to derail any move toward such a system. And they continued in 2016.

Intuit spent more than $2 million lobbying last year, much of it spent on legislation that would permanently bar the government from offering taxpayers prefilled returns. H&R Block spent $3 million, also directing some of their efforts towards the bill. Among the 60 co-sponsors of the bipartisan bill: then congressman and now Health and Human Services Secretary Tom Price.

The bill, called the Free File Act of 2016, looks on the surface to be consumer-friendly. It makes permanent a public-private partnership in which 13 private tax preparation companies — called the “Free File Alliance” — have offered free online tax filings to lower- and middle-income families. The Free File Alliance include both Intuit and H&R Block.

But the legislation would also permanently bar the IRS from offering its own free alternative.

Intuit has repeatedly warned investors about the prospect of government-prepared returns. “We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future,” Intuit said in its latest corporate filings.

Sen. Elizabeth Warren, D-Mass., offered a bill last year that would have actually allowed the government to start offering prefill tax returns. While Intuit did not lobby against Warren’s bill — presumably because the legislation had little chance of success — tax giant H&R Block did. (H&R Block did not respond to a request for comment.)

Neither Warren’s bill nor the Free File Act made it out of committee.

Answer 2

The IRS doesn't do that in the USA, because politics has decided so, as outlined in AquaticFires answer.

I have paid income tax in Sweden, Canada, and the UK. In Sweden, I was sent a completely filled form which I was invited to amend, in case anything was missing. It was just a couple of pages. It usually resulted in either a small deposit into my bank account or a bill to pay a small amount of additional taxes. In the UK, I'm not sent anything at all. Only some people need to file tax returns, and that does not include me, because I have only one source of income and have no deductibles (when donating to charity, I opt to give my deductible to the charity instead). Only in Canada (Ontario) did I have to go through any significant work to prepare my tax return.

As evidenced, there is zero technical reason for the IRS not to send a filled form. The reason is entirely political.

Answer 3

The other answers address some of the reasons why, in this case, inertia of the status quo is not overcome. From the perspective of the IRS simply mailing a bill creates a collection challenge that is more logistical and not purely political.

Income

Most income Americans generally make through wages is reported (and witheld) directly to the IRS as it is being made, and most businesses are required to make earnings and distributions reports available and payments made to the government quarterly. However, not all income is reported quarterly since the underpayment penalties for some circumstances is small, and America is somewhat unique in that it currently also taxes income from worldwide sources. This means that there could be significant tax liability that exists which the U.S. Government has no way of regulating directly. This is one of the arguments against citizenship-based (versus residency-based) tax laws.

Deductions

Another complication is deductible expenses which may disappear in a simplified tax plan, but probably not completely. The government will not be able to determine prior to you declaring your intent to deduct any given expenditure, so it will not be able to include those factors into a simple "bill" to be mailed and then paid directly by each resident/citizen. As Adrian McCarthy correctly points out in the comments, the amount of information the Government would need to collect and also make decisions about is vast. Farmers for instance can deduct livestock's depreciation over 5 years as a business expense (source), but have the option of front-loading all of that depreciation in the first year after purchase. This makes sense if you're planning on a bumper crop and you want to hold on to those particular animals for five years, but you may want to decide not to do that if you think your income may be higher two to four years from now, or if you want to sell an animal before 5 years have passed and not have to track the basis and repay back in the year it is sold. Sometimes, two animals meet in a field and a new animal is produced, but this animal has different rules for you because it just so happened to be born on your farm.

Goods are sometimes bought for cash at auction where aggregate information may be provided after sale but individual buyers are not identifiable, and in order to calculate everyone's deductions correctly the government would have to know this information. Other questions that may affect deductions such as "Did you buy a house this year?" are easy enough perhaps for the federal government to track, but each one is generally complicated by a related question such as "Is this your primary residence?". This creates a decision making process that is intractable from anyone's perspective other than the individual tax payer, or would require an amount and sophistication of tracking and reporting that I don't think most people would be comfortable with.

You could get around this by just mailing the bill and then have a place where you could list any deductions and calculate a different bill amount, but then you'd have just about re-invented tax filing. It can be much simpler, but politicians have yet to show the will required to make it so.

Political Resistance

Politicians ranging from Grover Norquist to Ronald Reagan have also been champions of the idea that, in Reagan's words, "paying taxes should hurt." From that perspective, letting the IRS "calculate" your taxes so they can then send you the bill is a conflict of interest since the Government will of course overcharge you. Instead individuals should be given the chance to calculate the total ourselves.

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NB- I don't think being able to make certain deductions from your taxes will ever be able to disappear completely because politicians are pragmatic people and they know that upsetting everyone will probably be the last professional politicking they'll ever do. Upsetting other people's constituencies though is something that can be tolerated, and there could be actual practical uses for using the tax plan to encourage certain spending habits from time to time. Plus the sheer weight of it all has created a few businesses that are optimized for it, and could cause a systemic shock for them and their customers/creditors if it is ripped away like a band-aid. All of this creates uncertainty, which some could argue is also the government's duty to prevent.

Answer 4

Why doesn't the IRS just send me a "bill" for the taxes that I owe? In other words, why doesn't the IRS just save me the trouble of submitting information it already has and just tell me what I owe?

Obviously, there is some information I would still need to fill out, like self-employment income. But wouldn't it be easier, and save more money for everyone, to just have the IRS tell me the information it knows and, if I don't have any corrections or additional information that I need to report, just ask me to write a check and send it back?

There are a few practical and policy reasons:

1. When you fill out a tax return you are verifying that you have reported all of your income, including income which is not covered by information reporting and may be unknown to the IRS. It creates a hook to impose penalties on you if you don't report income and the IRS later learns that you had income. Lots of people have at least a little income (e.g. tips or babysitting money) upon which taxes are owed that is not reported to the IRS. This is particularly true of rental and self-employment income, which while they make up the lion's share of unreported income.

2. When you fill out a tax return you are keeping your contact information current making it easier to find you.

3. Lots of people are entitled to refunds but don't make timely refund claims and requiring people to fill out tax returns to claim that revenue generates net revenue for the government.

4. There are quite a few events (having children, getting married, getting divorced, a child being emancipated, going blind) that have an impact on your tax obligation and are not reported to the IRS. You supply that information when you file your own tax return. Similarly, the IRS rarely has complete information about your itemized deductions. For example, even if it gets information reporting on mortgage interest, it doesn't know if you really used that property as a personal residence so that you are entitled to claim that interest as an itemized deduction.

5. There is a fair amount of art that goes into determining tax liability for taxpayers with complex tax situations and letting the taxpayer make a first attempt subject to audit reduces the power of the IRS bureaucracy over how tax laws are interpreted in disputed situations that the IRS may not contemplate.

6. Some of the information that informs the IRS of who has income comes from other people's tax returns (e.g. alimony payments).

7. For the people for whom the IRS could generate a reasonably accurate return, the time and cost of filling out a tax return is very modest.

From a political perspective, the key observation is that to enact an automatic tax return system, it would be highly desirable to simplify the tax code in many fairly modest ways. But, the details of the tax code's benefits and limitations are carefully crafted political compromises and all of those compromises would have to be reopened for political negotiation to implement this system.

Answer 5

It's been tried. Look up "ReadyReturn" in California (or just: https://priceonomics.com/the-stanford-professor-who-fought-the-tax-lobby/). Intuit, H&R Block and the rest of the tax preparation lobby will do just about anything to stop it.

Answer 6

Aside from the fact of political interests, there is:

1. The IRS does not want you to know what they know about you. This is a means to keep you honest about anything they may potentially be unaware of. For a highly relevant example, cryptocurrency has been popular and they wouldn't want people dodging those taxes.
2. It has been argued by some politicians that this encourages the IRS to charge higher and put the burden on citizens to correct the amount

Answer 7

While the IRS knows SOME of the information required to calculate your taxes, it doesn't know all of it.

If you work a regular job, it knows your income. Some forms of outside income are reported on 1099s and the IRS knows that too.

But there are lots of things the IRS doesn't know. It doesn't know if you are married and how many children you have. It doesn't know if you went blind this year. It doesn't know if you gave money to charity. It doesn't know if you were robbed or the victim of a natural disaster. It doesn't know what your medical expenses were. It doesn't know how much money you spent on books and supplies for college. All those things alter the amount of taxes you pay.

For many Americas, all this information is irrelevant because they just take the standard deduction and don't claim any other special exemptions, etc. But the IRS has no way to know if you will claim any of these things or not.

One could certainly imagine a much simpler set of tax laws where none of this matters, where they just take your income, apply some formula, and say, this is how much you owe. Many people have been arguing for such a system for many years. But as long as we have the present complex system, either the IRS has to ask you to fill out long and complex forms, or, I suppose, they could required that people who give you money or take your money send all this information to the IRS, i.e. somebody else could fill out long and complex forms.

I suppose that for the large percentage of Americans whose taxes are fairly simple, they could give you a pre-filled form that you can just check a box saying "yup, that's all the relevant information", sign it and send it back. Then if this form doesn't cover your case, you could throw it away and fill out the more complex forms. Or they could keep the present forms and just fill in the few things that they know.

But really, even the simplest form, you have to tell them if you're married and have children. How would the IRS know if you got married this year or had a baby or if a member of your family died or moved out on their own? I suppose they could require hospitals to notify the IRS when a baby is born and require funeral parlors to notify the IRS when someone dies, etc. But again, that just shifts the burden from you to the hospital or the funeral parlor. And then if someone else makes a mistake, presumably you are responsible to fix it somehow. There'd have to be procedures for notifying the IRS that a reported birth, death, marriage, divorce, whatever was incorrect and getting it fixed, adding another level of complexity.

Answer 8

Having you fill out the form and send it in also allows you to address any changes that may have occurred during the year - getting married, divorced, having a child, having a child graduate college and move out, or otherwise "age out" of being declarable, death in the family, etc. And then income related stuff as mentioned above, from 1099 of the various kinds. Not all companies report them at the same time either. Or taxes you paid, which the gov't would not have known about - like property taxes. I pay my city directly, with no quarterly reporting to anyone when they are paid. Unless my city reports on them, which I am not provided any evidence of. (However, the married filing jointly standard deduction I think will swallow those taxes up in the 2018 filing.)

Answer 9

This is not an answer, since - obviously! - no one but the IRS rulemakers is qualified to provide an actual answer. However, it attempts to point out some relevant factors that really belong in comments. (And were put there, then deleted by officious busybodies.)

The most important factor is that for many people, the IRS simply does not know what information should go on that pre-filled tax form. W2 or 1099 income, perhaps, but then there are many legitimate sources of income - self employment, inheritance, and the like - that aren't reported.

Then there are deductions. For instance, I recieve $X gross income reported on 1099s, but then I have a number of business expenses that are subtracted before I report my net income on which I pay taxes. The IRS has no way of knowing these expenses - indeed, sometimes I don't have more than a vague idea until I add up the shoebox full of receipts for the year, and try to decide which are legitimately deductible.

Even for people who are not self-employed, there are many events that might render that pre-filled form incorrect. Get married or divorced during the year? Have a kid, or perhaps are now supporting an aged parent? The IRS does not know these things, and unless you are a fan of Big Brother government, there is every reason why they should not.

Answer 10

In reviewing the previous answers I see a glaring lack of attention to a different political issue that could prevent the IRS from automating the tax filing process: States' rights.

Our government is "a sovereign Nation of many sovereign States" and as such citizens have annual tax obligations to both the national and state revenue systems. Some states do not charge an income tax, some do, and (prior to Trump) most Americans could deduct from their federal taxes the amount of taxes paid to any state(s) where they may have worked.

In order for the IRS to pre-calculate the federal taxes due they would need to obtain the individual state filing information first, and doing that would be a logistical nightmare, especially for anyone who owes taxes in multiple states (migrant workers, traveling consultants, etc).

Leaving a blank on IRS forms for state taxes effectively defeats the whole pre-filled tax calculation since the total due could not be calculated until that blank is filled in.

This then creates a technological hurdle that could be solved but only by either (A) requiring states to have earlier filing periods, or (B) requiring some kind of uniform state taxation system. Either of these options would tread rather severely on States' rights to determine their own systems of taxation.

Answer 11

This isn't because of some grand conspiracy due to lobbying efforts by the tax preparation industry. While they do lobby Congress with the goal of resisting efforts to streamline the process (you can't e-file on your own, for example; you have to go through a licensed preparer, and they do make sure the IRS information is limited only to help filling out forms), the real, simple answer is:

Because the IRS doesn't actually know how much you owe.

The IRS does have some of the information it would need to estimate how much you owe (based on the taxes your employer paid on you), but the information is incomplete, and it's only reliable for traditional W-2 employees. There are legions of taxpayers that do not fit the regular employment paradigm.

Politically speaking (which is what you asked about in your question), the government is neither your shepherd nor your friend. It is your civic duty to asses your own liability and pay the taxes that you owe. The IRS only collects those taxes. When it comes to the law, the IRS's job is to investigate and prosecute tax evaders, not to enforce tax compliance -- that's your job.

The default position of the government is [supposed to be] that you are a law-abiding citizen who can be trusted to report all your applicable income accurately and deduct only what you are entitled to deduct. If you are suspected of cheating on your taxes, the IRS must begin a formal investigation on you (in the form of an audit), and only then can they investigate your accounting and compare it with the information from other sources to see if they reasonably match up. The government is not allowed (in an ideal world anyway) to abuse their power to verify what you have reported unless they have a valid reason to suspect you of false or incorrect statements on your tax returns.

Your employer files and pays their taxes quarterly, a portion of which is income they withheld from your paycheck on your behalf (if you are a W-2 employee). You file a form W-4 with your employer indicating how much you would like them to withhold, but you are free to have your employer withhold nothing if you choose. Also if you choose, you can opt to not use a tax preparer and simply fill out and mail in the requisite forms yourself (which can get quite complicated if you must deviate from the standard 1040 form -- this is what tax preparers are in business to help you with).

There are many sources of income that you can have, and deductions you can make that the government does not, and can not know about unless you tell them (which you are required by law to do). If the IRS were in charge if retaining all that information and assessing your taxes for you, it would be much larger than it currently is. In the United States, there is still the concept of limited government in which the IRS is supposed to stay out of your way as much as possible, and given how heavy-handed the IRS can be when it does act, it's politically difficult to change that role.

Mailing you a bill for your taxes would be extremely convenient, but would also place the IRS in a role that many Americans don't want the government to play. To quote Ronald Reagan's humorous joke, "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'"

Answer 12

For the W-2 form: There is no guarantee that the W-2 form given to you and the W-2 form sent to the IRS contain the same numbers. The company could tell the IRS that you make much less money than you do, and pocket the difference in tax.