New Bill Pushes Tax Simplification

May 6, 2016
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New bill pushes tax simplification

Tax simplification has been a popular topic around Washington recently. But on April 13, Sen. Elizabeth Warren, D-Mass., introduced legislation that may take a big step toward it. According to a CPA Practice Advisor report, the “Tax Filing Simplification Act of 2016,” would require the IRS to create a free service online for tax preparation and filing.

This would involve the IRS preparing tax returns for taxpayers, which would effectively eliminate tax returns. In turn, taxpayers would still be allowed to send the IRS tax information provided to them by a third party prior to the completion of their returns.

Warren’s bill was co-sponsored by Sen. Bernie Sanders, I-Vt., Sen. Sheldon Whitehouse, D-R.I., Sen. Tom Udall, D-N.M., Sen. Jeanne Shaheen, D-N.H., Sen. Al Franken, D-Minn., Sen. Tammy Baldwin, D-Wis., and Sen. Edward Markey, D-Mass.

The rationale behind the proposal

Warren argued in a statement that the bill was proposed to eliminate peoples’ reliance on the tax preparation industry to complete their tax returns.

“Congress should be making it easier for Americans to file their taxes each year, not bowing to the interests of the tax prep industry,” Warren commented in the statement. “The Tax Filing Simplification Act is a commonsense bill that would help taxpayers all across this country file their taxes with less stress and fewer costs, and it would push the IRS to use the authority it already has to simplify Tax Day for all Americans.”

Furthermore, Warren released a report with the proposed bill that showed the costs incurred by taxpayers in filing their returns with third parties. There was also an element of danger in sharing personal proprietary information with private third party companies. This was a point highlighted with the Free File Alliance as an example.

The Free File Alliance is a network of tax software vendors that partners with the IRS. But Warren argued that it is only used by 3 percent of taxpayers and offers several – and potentially unnecessary – products to unwitting taxpayers.

Critics of the proposal

Opposition to the bill argued that it is an attempt to remove representation for taxpayers. It would effectively put taxpayers in direct contact with the IRS. Other detractors supported this point by explaining that there is a general lack of trust in the IRS. Perhaps the most vocal lobbies yet to comment on the bill are the Republicans in Congress and tax product vendors, who stand to lose the most.

The Free File Alliance has initially objected to the proposed legislation and Warren’s follow-up report findings. It pointed out that the bill would put the IRS as a single entity responsible for tax preparation, collection, auditing and enforcing.

Bottom line

The proposal has great significance for tax practitioners. Despite the fact that tax planning will still be an option for taxpayers, the legislation would dramatically change the tax preparation industry as we know it.