Data myths - can the IRS do your taxes?

Jesse Harris alerted me to a story about the U.S. Internal Revenue Service and the entities surrounding it. While the story touched upon a number of interesting topics - for example, the fact that tax preparation firms want to reduce competition (surprise), the story also raised the question - could the IRS do our taxes for us, saving us the trouble?

Matthew Yglesias:

Why don’t you just lie on your taxes? You don’t lie because you’re worried that the IRS will catch you. And why do you worry about that? Because all the various entities who’ve paid you over the course of the past year have to submit paperwork about your income. Your employer, your bank, your stock broker, etc.—record and transmit almost all relevant information about your money to the IRS, meaning that if you lie you’ll get caught. But by the same token, the IRS could simply collect all this information and send you a tax bill. You could read it over, sign at the bottom, and either include a check or wait for your refund. It wouldn’t be fun, exactly, but it would sure be simple.

Could the IRS "simply collect all this information" and compile it into a tax form that you could sign?

Let me tell you a story. Many years ago, I was unable to pay my taxes on time. I talked to someone at the IRS and worked out a payment schedule. The person at the IRS told me, "Every month our computer system will print out a nasty letter. Ignore it." Sure enough, I got a few of those nasty letters before I paid off my tax debt. Why? Because the IRS computers at the time were not designed to accommodate payment plans.

Now I'll grant that this was some time ago, and we all know that the IRS has implemented vastly improved software that can properly handle every contingency, and that can easily accommodate new changes such as a need for the IRS to generate tax forms for us. How do we know this? Because the General Services Administration is looking out for our interests, and has spent a lot of money to make sure that the IRS can handle future needs...wait a minute, the General Services Administration has spent a lot of money, but for other purposes.

Remember that just because the IRS has data doesn't mean that it can be converted into knowledge. I'll grant that I don't know the internal workings of the IRS, but chances are high that the IRS has a system to get information from employers, then another system to get information from banks, and still another system to get information from stock sales. And all of these bits of data are identified by taxpayer identification numbers. Great - that's like finding three needles in a haystack.

The supposedly "simple" process of the IRS preparing our tax returns for us would require the IRS to create yet another system - one that would extract data from the other IRS systems, format it into the proper forms, and send the completed forms to us for our review.

How much time and money would it take to get such a system working? Probably a few years and a few billion dollars.

Which, of course, means that we'd have to pay more taxes...