Internal Revenue Service

Under a return-free filing system, the Internal Revenue Service (IRS) would prepare tax returns using information received from third parties, thereby freeing millions of taxpayers from having to prepare and file their own returns. IRS studied this system and concluded that timing and cost considerations made it infeasible. While this system could be redesigned to incorporate new technologies that would overcome these objections, taxpayer resistance and the cost-effectiveness of other filing alternatives could make this an unattractive business proposition. IRS is using available technology to provide various filing alternatives that have significant benefits, such as faster refunds and more accurate filings. However, taxpayers must still prepare and submit paper documents to IRS, which in turn mails out refunds and bills. Many foreign countries use a version of return-free filing known as final withholding. Under this system, an employee's withholding becomes the tax, eliminating the need for many taxpayers to file returns. Final withholding could significantly reduce the number of individual returns in the United States; however, this system shifts some burden to employers and taxing authorities.

GAO found that: (1) the IRS system would relieve millions of individual taxpayers of the burden of preparing and filing their own returns; (2) the IRS return-free system could be redesigned to use new technologies and be more cost-effective and feasible, but taxpayer resistance and the cost-effectiveness of other filling alternatives could make this an unattractive alternative; (3) IRS is using available technology to provide various filing alternatives, but they all continue to require that taxpayers prepare and submit paper documents and that IRS send out refunds and bills; (4) many foreign countries use a version of return-free filing called final withholding in which an employee's withholding becomes the tax; and (5) if the United States adopted the withholding system it could significantly reduce the number of individual returns and reduce costs to IRS.