New IRS Change Could Impact How Everyone Pays Taxes

( It’s possible that within the next few years, the way that Americans file their annual taxes could change dramatically — and not all people are going to be happy about it.

As part of the Inflation Reduction Act, the Internal Revenue Service was given $80 billion in total funding. Of that total, $15 million was designated so the agency could deliver a report to the White House on whether it could offer an e-filing system for annual taxes that would be free for people to use and run by the government.

Most of the funds that the IRS is being given will be distributed over the next 10 years, the agency only has roughly one year to deliver this report on e-filing. That means major changes could come to how Americans file their taxes in the near future.

Some tax experts believe that the IRS will basically have two options — one that’s scope would be more conservative, and one that could be much more out there.

Let’s start with the potentially conservative approach. That would see the government create a standardized e-filing system that would rival that of private software companies such as TaxACT, H&R Block and Intuit.

The IRS has a program already in place that provides this option for low-income households in America. The program hasn’t performed well, though.

The U.S. Government Accountability Office found in April that 70% of all taxpayers qualify for this free program, but only 3% use it.

While the government initially signed a noncompete clause with private companies that said they wouldn’t create their own free software for people to file their taxes, subsequent agreements removed that specific clause. That would allow the IRS to move forward with that plan.

The much more dramatic course of action could be the U.S. moving to a system known as “return-free filing.” Many countries that are in the Organization for Economic Cooperation and Development actually use this system — including Germany, Japan and the United Kingdom.

It’s referred to as an exact withholding system. How it works is that the government would end up conducting the tax returns on behalf of every American. They would withhold from citizens what is owed to the government and do their own accounting.

Forms wouldn’t have to be sent by taxpayers into the IRS under this arrangement. The IRS would attempt to withhold less taxes from Americans’ paychecks, and then not issue any refunds at all — since the withholding was done correctly.

While a 2003 report from the Treasury Department found that countries that use the return-free tax system were able to meet all tax obligations through tax withholding directly, others aren’t so keen on the idea.

Some experts believe that the U.S. tax code offers so many tax credits that self-reporting is necessary in many cases — and helpful in just about all — when viewed administratively.

One of the Tax Foundation’s tax analysts, Alex Muresianu, commented for The Hill:

“With withholding, the IRS already has that information. So, it’s kind of annoying that you have to go through and enter it in yourself. But, in the U.S., we have, for instance, joint filing. So, if your employer knows what your income is, they don’t necessarily know what your spouse’s is. Employer withholding isn’t reflective of various credits and tax programs.”