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Prefilled personal income tax forms offer little opportunity for compliance cost savings

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Release Date: June 21, 2011
VANCOUVER, BC—The use of prefilled personal income tax forms does little to reduce the costs of personal income tax compliance in Quebec and California, concludes a new study from the Fraser Institute, Canada’s leading public policy think-tank.

“The idea behind the prefilled personal income tax form is that the government sends the forms to taxpayers with much of their personal tax information already filled in. Individual taxpayers check the information, add whatever is missing, and return the forms to the government,” said Francois Vaillancourt, the study’s editor and an economics professor at the Université de Montréal.  

“But since taxpayers with more complex tax returns bear the brunt of compliance costs and governments find it difficult to prepare pre-completed forms for these taxpayers, the opportunities for such programs to reduce total compliance costs are limited.”

The study notes that there may be opportunities to reduce compliance costs by making the information employers submit to the Canada Revenue Agency available to taxpayers in electronic form, as is done in Australia and Spain. Aside from cost savings, this could also help tax filers avoid transcription mistakes and speed up tax return preparation.

The study, Prefilled Personal Income Tax Returns: A Comparative Analysis of Australia, Belgium, California, Quebec, and Spain, looks at the use of prefilled tax returns in the five jurisdictions. The catalyst for the study was a pilot program Revenu Quebec launched in 2008 aimed at reducing compliance costs associated with personal income tax returns through the use of prefilled tax returns.

In all cases, prefilled tax returns were introduced as a way of trying to make it easier for taxpayers to complete their personal income tax returns. In some cases (Australia and Belgium), prefilled forms were also introduced as a way of encouraging taxpayers to file their returns electronically.

In California, Quebec, and Belgium, prefilled returns are a niche program with a relatively small percentage of tax filers eligible and/or willing to use the service, while in Spain and Australia, the program is more pervasive.

“The different uptake rates may be due to several factors including differences in the complexity of taxes, withholding systems, the timeliness and availability of income and tax information from employers, and differences among taxpayers in perceptions about how well their privacy will be protected,” Vaillancourt said.

In his analysis of the Quebec experience, Vaillancourt notes that the program was set to be rolled out in four stages beginning with 100,000 taxpayers who received prefilled tax forms in 2008, and expanding to virtually all Quebec tax filers in 2011.

Of the initial 100,000 taxpayers selected to receive a prefilled tax return in 2008, 80 per cent were more than 65 years old. And of those who received a prefilled return, only 33 per cent made use of it. According to follow-up surveys, those who did not use the prefilled forms said they preferred the old, existing tax form, or that the prefilled returns were received too late in the year to be used.

After the 2008 experiment, Revenu Quebec decided to abandon plans to expand the program.

California enacted a similar program in 2005 for a small sample of taxpayers with simple returns. In 2008, a more complete version of the program was implemented with one million taxpayers eligible to participate.

“It seemed appropriate to compare Quebec’s experience to that of other tax jurisdictions implementing similar programs, with the most obvious candidate being California’s ReadyReturn program, another sub-national program,” Vaillancourt said.

Brian Erard, the author of the section on the California experience, found that the program has the potential to reduce the burden and cost of income tax filing for those with low to moderate incomes and simple tax returns, but the prefilled tax return program will have little effect on the total compliance costs of California’s complex and burdensome income tax regime.

“Ultimately, if other jurisdictions, including Canadian provinces and the federal government, aim to reduce income tax compliance costs, they would do well to review the experiences in other jurisdictions, especially Quebec and California,” Vaillancourt said.


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