Originally published by Washington Examiner on March 2, 2017.
With President Trump in office and Republicans in full control of Congress, the prospects for major reforms to the tax code are the highest they’ve been since the Reagan era. Reform might not only mean lower tax burdens on individuals and businesses, but it could also lead to changes in how taxes are filed and collected. One idea Republicans should absolutely avoid is expanding IRS power to prepare tax returns on behalf of taxpayers.
Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt., have said the IRS should engage in its own tax preparation services, similar to those offered by private companies, though the IRS would make it available for free. This may sound like a reasonable idea, but it is rife with problems. Chief among them is the huge conflict of interest it would create for the IRS.
The IRS exists to collect tax revenue for the government. It answers to the president and Congress, both of whom are primarily concerned with raising money to fund government programs. In contrast, tax preparers answer to their customers, who are interested in paying as little tax as legally possible.
These two objectives are clearly at odds.
Preparation work done by the IRS is likely to reflect their organizational agenda, not that of taxpayers. This will lead to higher than necessary tax payments on average, making this proposal a de facto tax increase. That’s the opposite of what Congressional Republicans should hope to achieve with this year’s reform effort.
There is also reason to question the ability of the IRS to competently accomplish the task of preparing tax returns. For decades, studies have found that IRS help centers provide an unacceptably high rate of false information when responding to taxpayer questions. The agency also has a history of overcharging interest and other fees.
Private tax preparation companies obviously make mistakes, too. After all, the tax code is extremely complex. But competition for customers gives them strong incentive to invest in getting it right. A preparation program run by the IRS, however, would have no such incentive and would make it harder for private solutions not subsidized by the government to fairly compete.
Finally, it’s vitally important to maintain our system of voluntary tax compliance. Voluntary in this case doesn’t mean that compliance is optional, but rather that the IRS does not directly assess taxes against each individual nor audit every single return. The key benefit of this system is that taxpayers are exposed to the cost of the tax code as they fill out their forms each year. Though there is room for improvement to make the full costs of the tax system more transparent, taxpayers generally see first hand how much taxes are impacting them, which is useful information when entering the voting booth.
While announcing her proposal, Warren suggested that it should be made easier for Americans to file their taxes. On that point, she is entirely correct. However, simplifying the tax code is the best way to do that, not to grant the IRS even more control over individual tax returns. The standing separation between tax collection and compliance services needs to be maintained.
