HR leaders should make sure internal payroll processes are also in place to extend to individual tax reporting.
Tax season can be a season of stress. In the United States in 2016, employees spent an average of 13 hours and approximately $200-300 for tax preparation services to file their taxes, according to Slate. For many, taxes are fairly simple, yet the industry has convinced them that they need ample help in completing their filings. Thus, these employees spend a tremendous amount of time gathering information that the IRS already has, hires someone they do not need or juggles deciding which online service will give them the best deal, when all along, they could file a prefilled tax return and be done in 5 minutes. Fantasy? No. Many employees in Europe are filing their taxes just this way, through email or even text message — stress-free.
How Does This Work?
Currently, eight out of 32 countries in the Organisation for Economic Co-operation and Development (OECD) — including Denmark, Sweden, Spain and Estonia — prepare the prefilled tax returns for their citizens and send them for approval via email or text message, according to the OECD and as reported by ProPublica. The individuals may approve or reject if they need to revise the returns for more information. The government is able to prefill the returns since it has access to the returns from the previous year, access to the employee's compensation information through the employer's filed reports and can easily access any interest information of the individual's bank, if necessary. For individual's who have more complicated taxes, such as those who have sole proprietorships and must list business expenses, the prefilled tax return may not work.
Has the United States Tried This?
The U.S. has been fiddling around with such a system since the late 90s. However, the tax preparation firms are fighting hard against such a system, as it would threaten their livelihoods. In 1998, Congress passed the IRS Restructuring and Reform Act, which required the IRS to implement a "return-free" system by 2008 for individuals with easy filings. However, to date, the Department of the Treasury has not implemented such a system.
Instead, in 2002, the IRS signed one of its first free file agreements, an agreement heavily influenced by the tax preparation industry. Under these agreements, the IRS agreed not to compete with the tax preparation industry in providing free, online tax return preparation and filing services to primarily low income tax payers. To date, according to the Tax Maze Report issued by Sen. Elizabeth Warren (D-MA), fewer than 3 percent of eligible tax payers use this service.
Sen. Warren introduced legislation in 2016, the Tax Filing Simplification Act, which would require that the IRS prefill tax returns, much like in Europe, for filers with simple tax situations. This bill also prohibited the IRS from entering into agreements that would limit its ability to provide online filing services. However, the Free File Alliance, which is primarily led by Intuit (makers of TurboTax) H&R Block and Jackson Hewitt, has been fully opposed to this bill, and to date this bill remains in the Committee on Finance.
Payroll and European Processes
The world is getting smaller and businesses are globalizing. For those HR leaders that are providing payroll across the globe, and perhaps in countries that provide prefilled tax returns, you need to be cognizant of not only the national laws, but the local and state payroll laws as well. In other countries, correct filing may not just depend upon the national, state and local laws and regulations, but also upon collective bargaining agreements, long-standing culture and specific practices.
HR leaders will want to become comfortable with these practices before submitting the correct data on payroll and other compensation, such as benefits, overtime, time off and other components, that may play into tax calculations. As organizations are well aware, global payroll compliance is becoming more complex. Accurate payroll and reporting is crucial to employee satisfaction and retention. Now with countries using prefilled tax returns, payroll data crosses over to personal tax reporting, another sense of satisfaction.
Whether the U.S. will get such simplified tax reporting is yet to be seen. However, for overseas employees, there are simplification processes already in place. HR leaders should make sure internal payroll processes are also in place to extend to individual tax reporting.
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