Research shows that pre-filled tax returns may be possible

The IRS is preparing to pilot a free online direct filing system for some taxpayers — and while pre-filled returns with certain pre-filled details aren’t part of the original plan, research shows it may be possible for certain taxpayers.

Per U.S. Treasury Department guidance, the pilot program will launch during the 2024 filing season to allow some taxpayers to assess the overall viability of the platform.

“We do not anticipate that pre-allocation or pre-determined tax obligations will be part of this,” IRS Commissioner Daniel Werfel said in a press briefing with reporters on Tuesday, noting the limited scope of the project.

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However, according to a 2022 working paper from the National Bureau of Economic Research, the IRS could have the ability to prefill nearly half of tax returns in the future.

Researchers from the Treasury Department, the Minneapolis Federal Reserve and Dartmouth College have found that the agency could potentially correctly autofill an estimated 62 to 73 million tax returns using information it already has, which would cover 41 to 48 percent of taxpayers.

The paper was based on a random sample of approximately 350,000 individual tax returns filed in 2019, and accuracy was highest among low- to middle-income applicants. The more individual prints were made, the more likely errors were to occur.

Bruce Sacerdote, an economics professor at Dartmouth College and co-author of the NBER paper, said he was “impressed” to learn the extent to which other countries are successfully using pre-filled individual tax returns.

In 2021, more than 45 countries, including Germany, Japan and the United Kingdom, will pre-complete at least part of their income tax returns.

Some countries use “reconciliation with tax authorities,” which allows residents to choose to have tax authorities auto-complete data before taxpayers approve the tax return. Others may use an “exact withholding system” in which employers attempt to defer exactly what employees owe.

According to Sacerdote, if the IRS wanted to use pre-filled tax returns, some “gotchas” would need to be addressed, such as third-party tax forms, called information returns, that the IRS receives annually for taxpayers.

“If we still complete returns by April 15, employers and reporters may need to send information returns sooner,” Sacerdote said.

Another potential issue is entering a taxpayer’s filing status correctly, which may impact tax liability or a refund. However, this could potentially be checked and corrected by taxpayers before filing, he said.

And pre-filled tax returns could raise questions about tax compliance by taxpayers. Sacerdote added, “They’re certainly afraid of diverting people from their true responsibilities.”

Of course, it’s too early to tell if the IRS’s free online direct filing test will succeed.

Ayushi Roy, New America’s associate director, who led the independent third-party task force responsible for reviewing the IRS feasibility report, said that with any new project there are also organizational and operational challenges to consider.

“Any technology you develop is only as good as that organization’s organizational design, bureaucracy and communications,” she said.