Taxes Without Returns: Pipe Dream Or Possibility?

Transcript

CELESTE HEADLEE, HOST:

This is TALK OF THE NATION. I'm Celeste Headlee in Washington. Imagine April 15 but without tax returns, without the mad scramble to finish them, the long wait at the post office, the piles of receipts piling up for deductible expenses, in other words an America without tax returns.

It's a system known as return-free filing, and the very idea is pitting taxpayer advocates against tax preparation companies. With return-free filing, the government tells you what it thinks you owe in taxes, and then you make changes as you see fit. Taxpayer advocates say it would simplify the entire process.

But the other side argues the current system gives consumers more choice in the tax process. The debate raises really larger questions about the business of tax preparation and what's best for taxpayers in general. So we're wondering: What have you learned when it's time to call in professional help on your taxes? When is it time to get professional help? Our number is 800-989-8255. Our email address is talk@npr.org. And you can also join the conversation at our website. Go to npr.org, and then click on TALK OF THE NATION.

Later on in the program we're going to talk about exhuming Pablo Neruda's body. But first happy tax day, if one says that anymore. We're joined by Eric Toder, an institute fellow at the Urban Institute. He's also co-director of the Urban-Brookings Tax Policy Center and the former director of research for the Internal Revenue Service. That's a long list, Eric. Welcome to the program.

ERIC TODER: Thank you very much.

HEADLEE: So can you explain to us first what is return-free filing? How exactly does it work?

TODER: OK, so there are two kinds of return-free filing. There's the kind that's done in the United Kingdom, which is where basically people - the majority of taxpayers don't have to file a tax return. Many do, but people in certain circumstances don't. And that, the way that works is you're withholding, that's the amount that's withheld from your wages, your interest and dividends and so forth, is your final tax liability.

HEADLEE: In other words...

TODER: You don't have...

HEADLEE: Right, you don't change what you already paid with your...

TODER: You don't change what you've already paid. Now you need to have special kinds of provisions in a tax system to make that possible for people. That really would not work here.

HEADLEE: But OK, but you say most people don't need to file taxes, meaning most people don't itemize. And yet I was shocked to see that...

TODER: Well, this is - we're talking about now the U.K., where they don't have itemized deductions.

HEADLEE: I see, OK, so that makes a difference.

TODER: You get your interest off, or you used to get it, and your charitable you get off. There's basically a refund paid to the charity, not to you. It doesn't actually even show up on your tax return.

HEADLEE: It seems, though, Eric, that most people would have to make a change, that most people do - you know, most people do owe something different than what was withheld.

TODER: In the United States that's correct, yeah, and it would be almost impossible in our system, where we don't have individual filing like they do in the U.K. So your return, if you're married, depends on your income and your spouse's income. It would be really difficult to have exact withholding.

HEADLEE: Exactly, which would mean everyone would end up having to change it anyway.

TODER: That's right, everybody's going to have to change it anyway. Now there's a second method, which is called Tax Agency Reconciliation. It's done in Sweden and some other places. And the way that would work would be basically where the IRS has information about you. So if it knows your - it knows your wages because that's supplied by your - we'll get to that.

But in theory the idea is they know your wages because it comes from your employer and is reported to them. They know your dividends and interest because your bank reports it to them. And they know your pensions; they know your Social Security benefits. So there are certain things that are reported to them on match documents.

HEADLEE: Right, OK.

TODER: So if those are your only sources of income, and the only things you itemize are things like mortgage interest, for which your bank sends a match deduction, and state and local taxes, which they would...

HEADLEE: They also report for you.

TODER: ...could be able to get theoretically. There isn't a match document for that. Then in theory what they could do is send you a pre-filled form. This is what's done in Sweden and some other places. They send you a pre-filled form, and then you either sign the form and say OK and send it back, or you say no, you've got some of those numbers wrong, or I actually had some other sources of income, and then you add other things and do it yourself.

HEADLEE: OK, we're speaking with Eric Toder, who is an institute fellow at the Urban Institute and co-director of the Urban-Brookings Tax Policy Center. But let me bring Liz Day into this and see if we can simplify it even further. Liz Day is ProPublica's director of research. Her piece was called "How the Maker of TurboTax Fought Free, Simple Tax Filing." And she joins us from the studios in New York City.

Let's talk about your piece in particular because I talked about why taxpayer advocates right now are arguing with people like the makers of TurboTax, Intuit Corporation. What is the debate here? Lay out the two sides of this argument.

LIZ DAY: Sure, so return-free tax filing, it sounds like you have already sort of discussed the basics, but essentially it would allow the IRS to offer certain taxpayers with simple tax situations the option to get a prefilled tax return using information the government already receives.

Taxpayers could then review, sign it and send in for free. Or they could choose not to and throw it away and use the usual methods that they would file their taxes. It's completely voluntary.

Now return-free tax filing has some support from, you know, tax experts and advocates. President Reagan talked about it favorably back in 1985. And President Obama also spoke about it on the campaign trail. Yet it also has some opponents and some of which have recognizable names, most notably Intuit, the maker of TurboTax.

They've lobbied on bills regarding return-free tax filing and have, you know, argued that it could basically have taxpayers ending up owing more money. Other...

HEADLEE: OK...

TODER: OK, can I add something to that?

HEADLEE: Sure, Eric.

TODER: Because Liz has mentioned it. If you say Intuit is against it, you could say OK, they don't like the competition. They have a good business.

HEADLEE: Right, they make a lot of money, right.

TODER: And they make a lot of money and don't want somebody else doing something for taxpayers that would cut into their profits. But, you know, I testified on this issue before the president - President Bush's tax reform panel in 2005, and actually one of the people on the panel who was very much against this idea what Charles Risotti, who was a former commissioner of the IRS.

And he was coming at it from a very different point of view, from having kind of done the numbers of what it would cost the IRS and whether this would really be cost-effective. So there's other issues. It's not just one company that's concerned about their profits.

DAY: Absolutely, it's not just Intuit who opposes this, and, you know, independent tax experts like yourself, you know, raise very important questions like should we be asking the IRS, who's, you know, an already stressed agency to do this, you know, additional work. And would taxpayers that got a pre-filled return really scrutinize it to make sure the numbers are correct, and are they getting, you know, all the tax deductions and credits that they qualify for?

As to the cost, which is, you know, a really important question, as well...

HEADLEE: The cost of...

DAY: The cost for the IRS to implement a system like this. It's really unknown. The last time the government studied it, you know, is many years ago. They studied it in the late '80s, and the IRS said this will cost money, more money than we would save, because we'd have to, you know, upgrade our infrastructure considerably. That was also with, you know, 1980s computers.

The GAO, which is the Government Accountability Office, later studied this in the late '90s and said wait, actually we could save some money if we did this, you know, if all taxpayers eligible used it, because we would get more accurate returns, we would have less audits, and, you know, the e-filing rates might also go up.

HEADLEE: I see, and OK, let me read an email here that we just got from a listener. Owen(ph) in Springville, Utah, says this: I've worked some in Finland and continue to work for clients there. Even though I've never been liable for income tax there, a couple of times clients have withheld tax. The Finnish government automatically refunded my money with interest without me ever filing a return: no-brainer.

So that sounds like somebody who is all for return-free filings. And we want to throw this question to those of you out there. I assume most people are taxpayers. So we want to know: What have you learned about when it's time to call in a professional for help on your taxes? Our number is 800-989-8255. Our email address is talk@npr.org.

Let me just put something to you, Eric, which is right now, I saw a statistic that said one in - I mean nine out of 10 Americans use professional tax help of some kind, whether it be TurboTax or H&R Block or something like that. But I can't imagine 90 percent of Americans need professional help, which would suggest that there actually is an industry out there which is possibly selling a product that people don't need.

TODER: Well it depends on what you mean by need. I mean, right now about 60 percent use preparers; about 30 percent use software; about 10 percent do it on their own with paper and pencil. But the software people are generally fairly sophisticated users who have complicated returns.

The people who use preparers fall in two buckets: They're people who have extremely complicated returns, the most complicated people use preparers. And surprisingly, the least complicated people use preparers. So there's a lot of people that just don't want to deal with a tax return, and they go to a preparer.

HEADLEE: All right, but there is the possibility for abuse, is there not, Eric? I mean, there's the possibility that people who don't have a really high financial literacy are being overcharged? Oftentimes when you go to a tax preparer or even software, you get charged for every form that gets submitted to the IRS.

TODER: No, actually the software, I believe, because I do it, there are certain packages that have a price, and it's a pretty standard pricing thing. You don't get charged per form.

HEADLEE: But when you go in oftentimes to an office, you get charged per form, right?

TODER: No, I think there's a pretty standard price. Yeah, I guess you do...

HEADLEE: You do. You get - I can say definitively you do get charged per form.

TODER: If it's a more complicated return. But, you know, and I'm not familiar with the pricing of the preparers because I don't use them, but...

HEADLEE: I'm just - I'm simply saying that there is a business here that's trying to sell extra - wait, hold on one second, Eric. There is a business that's charging extra per form and might be tempted to make something more complicated than it is, right?

TODER: You know...

HEADLEE: OK, I'm going to let you think about for just a second while we take a break.

TODER: That's a hypothetical possibility. I've heard complaints about preparers and complaints about refund anticipation loans and stuff they try to sell people. But in terms of what you just said, the average person...

HEADLEE: OK, we're going to get back to it in just a second, Eric.

TODER: ...with a simple return is getting something really complicated...

HEADLEE: We're going to get back to that in just a second, Eric. We need to take a break here, and we want to hear from taxpayers, 800-989-8255. Or email at talk@npr.org. More in a minute. I'm Celeste Headlee. This is TALK OF THE NATION from NPR News.

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HEADLEE: This is TALK OF THE NATION from NPR News. I'm Celeste Headlee. It is tax day. That means some of you listening right now probably have receipts and pencils and forms spread out across your desk or your kitchen table, a mad tangle of income and investments and donations and deductions.

But what if the government prepared your return for you, and you just checked it over, made changes and then submitted it? That was called return-free filing. It could be a voluntary option for taxpayers, but it's not yet.

And a new piece from ProPublica says one reason for that is Intuit, the company that makes TurboTax, has fought it. Liz Day from ProPublica is here today. And Intuit has actually responded to ProPublica's reporting in an email, explaining its position. And I quote here from that statement: Relying on an actual withholding or government reconciliation tax system, eliminating or curtailing citizen participation in the taxation process, has far-reaching implications for accuracy in public tax expenditures, which are often targeted by policymakers to those lower and middle-income citizens with the simplest returns.

This in turn has implications for accuracy and fairness in taxation itself. And Intuit continues: This is not about Intuit, although some work very hard to make it appear that way. This is about a basic belief that taxpayers deserve the right to voluntary compliance so they can keep more of their hard-earned money.

So we wonder: What have you learned about doing your taxes, about when it's time to call in professional help? Call us at 800-989-8255. Or send an email to talk@npr.org. We're joined right now by Liz Day at ProPublica, she's the director of research there, joining us from studios in New York City. Also Eric Toder, who is an institute fellow at the Urban Institute, also co-director of the Urban-Brookings Tax Policy Center.

And we have another co-director of the Urban-Bookings Tax Policy Center joining us as well: William Gale, senior fellow in economic studies for the Brookings Institution as well. William, welcome to the conversation.

WILLIAM GALE: Thanks very much.

HEADLEE: Who knew that taxes could be so passionate, right? Let me get your view of return-free filing. Right now, as I understand it, it's being proposed as a voluntary thing, that people could choose to do it either this way or the old way, right?

GALE: Right, there's a - there seems like there's a lot of misinformation floating around about this. And the statement that you read from Intuit is a perfect example of that. They mentioned the prospect of eliminating citizen participation in the tax system. This has nothing to do with that.

They mention taxpayers' right to voluntary compliance. This has nothing to do with that. What they're putting out is a total bait-and-switch argument about - that's totally irrelevant to the issues at hand. The basic question is that this is kind of a good government thing to do.

It would be helpful to people if the IRS simply summarized the information that they already had about the taxpayer and sent it to the taxpayer. It doesn't violate anybody's rights, it doesn't stop anybody from doing their own tax return if they want to. It's simply a way of economizing on information and giving the taxpayer essentially a running start in filling out their tax forms.

HEADLEE: OK, so let me go back to Liz Day, since Intuit was basically responding to ProPublica's reporting here. Why does Intuit or anyone else who's lobbying against return-free filing, or arguing against it, why would they do that? What's the motivation behind not offering this as an option?

DAY: Well, it would - many Americans could opt to use this method and no longer use, say, TurboTax or H&R Block or, you know, the tax guy up the street. So it would take out a good chunk of business from the private sector. So you know, some advocates say that, you know, that's one reason it's being opposed.

Another argument that, you know, Intuit made in that statement is that citizens who use this method could end up paying more in taxes, and that's an argument shared by Grover Norquist, who's also opposed to return-free filing, who, you know, essentially says there's a conflict of interest if the IRS is both the tax preparer and the collector and that they would err on the side of overstating how much you owe in taxes versus...

HEADLEE: Grover Norquist is, of course, the president of Americans for Tax Reform. Go ahead.

DAY: Yes, and that, you know, Americans could end up paying more in taxes, though, you know, it's important to keep in mind this is a voluntary system. You would get the return, you would review it, you would make sure it's correct, and you know, you could also choose not to use it.

If you found it was - you know, you were ending up paying more if you used it, you could, you know, use TurboTax and save more money, as they argue.

HEADLEE: Liz Day is ProPublica's director of research. Her piece is called "How the Maker of TurboTax Fought Free, Simple Tax Filing." And she joined us from the studios in New York City. Liz, thank you so much.

DAY: Thank you.

HEADLEE: I wanted to take a phone call, and we are getting phone calls from you out there on this tax day. Our number is 800-989-8255. The question is: What have you learned about when it's time to call in a professional? So let's hear now from Corrinda(ph), I hope I'm pronouncing that right, Corrinda, in Fort Wayne, Indiana.

CORRINDA: Yeah, you absolutely - you got it right.

HEADLEE: I'm so glad. When do you think it's time to get professional help on your taxes?

CORRINDA: Well, right out of college I joined AmeriCorps for two years and then landed my first real job, first big job. So I went from the AmeriCorps budget to, you know, a decent salary. And on top of that moved home, bought a condo, started a Master's program, began a Ph.D. program, couple of side jobs, donate to NPR twice a year, of course.

So it really put me into a totally different tax bracket. So, you know, kind of being a younger person, that might be OK to just file the E-Z, but when you begin to become a more active participant in your community, that's when it's time to get the help of a tax preparer.

My preparer helped to make sure that I can write off my school expenses and that everything line by line is absolutely correct.

HEADLEE: All right, that's a really great argument. Thank you so much. That's Corrinda in Fort Wayne, Indiana. And we also have this email from Bayport, Minnesota, who says: You need it anytime you're self-employed. It's an absolute morass of forms and deductions. How would returnless taxes work with the self-employed, where no W-2s or 1099s are available?

And Eric, let me go back to you. I'm sorry we had to cut you off earlier.

TODER: Well, the answer is it wouldn't - that simple.

HEADLEE: You say it would not work?

TODER: It would not because the biggest thing in tax preparing is collecting information you need to supply to the IRS, and a lot of this is based on self-reporting. The IRS just doesn't know it for a self-employed person. They don't have the matching documents.

HEADLEE: So Eric, you're saying return-free filing, we shouldn't offer it as an option?

TODER: No, no, wait. I am saying that, but I'm not saying that because it doesn't work for everybody it shouldn't be offered. I'm just pointing out it wouldn't work for this person.

HEADLEE: OK, but do you think it should be offered as an option for people?

TODER: Well, I think this is a cost-benefit thing, and this has been made to sound like, I think, you know, you've heard wrong arguments by some people who exaggerate how much this would save, and you hear other wrong arguments by TurboTax or Grover Norquist that say that somehow it's an assault on personal freedom, which it isn't.

This is really a question of: Is this something, given a very pressed revenue service and one which is having a hard time doing the tasks it's supposed to do, to take on something which is really fairly complicated? Because you've got to consider the timing in which they get the information and then how long it takes them to get the information to the taxpayer.

For example, right now the W-2 information doesn't come to the IRS until after the filing season.

HEADLEE: I see. OK, that's Eric Toder...

TODER: But that can be changed, don't get me wrong, but this is a lot more complicated than people make it out to be.

HEADLEE: I think everyone believes that taxes are complicated. Eric Toder, co-director of the Urban-Brookings Tax Policy Center. And also with us is the other co-director, William Gale. So William, why should we have return-free filing? I mean Eric is right, the tax code is incredibly complex. The IRS often makes mistakes now with this current that we have. Why on Earth would we trust them to get it right?

GALE: It's not a matter that the IRS would get it exactly right necessarily every time. Imagine instead about your credit card. Every month you pay your credit card bills. Imagine if the way you did that was you collected all your receipts and then you sent them into the credit card company and said this is what I think I owe, and then the credit card company looks at those receipts and says no, no, no, you owe this other amount.

So we pay our credit cards in this intelligent way, where the credit card company sends us a bill. And we look at it, we can contest it, and then if it's OK, we pay it. All the return-free filing system is suggesting is that we do the same thing on taxes. Now, it's...

TODER: But what would the credit care system...

GALE: This is not going to work - this is not going to work for everyone, as Eric mentioned.

HEADLEE: Yeah.

GALE: And - but there are 50 million taxpayers who are in situations where it would work. And I don't think we should let what we can't do, which is solve the problem of all several hundred million taxpayers, get in the way of the things that that we actually can do, which is simplify and provide good government for tens of millions, probably 50 million, taxpayers who are in relatively simple situations where we could offer this service.

HEADLEE: This service. All right. So let's go to another call here. Another one from Indiana, Don(ph) in Evansville, Indiana. When is it time to call in a professional, Don, for you?

DON: Well, hi. And thanks for taking my call.

HEADLEE: Sure.

DON: You know, for me, you know, I work for a nonprofit organization, and I've always - I always had the thought that, you know, sometimes the government might decide they want to audit me. And if they decide to audit my taxes, for me, I'd like to have the help of a professional that is very familiar with my tax - all my taxes and stuff so that they can help me in that kind of a case. And so I think that I always like to have a professional on my side who knows what they're doing and knows all the ins and outs of the tax code and all of that.

HEADLEE: And there you go. Let me bring this back to you, Eric, because a lot of people - thank you very much, Don, in Evansville. Eric, a lot of people go to a tax preparer even when they don't need to because they want some kind of insurance against an audit.

TODER: I think in Don's case, what he's describing is a situation and he's not the kind of person Bill is talking about because I think Bill and I would both agree that he probably needs to go a tax preparer.

HEADLEE: Ah, I see.

TODER: (Technical difficulty) people have complications with their business returns. There are tax situations where they might use a deduction that's a little unusual where they really need advice.

HEADLEE: Yeah.

TODER: And I don't think Bill and I disagree on that. I think the question is what's to be done with, you know, whether it makes sense to - and I think it's not a matter of (unintelligible) to require the IRS to offer this service to the number of people who would be able to use it, and here are some people who would be able to use it.

HEADLEE: Well, let me bring then to you, William Gale, the argument that that some are making which is that the current system in someway victimizes some taxpayers who end up paying for tax preparation when they don't need to. What's your response to that?

GALE: I don't know of any evidence for or against that. I - that sounds a little sensational to me.

HEADLEE: Yeah. I agree with you. But the return-free filing, the people that would be most likely to use it, would they be the people that Eric mentioned, somebody who just files a 1040EZ with no itemization?

GALE: Yeah. Typically, if you - yeah. If you - the people most likely to use it would be people who have relatively simple forms of income, so no self-employment income, no capital gains and don't have itemized deductions. You could work in child credit and the EITC with a few minimal changes in the system. Basically, you could get about 50 million people or more who file taxes onto this system. You certainly couldn't get everyone onto the system.

HEADLEE: You're listening to TALK OF THE NATION from NPR News. And let's take a call here. This is Sy(ph) in Saginaw, Michigan. Sy, what do you think? When have you learned about whether or not to call in a professional on your taxes?

SY: Well, I actually am not in favor of professionals very much. I've done my own taxes through TaxACT.com for, oh, maybe 12 or 15 years now. The last two years, I've got a couple of friends that work for H&R Block, and they kept trying to convince me to come in. So I so decided I'd have them look them over. Two years ago, I had H&R Block and Jackson-Hewitt look over my taxes because they'll check it for free and then they'll let you know before they charge you.

And then last year, I had H&R Block do it again, and both times, they were going to chare me over $150 for their services and actually found me a much larger return than what I had by doing it myself through the online service, and the online service costs me $15.

HEADLEE: OK. That's interesting. That's Sy calling from Saginaw, Michigan. And thank you very much, Sy. And let me read this email from Blaine(ph) in New York who says - disagrees with Sy. He says: As a seasonal preparer, you need a preparer if you're not willing to learn about a tax code that's much larger than the King James Bible. We often correct returns where people didn't understand the questions. And what about that, Eric, wouldn't we solve this problem in another way if we just made the tax code simpler?

TODER: Of course, we would.

(LAUGHTER)

TODER: And that's...

(LAUGHTER)

TODER: That - we seem to be going in the opposite direction, unfortunately. If you read the latest budget and what they're preparing, you know, you've got two ways now to figure out your taxes, or three if you decide whether to itemize or you decide whether you're on the alternative tax. Now, you're going to pay an alternative - another alternative 28 percent maximum rate or if you're really rich, a Buffett tax. You know, they're always layering some different new thing you have to do.

HEADLEE: New provisions and new things. To a certain extent, I guess, some of them are deductions that you want. But, William Gale, is return-free filing the solution for a tax code which we will never make simple? Is that really what we're talking about?

GALE: I think it's important not to oversell the costs or the benefits of it. It's never going to solve the issues with why we have a complicated tax system. I view it as more of as a way to help people navigate through the system, and it might have some benefit in terms of keeping the system - parts of the system simple because there would be a threshold where if you take this deduction, you can't do the pre-populated returns. There's - I mean there's experience of this in these other countries that that have done pre-populated returns.

And it's important to understand it's not some policy that's never existed anywhere in the past. It actually is in operation in other countries and those countries, you know, they don't have simple, incredibly easy tax systems. They face the same concerns we do with fairness and trying to measure income right and stuff like that. So it's definitely not a cure-all but...

HEADLEE: But did it save those countries money? Either the taxpayers or the government?

GALE: There's been some studies of this, and I think it is mixed. I think it depends on how you measure the government cost. I think one of the big savings, which is hard to measure, is taxpayer anxiety and stress. Somebody mentioned this a few minutes ago about going to a preparer just to be sure you get it right.

HEADLEE: Right.

GALE: You know, just like the view point of, look, I don't mind paying my taxes. I'm happy to pay my fair share. I just don't want to get it wrong and get hauled in to court and all that.

HEADLEE: Yeah. And we'll have to leave it at that. That's William Gale, senior fellow of economic studies at the Brookings Institution, co-director of the Urban-Brookings Tax Policy Center, joined us from studios at Brookings. And the other co-director at the Tax Policy Center, Eric Toder, who is institute fellow at the Urban Institute, and joined us by phone from his office in Washington, D.C. Eric and William, thank you both so much.

GALE: Thank you.

TODER: Thank you.

HEADLEE: Up next, we turn to The Opinion Page. Chilean poet Pablo Neruda's body has been exhumed after his driver raised the possibility he'd been poisoned. Our next guest says Neruda's legacy is so vibrantly alive it matters little how he died. Ilan Stevens - Stavans joins us after a short break. I'm Celeste Headlee. This is TALK OF THE NATION from NPR News. Transcript provided by NPR, Copyright NPR.