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The IRS is preparing to test a free online direct filing system for some taxpayers — and while pre-filled returns with certain details already filled out aren’t part of the initial plan, research shows it may be possible for certain applicants.
As directed by the US Treasury Department, the pilot program will be launched during the 2024 filing season for some taxpayers to assess the viability of the broader platform.
“We don’t anticipate that pre-population or predetermination tax liabilities will be a part of it,” IRS Commissioner Daniel Werfel told reporters on a press call Tuesday, noting the limited scope of the project.
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However, the IRS may have the future ability to pre-fill nearly half of all tax returns, according to a 2022 working paper from the National Bureau of Economic Research.
Researchers from the Treasury Department, the Minneapolis Federal Reserve and Dartmouth College have determined that it is possible for the agency to correctly fill in an estimated 62 million to 73 million returns with information it already has, which would cover 41% to 48% of taxpayers.
The paper was based on a random sample of about 350,000 individual tax returns from 2019, and accuracy was highest among low-to-moderate earners. Errors were more likely to occur as itemized discounts increased.
Prepopulated tax returns are common abroad
Bruce Sacerdot, professor of economics at Dartmouth College and co-author of the NBER paper, said he was “impressed” to learn the degree to which other countries have succeeded in using pre-populated individual tax returns.
As of 2021, more than 45 countries, including Germany, Japan and the United Kingdom, have at least partially filled out personal income tax returns.
Some countries use Tax Agency Resolution where residents can choose to have the tax authorities auto-complete data before approving a return. Others may use a “microbooking system” where employers attempt to set aside specifically what workers owe.
Possible “pitfalls” of pre-populated tax returns
If the IRS wants to use pre-filled tax returns, Sacerdot said there will be a few “pitfalls” that need to be addressed, such as the third-party tax forms, known as information returns, that the IRS receives from taxpayers annually.
“If we’re going to still get returns done by April 15th, you may need employers and reporters to send urgent information,” Sacerdot said.
Another potential issue is incorrectly entering a taxpayer’s filing status, which could affect tax liability or a refund. However, taxpayers will likely review and correct this before filing.
And prepopulated returns can raise questions about taxpayer compliance. “You’re definitely concerned about diverting people from their true responsibility,” Sacerdot added.
Of course, it’s still too early to tell if the IRS’ free online direct deposit test will be a success.
Ayushi Roy, There are also organizational and operational challenges that must be considered for any new project, said New America’s deputy director, who led the third-party independent task force responsible for reviewing the IRS feasibility report.
“Any technology you build is only as good as the organizational design, bureaucracy, and communication of that organization,” she said.