IRS Automation Could Save Americans $191 Billion

Mike P. Sinn,

The Internal Revenue Service (IRS) handling over 150 million individual tax returns annually faces significant challenges in efficiency and cost-effectiveness. This article examines the potential economic benefits of the IRS implementing a TurboTax-like website with automated features, including pre-filling forms with available data.

Current Costs of Tax Compliance

  1. Time Costs:

    • Average time spent on tax preparation: 13 hours per taxpayer
    • Total time cost: Approximately 1.95 billion hours annually
    • Monetary value: $210 billion (based on average hourly earnings)

  2. Out-of-Pocket Costs:

    • Average cost for basic 1040 preparation: $176
    • Total out-of-pocket costs: $31 billion annually

  3. IRS Operational Costs:

    • FY 2022 IRS budget: $12.6 billion

  4. Economic Inefficiency:

    • Estimated cost due to tax-induced behavioral changes: $400 billion annually

Total Direct and Indirect Costs: Over $650 billion annually

Potential Benefits of Automated IRS Filing System

  1. Time Savings:

    • Estimated reduction in preparation time: 50-70%
    • Potential time saved: 975 million to 1.37 billion hours annually
    • Monetary value of time saved: $105-147 billion

  2. Out-of-Pocket Savings:

    • Potential reduction in tax preparation costs: 80-90%
    • Estimated savings: $24.8-27.9 billion annually

  3. Improved Accuracy:

    • Current net tax gap (difference between taxes owed and collected): $380 billion (2013-2015 average)
    • Potential reduction in tax gap: 10-20%
    • Additional tax revenue: $38-76 billion annually

  4. IRS Operational Efficiency:

    • Potential reduction in IRS processing costs: 30-40%
    • Estimated savings: $3.8-5.0 billion annually

  5. Economic Efficiency Gains:

    • Potential reduction in tax-induced economic distortions: 5-10%
    • Estimated economic benefit: $20-40 billion annually

Implementation Costs and Considerations

  1. Development Costs:

    • Estimated initial development cost: $50-100 million
    • Annual maintenance and updates: $10-20 million

  2. Data Security:

    • Enhanced cybersecurity measures: $50-100 million initially, $10-20 million annually

  3. Public Education and Outreach:

    • Initial campaign: $100-200 million
    • Ongoing education: $20-50 million annually

  4. Transition Period:

    • Gradual adoption over 3-5 years
    • Parallel operation of old and new systems during transition

Net Economic Benefit

Conservative Estimate:

  • Total Annual Benefits: $191.6 billion
  • Total Annual Costs: $40-90 million
  • Net Annual Benefit: Approximately $191.5 billion

Optimistic Estimate:

  • Total Annual Benefits: $295.9 billion
  • Total Annual Costs: $40-90 million
  • Net Annual Benefit: Approximately $295.8 billion

Conclusion

Implementing an automated, TurboTax-like system by the IRS could potentially yield net economic benefits of $191-296 billion annually. This represents a significant return on investment, with benefits far outweighing implementation and operational costs. However, successful implementation would require careful planning, robust security measures, and a comprehensive public education campaign.

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