More than 8 million people file tax returns each year who don’t need to do so, imposing heavy costs on the Internal Revenue Service, according to a new report from a Treasury Department watchdog.
The Treasury Inspector General for Tax Administration looked at the steps the IRS has been taking to reduce the number of tax returns filed by individuals whose wages are too low to meet the filing threshold. TIGTA found that taxpayers collectively spent an average of $390 million and 75 million hours per year preparing and filing unnecessary tax returns. The IRS, for its part, spent an average of $11 million each year to process the unnecessary returns.
Many low-income taxpayers file the returns to obtain refunds on their withheld taxes, TIGTA noted. Even so, 15 percent of the unnecessary tax returns did not generate a refund. For the other 85 percent, the taxes often should not have been withheld in the first place because many of the filers were under the age of 21 and were claimed as dependents on other people’s tax returns.
A major part of the expense comes from the 60 percent of the unnecessary tax returns filed on paper, which cost the IRS more to process than electronically filed returns. Most of the taxpayers who file the unnecessary returns qualify for the IRS Free File Program, which would allow them to file their returns electronically for free.
An earlier TIGTA report recommended that the IRS should expand the marketing of the Free File Program by sending materials to eligible taxpayers who have filed paper returns. TIGTA suggested that the IRS do more to educate taxpayers who no longer need to file tax returns, but stopped short of making a firm recommendation. It was concerned about the potential negative consequences of advising the wrong taxpayers to claim exemption from withholding.