Why Doesn't the IRS Just Send You a Bill for Your Taxes?

A user on Reddit asks a very good question...

Why doesn't the IRS just send you a bill stating how much you owe?

Now that’s a great question.

Why doesn’t the IRS just send you a bill for what you owe? After all, they have all of your tax documents showing the income you earned throughout the year.

Doing it this way, you wouldn’t have to worry about figuring out your taxes. The IRS would do it for you.

Other countries successfully do just this and it works out well for them.

Could a system with pre populated tax returns be coming for the American taxpayer?

Is this what tax reform could look like in the United States?

Imagine, at tax time, instead of you having to find all of your tax forms, and entering it into tax software like Turbotax…

What if the IRS could just send you a bill for what you owe?

Naturally, it wouldn’t be 100% right all of the time, but they do have all of your income information, like W2s from your job, 1099 income from other sources like investments, dividends, and bank interest. And even 1099 information from sites like eBay or PayPal.

And they also have your taxpayer information online. As you probably already know, you and I as taxpayers can create an online account at irs.gov and access our tax information.

So, a system where the IRS could calculate your tax bill for you, shouldn’t be to far off. Of course you might need to modify some information as needed. Such as, maybe you need to update your filing status or dependent information. Maybe you need to add in some deductions or expenses. And you should be able to do all of this, online.

Think about it...

This could really work and for say 70 to 80% of taxpayers it should be doable. Most people don’t have complicated tax returns, and for those people that do… they should still be able to file the old fashioned way.

Is this wishful thinking or could this really happen?

I did some research, and not surprisingly other countries are doing just this.

That is, calculating your income tax bill for you, and telling you what you owe. All without having to hire an expensive accountant or using software like TurboTax.

What I’m describing is called a tax agency reconciliation system.

According to the Tax Policy Center: 

In a tax agency reconciliation system, taxpayers who choose to do so, provide the taxing authority with basic information, like about their family and filing status. The tax authority then calculates their tax liability from this information… And from information it receives from employers, financial institutions, and other payers. The taxpayer then has a chance to review, and if needed, correct these calculations and then submits the tax return. 

Someone from Australia commented that you log into your MyGov account, it tells you how much it knows you earned, it then asks you about any other earnings and deductions you want to declare… it also has a section about crypto assets, and you're done. The system tells you approximately what your refund will be, and it gets paid directly to you in a few days.

All in all, this takes about 5 to 10 minutes start to finish. If this isn’t the definition of freedom, I don’t know what is.

Seriously, could a system like this ever come to the United States?

It’s a good question. I don’t know for certain.

If a tax reconciliation system appeals to you, let your elected leaders know.

But, there’s good news… maybe.

In 2024, the IRS is preparing to test a free online direct filing system for some taxpayers.

Now this might be interesting. According to a CNBC article:

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

IRS commissioner Daniel Werfel stated “We do not expect pre-population or pre-determining tax obligations to be part of it,” noting the project’s limited scope.

However, the IRS may have the future ability to pre-populate nearly half of tax returns, according to the National Bureau of Economic Research.

And in testing, the accuracy was highest among low- to moderate-income filers, not surprisingly.

See folks, the technology is there. I think we’ll definitely see this happening in the next few years. Why wouldn’t they do this?

Unless the makers of TurboTax lobby Congress and succeed, I think this is a no brainer.

The article goes on to say in the article that in 2021, more than 45 countries, including Germany, Japan and the U.K., at least partially pre-populate personal income tax returns.

Would you like to see pre populated, done-for-you tax returns?

I would. Although, it would make the job of many tax preparers obsolete. 

Thanks for watching and see you in the next blog post!