If the IRS has the info needed to accept/reject tax returns, why do Americans have to file?

Question

A friend of mine had her tax return rejected because one of the numbers she entered didn't match the data the IRS had. This made me wonder, if the IRS has all the data it needs to determine if you filed correctly, why do Americans even need to file returns at all? 36 countries allow return-free filing, so it's not impossible.

My hunch is that tax returns stick around because there's a lot of money to be made by the return-filing industry, and the government makes money on fining people for doing their returns wrong too. Is there a less (imo) dystopian and parasitic reason for keeping returns, or is that it?

Answer 1

Because they don't have all the needed information for the taxes to be filed. They only have the information that gets reported and not all forms of income get automatically reported to the IRS. In the case you mentioned it was likely because some of the income such as from their employer was reported.

Another reason is the tax preparation industry makes a lot of money and they lobby to prevent making it easier for people to file taxes and not need to pay for it.

Tax Preparation Services in the US - Market Size 2004–2029

What is the market size of the Tax Preparation Services industry in the US in 2023?

The market size, measured by revenue, of the Tax Preparation Services industry is $14.4bn in 2023.

Here is an article that goes into more details about why we can't have free tax filings which should also shed light on why the IRS can't do it for us.

Why can’t the IRS just send Americans a refund – or a bill?

Almost 20 years ago, Congress directed the IRS to provide low-income taxpayers with free tax preparation. The agency responded in 2002 with “Free File,” a public-private partnership between the government and the tax preparation industry. As part of the deal, the IRS agreed to not compete with the private sector in the free tax preparation market.

In 2007, the House of Representatives rejected legislation to provide free, government tax preparation. And in 2019, Congress tried to legally bar the IRS from ever providing free online tax preparation services.

Only a public outcry turned the tide.

The public part of Free File consists of the IRS herding taxpayers to commercial tax preparation websites. The private part consists of those commercial entities diverting taxpayers toward costly alternatives.

According to the Treasury Inspector General for Tax Administration, which oversees IRS activities, private partners use computer code to hide the free websites and take unsuspecting taxpayers to paid sites.

Should a taxpayer discover a free preparation alternative, the private preparers impose various restrictions such as income or the use of various forms as an excuse to kick taxpayers back to paid preparation.

Consequently, of the more than 100 million taxpayers eligible for free help, 35% end up paying for tax preparation and 60% never even visit the free websites. Instead of 70% of Americans receiving free tax preparation, commercial companies whittle that percentage down to 3%.

Answer 2

A important reason is that the information submitted by others may be fraudulently manipulated.

For example, you are paid an $80k salary and the appropriate taxes are withheld. A employer could illegally report your salary to the IRS as $60k, or even not at all, and pocket the difference in taxes.

Another example would be a company under-reporting its sales, or over-reporting payments made to contractors, thus reducing its apparent profits and taxes. This reporting is done via Form 1099s.

By requiring a report of taxes and major transactions from both sides, tax evasion can be detected. The IRS does this via its document matching program. A discrepancy is found in roughly 1% of returns. On the same vein, any fraud would have to involve both parties collaborating.