Tax-Filing Legislation Could Ease Clients’ Angst  

It also ramps up the importance of tax-planning conversations with clients who may opt for the DIY approach.

By John Gehri

Of all the financial realities your clients will face, one of them is the annual exercise of filing a tax return with the IRS. As intellectually stimulating as the process can be, I suspect that your clients have shared with you their displeasure with this event on more than one occasion.

Under a new bill, Congress is seeking to direct the Treasury Department to create a free online tax preparation and filing system that allows taxpayers to access third-party information on file at the IRS. The primary sponsor of the bill is Brad Sherman (D-Calif.) who among other credentials held a CPA license in the past. The bill also has 50 co-sponsors.

A better freebie

Taxpayers can already electronically file their returns for free either directly through the IRS, or by using software they’ve purchased or turning the process over to an accountant. Nevertheless, the taxpayer or accountant often needs to pour through numerous documents such as 1099s for needed information to enter into the return. The new system would not only simplify the process by prepopulating the information from these forms, but would likely reduce errors.

The current version of the Free File tool also requires taxpayers with an adjusted gross income of more than $73,000 to know which forms to fill out without any guidance. Very few taxpayers use this tool because they don’t feel confident about which forms are needed and can potentially face civil and criminal penalties for getting this wrong.

Meanwhile, having a return professionally prepared means a client has to pay an independent CPA or use a store front tax preparation service.  The client has to drop off documents and may have to return to the accountant’s office for an interview to fill in any gaps the accountant may have discovered when preparing the return.

An aggressive calendar

My first reaction at reading this bill was optimism, a hope that a system could be developed that would compete with the current providers charging for the same service, as well as create some changes at the IRS that would make filing annual tax returns a more palatable process. The bill is aggressive in focus, requiring a working solution be in place by January 31, 2024.  This solution must also be available in mobile devices and be prominently displayed on the IRS website.

I also found it encouraging that for 2023 tax returns the bill seeks to limit the population of taxpayers eligible to use this service to wage earners claiming the standard deduction that have no other income besides interest and dividends. The bill suggests that the tax filing process would become easier because a taxpayer would certify income sources that the IRS already has on file as being correct rather than typing in data from different sources.

Within three years of the bill being signed into law, 70% of all U.S. taxpayers would have access to the system. This includes 80% of taxpayers who are eligible to claim the earned income tax credit.

Better communication, too

Although the IRS encourages returns to be filed electronically, other communications are still done by letter or phone.  I could see this new system being expanded to remedy this serious pain point for many taxpayers by letting them upload documents and provide explanations. The current IRS portal currently only allows taxpayers to view documents that the IRS has posted, like the child tax credit letter. Opening up a two-way communication system would make it easier for the IRS, too, although I expect it would initially fight hard against this change.

It’s not perfect …

Sounds great. What’s the catch? The first issue that comes to mind is cybersecurity. The information available about taxpayers at the IRS is an attractive target for bad actors. Allowing this kind of direct access for taxpayers will only increase this reality. Some recent incidents involving the IRS include a breach and a cyber hack.

Another issue will be the implementation. The complex nature of filing a tax return could lead to several problems for the taxpayer. What happens when the system crashes on or near a tax-filing deadline, preventing hundreds of thousands or millions of returns from being filed? And how will a taxpayer challenge incorrect information that the IRS has from a third party?

Currently, outside parties such as brokerages and employers use interfaces to submit information to the IRS.  If the IRS site is slow or down the information is still collected, and it just gets in a queue; it will eventually get submitted.  However, if the taxpayer is submitting directly though the IRS and encounters the same issues, nothing has been submitted and the taxpayer is looking at penalties for not filing on time.

A third issue will be the capacity of the IRS to get this system up and running. This same agency that is working through a backlog of millions of unprocessed returns was responsible for sending Advance Child Tax Credits — along with processing other Covid-related relief payments — would also be tasked with taking on the creation of this service.

There may be pushback

The biggest potential issue with this passing is going to be the tax service providers that stand to lose their standing as the solution for the taxpayer. I expect a concentrated effort from this group to maintain their jobs and their stance in the industry.  If this legislation is passed, most of the self-service tax prep will come to a halt because all of the taxpayers who currently use software could then use the IRS tool.  This includes 56 million who bought TurboTax in 2022 and many who use H&R Block.

What clients need to know

 So, what can an advisor do to help their clients given this development?  While this system may or may not be an option in the future, we should be having conversations with clients about their tax-planning process for categories such as their income, their investments, their gifting intentions and their estate plan.

Some clients may be using a professional to file their taxes and others may take a do-it-yourself approach but the takeaway here is that advisors should stand ready to provide insights regarding the policies that the taxing authorities are likely to put in place. That’s because the one truism of tax policy is that it will keep changing.  Knowing the direction that tax policy is likely to go can help the client decide how to arrange financial affairs.  Having ongoing conversations about tax planning and filing can help the clients who eventually use this system to know what to expect.

John M. Gehri, CFP, ChFC is a licensed investment advisor representative with Harvest Financial Advisors in the Cincinnati/West Chester, Ohio area. He may be reached at [email protected]. This article is for informational purposes only. Any commentary and third-party sources are believed to be reliable but Harvest Financial Advisors cannot guarantee their accuracy.


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