Report to The Congress on

Return-Free Tax Systems: 

Tax Simplification Is a Prerequisite

Department of the Treasury 

December 2003 
Y 

WASHINGTON, D.C. 

BEC 2 3 2003 SECRETARY OF THE TREASURY 

The Honorable William Thomas 
 

Chairman 
 

Committee on Ways and Means 
 

U.S. House of Representatives 
 

Washington, DC 205 15 
 

Dear Chairman Thomas: 

Section 2004 of the Internal Revenue Service Restructuring and Reform Act of 1998 

(P.L. 105-206) calls for the Secretary of the Treasury to develop procedures for the 

implementation of a return-free tax system for appropriate individuals by 2007. Section 2004 

further calls for the Secretary to report periodically on the additional resources the IRS would 

need to implement a return-free tax system, the changes to the Internal Revenue Code that would 

enhance such a system, the procedures developed for the implementation of a return-free tax 

system for appropriate individuals, and the number and classes of taxpayers that would be 

permitted to use those procedures. 

I am pleased to submit the “Report to the Congress on Return-Free Tax Systems: Tax 

Simplification Is a Prerequisite,” as requested under Section 2004. 

This report is also being transmitted to Senator Charles Grassley, Chairman of the 

Committee on Finance, Senator Max Baucus, and Representative Charles Rangel. 

Sincerely, 

John W. Snow 
B %A Y 

WASHINGTON, D.C. 

SECRETARY OF THE TREASURY 

DEC 2 3 2003 

The Honorable Charles Grassley 
 

Chairman 
 

Committee on Finance 
 

United States Senate 
 

Washington, DC 205 10 
 

Dear Chairman Grassley: 
 

Section 2004 of the Internal Revenue Service Restructuring and Reform Act of 1998 

(P.L. 105-206) calls for the Secretary of the Treasury to develop procedures for the 

implementation of a return-free tax system for appropriate individuals by 2007. Section 2004 

further calls for the Secretary to report periodically on the additional resources the IRS would 

need to implement a return-free tax system, the changes to the Internal Revenue Code that would 

enhance such a system, the procedures developed for the implementation of a return-free tax 

system for appropriate individuals, and the number and classes of taxpayers that would be 

permitted to use those procedures. 

I am pleased to submit the “Report to the Congress on Return-Free Tax Systems: Tax 

Simplification Is a Prerequisite,” as requested under Section 2004. 

This report is also being transmitted to Representative William Thomas, Chairman of the 

Committee on Ways and Means, Senator Max Baucus, and Representative Charles Rangel. 

Sincerely, 

John W. Snow 
Table of Contents 

Chapter I: INTRODUCTION AND SUMMARY .......................................................1

Chapter II: TYPES OF RETURN-FREE SYSTEMS ..................................................7

Chapter III: ELIGIBILITY AND PARTICIPATION IN A RETURN-FREE 

SYSTEM.....................................................................................................15

Chapter IV: IMPACT OF RETURN-FREE SYSTEMS ON COMPLIANCE 

BURDENS AND ADMINISTRATIVE COSTS .....................................33

Chapter V: ALTERNATIVE PROPOSALS TO REDUCE TAXPAYER 

BURDEN ....................................................................................................41

Appendix A: BRITISH INDIVIDUAL INCOME TAX SYSTEM ..............................45

Appendix B: SWEDISH INDIVIDUAL INCOME TAX SYSTEM ............................49

Appendix C: DANISH INDIVIDUAL INCOME TAX SYSTEM ...............................51

Appendix D: WAGE REPORTING AND INCOME REPORTING FOR TAX 

YEAR 1999.................................................................................................53

Appendix E: CHARACTERISTICS OF FILERS POTENTIALLY QUALIFYING 

FOR ALTERNATIVE RETURN-FREE SYSTEMS.............................59

v 
Table of Tables 

Box 1: Studies of Return-Free Tax Filing Systems................................................................. 16

Table 1: Gross Income Thresholds for Filing Requirements............................................... 17

Table 2: Number of Filers by Reason of Filing a Tax Return in Tax Year 1999............... 18

Table 3: Filers by Filing Characteristics................................................................................ 20

Table 4: Filers Qualifying for Alternative Return-Free Systems By

Type of Income and Return ..................................................................................... 21

Table 5: Filers Qualifying for Alternative Return-Free Systems by 

Filing Characteristics................................................................................................ 25

Table 6: Likelihood of Participating in a Return-Free System ........................................... 27

Table 7: Length of Time Return-Free System Would Have to be In Effect 

Before Respondents Would Use It........................................................................... 27

Table 8: Attitudes Toward Return-Free Systems ................................................................. 28

Table 9: Amount Willing to Pay to Use Return-Free System.............................................. 29

Table 10: Preferences on Type of Return-Free System.......................................................... 30

Table 11: Effects of Delays in Refund Payments on Preferences for 

Tax-Agency Reconciliation ...................................................................................... 31

Table 12: Tax Year 1999 Filing Characteristics of Survey Participants .............................. 32

Table 13: Individual IRS e-file.................................................................................................. 43

Appendix Tables 

Table D - 1: Wages Exempt from Income Tax Withholding.................................................54

Table D - 2: Types of Information Returns ............................................................................55

Table E - 1: Filers Qualifying for Alternative Return-Free Systems:

Used Paid Preparers ............................................................................................60

Table E - 2: Filers Qualifying for Alternative Return-Free Systems:

Did Not Use Paid Preparers................................................................................61

Table E - 3: Filers Qualifying for Alternative Return-Free Systems: Paper Returns........62

Table E - 4: Filers Qualifying for Alternative Return-Free Systems: Electronic Returns 63

Table E - 5: Filers Qualifying for Alternative Return-Free Systems:

Filed in January or February .............................................................................64

Table E - 6: Filers Qualifying for Alternative Return-Free Systems:

Filed in March or April .......................................................................................65

Table E - 7: Filers Qualifying for Alternative Return-Free Systems:

Filed in May or Later ..........................................................................................66

Table E - 8: Filers Qualifying for Alternative Return-Free Systems:

Received Refund Less Than $100.......................................................................67

Table E - 9: Filers Qualifying for Alternative Return-Free Systems:

Received Refund of $100 or More ......................................................................68

Table E - 10: Filers Qualifying for Alternative Return-Free Systems: Balance Due ...........69

Table E - 11: Filers Qualifying for Alternative Return-Free Systems:

No Refund or Balance Due..................................................................................70

vii 
Chapter I: INTRODUCTION AND SUMMARY 

MANDATE AND SCOPE OF THE STUDY 

In the United States, an individual whose income exceeds a certain threshold (the sum of 

the standard deduction and personal exemptions) is required to file a tax return at the end of the 

year. Under a return-free tax system, at least some taxpayers are not required to file a tax return 

at the end of the year. In many countries, taxpayers pay their tax obligations entirely through 

withholding throughout the year. In several countries, the tax authorities prepare tax returns for 

eligible individuals based on information provided by employers and others. 

The Internal Revenue Service Restructuring Act of 1998 (P.L.105-206) calls for the 

Secretary of the Treasury to develop procedures for the implementation of a return-free system in 

the United States for “appropriate” individuals by 2007.1 Until then, the Secretary is to report on 

the additional resources the IRS would need to implement a return-free tax system, the changes 

to the Internal Revenue Code that would enhance such a system, the procedures developed for 

the implementation of a return-free tax system for appropriate individuals, and the number and 

classes of taxpayers that would be permitted to use these procedures. 

The report provides background information relevant to the consideration of a return-free 

tax system. It contains descriptions of return-free systems in several other countries. The report 

contains new estimates of the number of taxpayers who could potentially be exempted from a 

filing requirement. The results of a telephone survey on taxpayers’ attitudes toward a return-free 

system are also presented. The report discusses some of the factors that would affect compliance 

burdens and administrative costs in a return-free tax system. The report concludes with a 

description of several Administration initiatives to encourage taxpayers to file electronically and 

to simplify the tax code. These proposals would both reduce compliance burdens in the shortterm and facilitate the implementation of a return-free system. 

ISSUES RAISED BY RETURN-FREE TAX SYSTEMS 

The goal of tax policy is to raise revenue in an equitable, efficient, and simple manner. 

These goals often are in conflict. A tax system that is perceived as equitable may be 

complicated, while a system that is simple may be unfair or inefficient. Simplification and other 

tax policy goals may also be sacrificed when the tax system is used to achieve additional 

economic and social policy goals, such as encouraging home ownership or work. 

The individual income tax, which finances a large share of the Federal government’s 

operations, is a progressive, broad-based tax. By basing tax liability on income and certain 

personal characteristics, it provides a mechanism to adjust for differences in ability to pay. 

However, many observers believe the current system is overly complex, making the costs of 

complying with the income tax excessive. 

1

 Section 2004 of the Act. 

1 
 There are several possible approaches that would make the tax system less complex and 

reduce compliance costs while meeting its other goals. The United States has attempted to 

reduce taxpayer burdens primarily by simplifying the tax law and tax forms when feasible, 

improving IRS customer service, and encouraging electronic filing and the use of tax preparation 

software. Another approach taken by over 30 countries is a return-free filing system. In most of 

these countries, taxpayers meet their tax obligations entirely through tax withholding payments 

made throughout the year. A few of these countries rely on tax agency reconciliation, in which 

tax authorities prepare tax returns for individuals based on information returns from employers 

and others, and send taxpayers a completed tax form for their review. 

The report provides information on a number of issues that must be considered in 

evaluating options to implement a return-free filing system, including: 

• How do the tax systems of other countries that operate return-free filing system differ 

from the U.S. individual income tax? Which features of their tax systems facilitate a 

return-free filing system? 

• In the United States, who could be exempted from a filing requirement without 

significant changes to the tax code? Among those who could be exempt from filing 

returns, who would be likely to participate in a return-free system? 

• Would a return-free system reduce compliance costs or merely shift these costs from 

individual taxpayers to employers and financial institutions? What would be the impact 

of a return-free system on administrative costs? 

• Are there alternative ways to reduce compliance burdens and IRS administrative costs? 

MAJOR FINDINGS 

• The experience of other countries suggests that a return-free system is easier to operate 

the simpler the tax system. Common features of the income tax systems in many 

countries with return-free tax systems include: 

− Most taxpayers face the same marginal “basic” rate. 

− The unit of taxation is the individual. 

− Interest and dividend income is taxed at a flat rate and withheld at source. 

− Some capital gains are exempted from taxation. 

− There are few deductions, allowances, and credits. 

• Making the U.S. income tax conform more closely to these characteristics would 

significantly simplify the tax system, but it would also require changes that could make it 

difficult to achieve other goals of the current income tax. 

2
• Some taxpayers could be exempted from a filing requirement without making fundamental 

changes to the structure of the U.S. income tax. But absent tax simplification, a return-free 

filing system would shift the costs of complying with the income tax from taxpayers to other 

affected parties. The total costs of operating the tax system might decline, stay the same, or 

even increase. 

− Moving to a return-free tax system without first simplifying the income tax would require 

substantive changes in tax administration. These changes could shift burdens from 

taxpayers to other parties, including employers, financial institutions, state governments, 

and the IRS. Even among those eligible to participate in a return-free tax system, 

compliance costs might not decline significantly if eligible taxpayers currently file 

relatively simple returns or are reluctant to participate. 

• In 2000, the IRS conducted the first survey of U.S. taxpayers’ attitudes toward return-free 

filing systems. In conjunction with this survey, the Treasury Department analyzed the 

characteristics of taxpayers who filed 1999 tax returns and could be exempted from a return 

filing requirement by modifying the administration of the income tax. This analysis found: 

− If greater reliance were placed on collecting income taxes through withholding (an exact 

withholding system), withholding formulas would have to be fine-tuned in order to be 

more precise during the year. Mandatory withholding requirements might have to be 

imposed on additional sources of income. Because it may be difficult to apply 

progressive tax rates to a combination of income received from different sources in an 

exact withholding system, a return-free tax system might have to exclude taxpayers 

above the 15 percent tax rate bracket. 

 If wage withholding formulas and requirements were not modified, only about 7 

million taxpayers would qualify for a return-free tax system. These are taxpayers 

whose sole source of income consists of wages from one job and who do not claim 

deductions or credits (other than the child tax credit). 

 Making the current wage withholding formulas more precise could add an additional 

15 million taxpayers to a return-free tax system – bringing the total to 22 million. 

But making the current wage withholding formulas more precise could increase 

burdens on employers. While taxpayers would not have to file returns at the end of 

the year, they would have to provide more personal and financial information during 

the year to employers (or directly to the IRS) to facilitate a more precise withholding 

system. 

 Requiring income taxes to be withheld on income from interest, dividends, pensions, 

individual retirement account distributions and unemployment insurance benefits 

could increase the number of taxpayers exempt from a filing requirement by 13 

million – bringing the total to 35 million. However, financial institutions and other 

payers may resist the extension of withholding requirements due to concerns about 

burdens. 

3
 An additional 13 million taxpayers – bringing the total to 48 million – could be 

exempted from a return-filing requirement if taxpayers could claim the EITC 

without filing a tax return. 

 If capital gains distributions from mutual funds were taxed at the source, another 

300,000 taxpayers would no longer have to file a tax return. 

 An additional 4 million taxpayers in tax brackets higher than the 15 percent tax rate 

bracket could potentially be exempt from a filing requirement if a way was found to 

apply progressive tax rates to a combination of income received from different 

sources in an exact withholding system. 

− The number of taxpayers who could be exempted from a filing requirement depends on 

the extent of changes made to the administration of the Internal Revenue Code. These 

findings are consistent with earlier studies. 

 But the administrative changes necessary to implement an exact withholding system 

under the current income tax would impose new burdens on employers and other 

third-parties. 

 While increasing withholding requirements could reduce compliance burdens for 

many taxpayers and improve compliance, an exact withholding system could also 

impose new administrative costs on businesses and other payers of income. Even 

the effects on total compliance costs are ambiguous, as some taxpayers would have 

to provide additional information to third parties and/or the IRS to ensure the correct 

amounts of tax liabilities were withheld. 

• Over 80 percent of taxpayers potentially eligible to participate in a return-free 

system currently file the relatively simple 1040A or 1040EZ forms. 

− If instead, tax returns were prepared at the end of the year by the IRS (a tax agency 

reconciliation system), withholding formulas and requirements might be unaffected. 

However, employers and other payers of income would be required to accelerate 

reporting of W-2s and 1099s, and the IRS and SSA would have to speed up the 

processing and editing of these returns to avoid significant delays in refunds. Still, some 

taxpayers might experience delays in receiving tax refunds. 

 Nearly half of those who might be eligible to participate in a return-free system file 

their tax return in January or February. 

 About 80 percent of those eligible to participate in a return-free system currently 

receive refunds of at least $100. 

• A telephone survey conducted in July and August 2000 found mixed reactions to a returnfree tax system among taxpayers who would be potentially eligible to participate. While 39 

percent of respondents said they would definitely or probably volunteer to participate in a 

4 
return-free system, 36 percent responded that they would definitely or probably not opt for 

the new system. The remaining respondents were undecided. 

− Many of the respondents perceived that a return-free system would benefit them by 

saving time and money. However, they also were concerned that a return-free system 

would give the government too much control over their lives, and they were uncertain 

about how problems with the IRS would be resolved. 

− Respondents were also read descriptions of the two alternative approaches to return-free 

filing. Nearly two-thirds of respondents preferred the tax agency reconciliation approach, 

while only 19 percent stated that they would prefer paying taxes through a final 

withholding system. However, support for the tax agency reconciliation approach eroded 

significantly when taxpayers were asked how their views might be affected by delays in 

receiving tax refunds. 

• Estimates of the benefits and costs of a return-free tax system diverge widely, revealing some 

of the uncertainty surrounding how such a system would be implemented as well as how 

taxpayers would respond. In 1987, the IRS estimated that a tax agency reconciliation system 

would cost the federal government, on net, more than $284 million (2001 dollars), and that it 

would reduce annual taxpayer burdens by 8.8 million hours. In contrast, GAO (1996) 

estimated that the same system would reduce the federal government’s costs by $60 million 

(2001 dollars), while reducing taxpayer burdens by 155 million hours a year. 

− The divergent estimates are due, in large part, to differences in assumptions regarding the 

need for new infrastructure investment. 

 IRS assumed higher up-front investments in infrastructure, thus increasing the costs 

of a return-free tax system to the federal government. 

− They also reflect differences in assumptions about the willingness of eligible taxpayers to 

participate in a return-free system. At the time these studies were done, no survey had 

been conducted regarding taxpayers’ attitudes regarding return-free tax systems. Thus, 

both GAO and IRS had to make assumptions about taxpayers’ willingness to participate. 

 Because GAO assumes that all eligible taxpayers would choose to participate in a 

return-free tax system, their estimates of the reduction in taxpayer burden are higher 

than those found in the IRS study, which assumed a lower participation rate. 

− In both studies, the compliance cost estimates are based on incomplete data from the 

1980s, which do not reflect the current tax filing environment. 

 Since the 1980s, there have been significant technological advancements that have 

likely eased filing burdens, including the development of electronic filing. 

 Neither study accounts fully for the costs taxpayers may incur reviewing tax 

computations done by the IRS on their behalf in a return-free tax system. 

5 
• Ultimately, the goal of a return-free tax system is to reduce taxpayer compliance burdens and 

administrative costs. While it is clear that a return-free tax system would shift compliance 

costs among affected parties, it is not clear whether such a system would reduce overall 

compliance burdens and administrative costs if it were unaccompanied by tax simplification. 

There are other steps that can be taken to reduce taxpayer compliance burdens and 

administrative costs under the current tax system. These steps also have the benefit of 

eliminating barriers toward the development of a return-free tax system in the longer term. 

− In 2003, the Administration took action to reduce compliance burdens by encouraging the 

use of electronic filing. 

 As many as 78 million taxpayers can now file electronically for free by accessing a 

new web site that was launched at the beginning of the 2003 filing season. The web 

site is the result of a partnership between the Federal government and a consortium of 

tax software companies, the Free File Alliance. 

 In the FY 2004 budget, the Administration proposed extending return filing and 

payment due deadlines for electronically filed returns until April 30th. 

− The FY 2004 budget also contained proposals to simplify the income tax. By adopting 

uniform definitions across tax provisions and reducing taxpayer computations, these 

proposals would reduce compliance burdens and administrative costs. These proposals 

would also help facilitate the implementation of a return-free tax system by reducing 

complexity. The Administration will continue to work with Congress to enact legislation 

that would simplify the tax code. 

6 
Chapter II: TYPES OF RETURN-FREE SYSTEMS 

In contrast to the U.S. system with its end-of-year reconciliation on tax returns, over 30 

countries exempt some of their taxpayers from the requirement to file a tax return.2 Three states 

– Michigan, Louisiana, and Colorado – have taken steps towards a return-free system, but none 

currently exempt any taxpayers from filing a return. This chapter describes the two types of 

return-free tax systems, exact withholding and tax agency reconciliation. 

EXACT WITHHOLDING 

Most countries with return-free systems use exact withholding. In an exact withholding 

system, the tax agency attempts to insure that the exact amount of tax liability is withheld so that 

taxpayers are not required to file returns at the end of the year to obtain refunds or to pay a 

balance due. These systems require taxpayers to report certain information to either employers or 

the tax authority at the beginning of the tax year. The information is used to calculate 

withholding allowances by either the employer or the tax authority (who must then report the 

applicable withholding rates back to the employer in a timely fashion). Taxpayers may be 

required to report withholding information on a regular basis or whenever there is a change in 

their circumstances that affects income tax liability. 

There are several types of exact withholding systems. Cumulative systems (such as that 

used in the United Kingdom) aim to withhold exactly the right amount of taxes at each point in 

the year. Final withholding systems (such as those used in Germany and Japan) make 

adjustments to the final paycheck in the tax year to achieve exact withholding. Exact 

withholding systems typically apply a PAYE ("pay as you earn") tax withholding plan for wage 

income. 

Tax systems that rely on exact withholding often have structural features that facilitate 

taxation at source. For example, the individual is generally the unit of taxation (unlike the U.S. 

system in which married couples are taxed as a unit). Interest and dividend income is often made 

exempt or taxed at the source at a flat rate. Relative to the U.S. income tax system, PAYE 

systems are also characterized by fewer rates, fewer deductions, and fewer tax credits. These 

features facilitate the creation of a system in which employers and other payers can withhold the 

appropriate amount of tax from taxpayers without obtaining significant amounts of personal and 

financial information from taxpayers (such as spousal income, medical expenses, or child care 

costs). 

Nonetheless, countries with exact withholding systems generally require some taxpayers 

to file a return. Typically these include taxpayers with self-employment income or capital gains. 

Many countries also maintain a filing requirement for taxpayers who have more than one job. 

Thus, the extent of coverage under an exact withholding system will depend on certain taxpayer 

characteristics, such as the extent to which taxpayers have income from self-employment or 

capital gains. 

2

 United States General Accounting Office, Tax Administration: Alternative Filing Systems. GAO/GGDF-97-6, 

October 1996, pg. 4. 

7 
British Income Tax System. The British system illustrates the important relationship 

between tax structure and tax administration.3 The British income tax shares many of the same 

features that characterize the tax systems of other countries that rely on exact withholding. For 

example, the unit of taxation in the United Kingdom as well as in most PAYE systems is the 

individual, not the family. However in recent years, the British have enacted several tax credits, 

including a refundable credit for low-income working families, which are based on certain 

characteristics of the family. Thus, the British income tax system is of particular interest as it 

blends many of the conventional features of a PAYE system with provisions more common to 

the U.S. income tax system. 

The U.K. income tax system has only three statutory rates applicable to taxable income: 

10 percent, 22 percent, and 40 percent, with about 80 percent of taxpayers taxed at the basic rate 

of 22 percent. Separate rates apply to interest and dividend income, but taxes on these items are 

withheld at the source. Capital gains on owner-occupied housing are completely exempt from 

taxes. Other capital gains are taxed on an inflation-adjusted basis, and only realized gains in 

excess of 7,100 pounds (about $11,3004

) per person are subject to taxation. The first 4,250 

pounds (about $6,770) of rental income on furnished rooms in the taxpayer’s house is exempt 

from taxation. 

The British income tax system also has fewer itemized deductions than the U.S. tax, and 

the manner in which taxpayers claim these deductions differs. Until recently, mortgage interest 

relief was provided at the source at a 10 percent rate on up to 30,000 pounds (about $47,760) of 

the loan. A taxpayer with a 10 percent mortgage rate would pay 9 percent interest, and the 

lender would collect the remaining one percentage point of interest (up to the threshold) from the 

government. Taxpayers can also receive tax relief on donations to charities. The taxpayer 

deducts the basic rate (22 percent) from the donation, and the charity recovers the amount from 

Inland Revenue. Taxpayers in the highest rate bracket can receive additional tax benefits when 

they file a tax return at the end of the year. There are no deductions for medical expenses.5 

In the past, the British income tax system also relied less heavily on tax credits than the 

U.S. tax. But beginning in 1999, responsibility for administering an EITC-like benefit was 

shifted from the welfare system to the tax system. However, even though Inland Revenue 

administers the Working Family Tax Credit (WFTC), its operation is largely kept separate from 

the income tax. A separate application process is required because eligibility is based on 

different filing unit and income measures than the rest of their tax system. 

In 2001, the British enacted a children tax credit for taxpayers who have at least one child 

under the age of 16. The credit is worth up to 442 pounds a year (about $636). As with the 

3

 See Appendix A for more details on British tax system. 

4

 British tax parameters for 1999-2000 are converted into U.S. dollars using the rate of exchange on April 6, 1999 

(the beginning date of the tax year in the United Kingdom), which was 1 British pound = 1.592 U.S. dollar. 

5

 However, the structure of health care in the United Kingdom is very different than in the United States. 

8 
WFTC, taxpayers must complete a separate application form in order to qualify for the credit. 

However, the credit amount is built into the PAYE code and thus reduces withholding taxes.6 

On net, about two-thirds of British taxpayers were able to avoid filing tax returns for tax 

year 1999-2000. Those who have to file are largely high-income taxpayers with asset income 

(which is subject to tax withholding at the basic marginal rate), taxpayers with capital gains 

above the exempt amount, and taxpayers with self-employment income. The core return is eight 

pages and may be supplemented by additional schedules for specific forms of income. 

All workers, including those with no tax liabilities, have some paperwork and 

recordkeeping requirements in the British income tax system. Upon entering the workforce, 

employees must complete a Form P46 (similar to the Form W-4) providing Inland Revenue with 

basic information, including their national insurance number, date of birth, and whether he or she 

works at more than one job. While employers generally collect and forward the Form P46 to 

Inland Revenue, workers may also choose to provide supplemental background directly to Inland 

Revenue (e.g., information on other sources of income that may affect the taxpayer’s tax 

bracket). As circumstances change during the year, individuals are required to update this 

information. In addition, taxpayers with children may have to complete credit applications for 

the WFTC or the child tax credit. Since 1996, all taxpayers, including nonfilers, are also 

required to maintain records of their income for at least 22 months after the end of the tax year. 

While many taxpayers may have lower compliance burdens under a PAYE system, their 

employers incur more costs than they would experience under a return-filing system. Employers 

must forward the original and updated Form P46 to Inland Revenue, while U.S. employers are 

required only to keep copies of the W-2 for their own records. British employers must also 

adjust withholding during the year on a cumulative basis, using a more extensive and 

complicated set of withholding codes than under the U.S. system. As in the U.S. system, British 

employers are required to report earnings and taxes paid during the year to employees and the tax 

authority at the end of the year. But British employers are also required to complete forms 

during the year showing total amount of pay and tax to date whenever employees leave their 

firms. 

The British system also demonstrates that a PAYE system can impose additional costs on 

the tax authority. In the United States, the IRS does not generally have contact with taxpayers 

until after a tax return has been filed. But in the British system, taxpayer contact with Inland 

Revenue begins with the Form P46. Upon receipt of a Form P46, Inland Revenue computes 

withholding codes for the taxpayer and provides this information to their employer. In addition, 

as in the United States, Inland Revenue processes information returns from all employers and 

payers. 

6 In April 2003, the WFTC, disabled person’s tax credit, and children tax credit were replaced by two credits: the 

Child Tax Credit and the Working Tax Credit. Relief for families with children is provided through the former. 

Eligibility for the basic Working Tax Credit is based on employment status and annual income. Supplements are 

provided to workers who are married or single parents, work full-time, have a disability, or pay for child care. In 

2003, credit amounts are based on income during the 2001-2002 tax year. Recipients may have to repay some or all 

of the credit amount if income during 2003 exceeds the base year amount by a certain amount. 

9 
Inland Revenue has estimated that administering the British income tax, including 

receipts from both PAYE and the self-assessment system, costs about 1.2 pence per pound of 

total income taxes collected.7 A study by the Centre for Fiscal Studies at the University of Bath 

examined compliance costs to employers for operating PAYE, National Insurance Contributions 

(NIC) (the British social security system), and certain other benefits.8 The study found that total 

compliance costs (including both PAYE and NIC contributions) were about 1.3 percent of total 

receipts. When the cash flow advantage to businesses that accrues from holding withheld taxes 

between pay day and collection day is taken into account, the net compliance cost is reduced to 

about 1 percent of total receipts. Compliance costs varied greatly by the size of the business, 

with costs per employee being far higher for smaller businesses. These estimates do not include 

the costs incurred by taxpayers, either for complying with the PAYE system requirements or 

completing tax returns in the self-assessment system. 

U.S. Experience. In the United States, two states, Michigan and Louisiana, have enacted 

legislation calling for return-free tax systems. However, neither state currently exempts any 

taxpayers from a state income tax filing requirement. 

In 1996, Michigan enacted a “no-form” option for wage earners. Participants could not 

have more than $100 of non-wage income ($200 if filing jointly). There was no income cut-off 

for wage income. The no-form option followed the model of exact withholding systems. 

Eligible individuals could elect this option by filing an expanded Form W-4 that contains the 

names and social security numbers of dependents, with their employers. Employers were 

required to send the expanded Forms W-4 to the Michigan Department of Treasury. Taxpayers 

could participate in the no-form program even if they were eligible for a prescription drug credit 

or home heating credit. As with the British Working Family Tax Credit, there is a separate 

claims process for both the prescription drug credit and home heating credit. However, they still 

had to file an income tax return to claim other tax credits, including the refundable property tax 

credit. 

In 1997, only 94 Michigan taxpayers chose the no-form option. This number increased to 

128 in 1998. In response to low participation, Michigan suspended the no-form option. It is 

difficult to determine if the low take-up rate reflected dislike of the no-form option or other 

factors. It is possible that certain features of the no-form option, such as the relatively low 

threshold for non-wage income or the filing requirement to claim a refundable property tax 

credit, may have contributed to the low participation in the program. Many Michigan taxpayers 

may not have known about the no-form option because outreach efforts were directed at 

employers.9 

7

 Board of Inland Revenue, Report of the Commissioners of Her Majesty’s Inland Revenue for the Year Ending 31st 

March 2000, January 2001, pg. 33. 

8

 David Collard and M.G. Godwin, Employers’ Compliance Costs for PAYE and NICs, 1995 – 1996, Report to 

Inland Revenue and the Contributions Agency, 1998, pg. 25. 

9 Communication with Michigan Department of Treasury, April 12, 2000. 

10 
In 1997, Louisiana enacted legislation calling for a no-form system. However, the 

program was not implemented due to Y2K-related problems, and there are no plans underway to 

introduce a no-form pilot now that those problems have been resolved.10 

TAX AGENCY RECONCILIATION 

In tax agency reconciliation systems, taxpayers can elect to have the tax agency prepare 

their return. Tax agency reconciliation requires four steps. First, electing taxpayers provide 

basic information to the tax authority. The tax authority then calculates tax liabilities, given the 

information returns it receives from employers, financial institutions, and other payers, and the 

information obtained from the taxpayer. The taxpayer then has a chance to review (and contest) 

these calculations. Finally, refunds or tax payments are made. 

Because withholding does not have to be exact, tax agency reconciliation systems may 

not place as great a burden on employers and other payers as exact withholding systems. 

Moreover, it may be easier in a tax agency reconciliation system to apply progressive rates to a 

combination of income derived from different sources and to allow taxpayers to claim various 

types of deductions or credits. But tax agency reconciliation systems may require new tasks of 

employers, other third party payers, or the tax authorities. In order to ensure timely payment of 

refunds and balances due, payers must report payments to the tax authorities as close to the end 

of the tax year as possible, while the tax authorities must quickly absorb, process, and match a 

large number of information returns. Taxpayers must review these calculations and institute 

procedures, if necessary, to contest erroneous calculations. 

Danish and Swedish Income Tax Systems. Only two relatively small countries, 

Denmark and Sweden, operate tax agency reconciliation systems, while Finland and Norway are 

currently experimenting with this approach. About 87 percent of Denmark's taxpayers and 74 

percent of Sweden's taxpayers had their returns completed by the tax authorities in 1999. 

While in theory it would seem possible to operate a more complicated income tax 

through a tax agency reconciliation system, both the Danish and Swedish income taxes are in 

many respects similar to – and in some respects, even simpler than — the British income tax 

system.

11 As with the British income tax system, the individual is the unit of taxation in both, 

and both have only three rate brackets. Deductions are allowed for a few items, including travel 

to and from the office, alimony paid, interest payments, and contributions or premiums paid 

under certain pension plans. Unlike the British system, neither the Danish nor Swedish taxes 

allow deductions for charitable contributions. However, the Danes collect a “church tax” from 

members of the Danish Christian Church through the income tax. Nor does either system 

contain tax credits for working families, children, or disabled individuals, as are now found in 

the British system. 

10 Communication with Louisiana Department of Revenue, April 12, 2000 and August 10, 2002. 

11 See Appendixes B and C for more information regarding the Swedish and Danish tax systems. 

11 
In Sweden compliance costs were only about one percent of total income tax in 1998.12 

Two-thirds of compliance costs are incurred by the 18 percent of filers who use the traditional 

return because they have business income or shares in closely held businesses. The remaining 

one-third is incurred by those who use simplified returns or are not obligated to file an income 

tax return. Compliance costs have been increasing in recent years as more small businesses take 

advantage of an option that allows them to declare value-added-taxes on their annual income tax 

return and as more taxpayers have capital gains or losses to report. About 40 percent of 

taxpayers amend the returns prepared by the tax authorities, and in most cases it is because they 

must report capital gains.13 

This compliance cost estimate, however, reflects only the cost of completing the tax 

return, and not the costs of complying with the reporting obligations incurred by employers, 

banks, and other payers. In Sweden, an estimate of the costs to employers of complying with the 

monthly tax withholding declaration and annual income report was made immediately following 

the 1990-91 tax reform.

14 On average, employers were estimated to spend 12,000 SEK 

($2,16015) per year. About 64 million information returns (compared to over a billion in the 

United States) are filed annually in Sweden. Almost all information returns are filed using 

magnetic media, which is facilitated by a free program available to small businesses. In 

Denmark, fewer than 12 million information returns are filed with the tax authorities, and it takes 

the tax authorities (specifically, four individuals) only one month to process the data.16 

In 1997, the Swedish tax administration spent about 1 percent of the total state and 

municipal income taxes to administer the income tax. The Danes also spend about 1 percent of 

national and local income taxes on administering their income tax system. 

U.S. Experience. In the United States, one state – Colorado – has explored moving 

toward a tax agency reconciliation system.

17 In 1995, the Colorado Department of Revenue 

(CDOR) undertook a comprehensive review of the state’s tax system. As a result of this review, 

12 Correspondence with Fiscal and Customs Affair Department, Swedish Ministry of Finance, December 8, 2000. 

13 Similarly, in Denmark about 35 percent of taxpayers amend the “draft” returns. 

14 Correspondence with Swedish Ministry of Finance. 

15 The cost is translated into U.S. dollars using the rate of exchange on December 31, 1991, which was 1 Swedish 

krona = .18 U.S. dollar. 

16 Correspondence with Danish Ministry of Taxation, Central Customs and Tax Administration, July 2, 2001. 

17 California has developed a system akin to a tax agency reconciliation system, but it is currently limited to 

taxpayers who did not file a state tax return even though it appears they were required to file such a return. Selected 

non-filers receive a letter from the California Franchise Tax Board indicating total income and income source, with 

state tax, penalties, and interest calculated for them. If the non-filers agree with the computed amounts, they sign 

and return the letter to the Franchise Tax Board. According to the Franchise Tax Board, “Experiences learned from 

this project set the stage for implementing our vision of providing a return free filing option to California taxpayers 

before 2010.” California Franchise Tax Board, Filing 2010: The Future of California State Income Tax Filing, 

November 2000, pg. 8. 

12 
CDOR began to take steps to expand electronic filing options and to initiate a tax agency 

reconciliation system (File4Me). 

Under the initial File4Me plan, CDOR would have eliminated any tax return filing 

requirement for state residents with relatively simple tax returns. For these taxpayers, CDOR 

intended to calculate refunds or balances due amounts using Individual Master File (IMF) 

extracts obtained from the IRS during the filing season. By 1998, CDOR postponed full 

implementation of File4Me due to a lack of time and funds but instead added a modified 

File4Me feature to their electronic filing system.

18 

Under the modified File4Me program, taxpayers must supply some information 

electronically to CDOR to first determine if they are eligible to participate. File4Me participants 

must be full-year residents of Colorado with no dependents. In addition, they must have income 

solely from wages reported on W-2 forms and cannot claim itemized deductions or the EITC. 

They also cannot be 65 or older or blind and therefore qualified for a larger Federal standard 

deduction. If taxpayers meet these eligibility criteria, they must then file electronically their 

wages and Colorado income tax withheld as reported on their W-2s. CDOR will then 

automatically complete the tax return for the taxpayer, with refunds or balance due notices issued 

two to four weeks later. CDOR estimates that utilization of File4Me grew from 4,554 taxpayers 

in 1999 to 13,205 returns in 2002.19 

18 Anol Bhattacherjee, “Customer-Centric Reengineering at the Colorado Department of Revenue,” 

Communications of the Association for Information Systems. 3 (June 2000), pg. 34. 

19 Communication with Colorado Department of Revenue, February 1, 2002 and August 13, 2003. 

13 

Chapter III: ELIGIBILITY AND PARTICIPATION IN A RETURN-FREE SYSTEM 

If the United States were to implement a return-free system, its success would ultimately 

depend on the numbers of taxpayers who could be exempted from a filing requirement and their 

willingness to forgo filing a tax return. Several studies have estimated the number of taxpayers 

who could be exempted from a return-filing requirement.20 The General Accounting Office, for 

example, found that 51 million taxpayers – or about 45 percent of filers – could be exempted 

from a filing requirement with minimal changes to the tax system. However, none of these 

studies have examined the willingness of taxpayers, if eligible, to participate in such a system. 

In the summer of 2000, the IRS conducted a survey of taxpayers who could be covered by a 

return-free system with little or no change to the structure of the income tax. Taxpayers were 

selected for the survey based on the types of income, credits, and deductions claimed on their tax 

year 1999 returns. This survey provides new insight into taxpayers’ attitudes towards return-free 

tax systems. 

Before discussing the results of this survey, the chapter first examines filing requirements 

and the characteristics of filers in tax year 1999. The chapter then identifies groups of individual 

taxpayers that might be covered by a return-free tax system with little or no change to the 

structure of the income tax. The analysis is based on the 1999 Statistics of Income, and the 

results are similar to those found in the earlier studies. The chapter also provides more detailed 

information than found in the earlier studies on the characteristics of those likely to be eligible 

for a return-free system. 

FILING REQUIREMENTS AND CHARACTERISTICS IN 1999 

Through tax returns, taxpayers notify the IRS of their income, filing status, dependents, 

deductions, and credits, and they reconcile the amounts of taxes paid during the year with the 

amounts they owe the Federal government. About 127 million taxpayers filed a 1999 tax return. 

Filing Requirements. Under current law, taxpayers are required to file returns if their 

gross income exceeds a certain threshold. The threshold is equal to the sum of their standard 

deduction and personal exemptions (for the taxpayer and spouse)21. Thus, the filing threshold 

differs by filing status and whether the taxpayer is 65 and over. In tax year 1999, filing 

thresholds ranged from $7,050 (single taxpayer under 65) to $14,400 (married filing jointly and 

both spouses 65 or older). (See Table 1 for filing thresholds.) Because the filing thresholds do 

not vary with the number of dependents, taxpayers may be required to file a return even if they 

have no income tax liability. For example, a married couple with two children under 17 was 

required to file a return in 1999 if their gross income exceeded $12,700, even though they would 

not have incurred an income tax liability, prior to tax credits, until their income exceeded 

$18,200. 

20 See, for example, studies by United States Department of the Treasury, Internal Revenue Service, Current 

Feasibility of a Return-Free System, Washington, D.C. October 1987; United States General Accounting Office, Tax 

Administration: Alternative Filing Systems, GAO/GGD-97-6, October 1997; William G. Gale and Janet Holtzblatt, 

“On the Possibility of a No-Return Tax System,” National Tax Journal 50 No. 3 (September 1997), pgs. 475-485; 

and Testimony of Deputy Assistant Secretary for Tax Analysis Leonard Burman before Senate Appropriations 

Subcommittee on Treasury and General Government, April 13, 2000. Descriptions of the studies are found in Box 1 

on the following page. 

21 The extra standard deduction for blindness is not taken into account in determining filing thresholds. 

15
Children and other dependents are subject to different filing requirements. In tax year 1999, 

individuals who were claimed as dependents by other taxpayers were required to file their own 

tax returns if their unearned income was over $700 or their earned income was over $4,300. 

Dependents were also required to file if their gross income (the sum of unearned and earned 

income) exceeded certain thresholds. These thresholds also varied depending on whether the 

dependent was married, 65 or older, or blind. 

Box 1: Studies of Return-Free Tax Filing Systems 

Author & Year 

of Release 

Title Estimates of Numbers of Taxpayers 

Eligible for Return-Free Filing Systems22 

IRS, 1987 Current Feasibility of a 

Return-Free Tax System 

Between 20 and 55 million taxpayers, or 

up to 54% of filers.23 

GAO, 1996 Tax Administration: 

Alternative Filing Systems 

As many as 51 million taxpayers or 

45% of filers.24 

Gale and 

Holtzblatt, 1997 

On the Possibility of a 

No-Return Tax System 

Between 8 and 63 million taxpayers, or 

up to 54% of filers.25 

Treasury, 2000 Testimony of Deputy Asst. 

Secretary for Tax Analysis 

Leonard Burman before 

Senate Appropriations 

Subcommittee on Treasury 

and General Government 

Between 8 and 57 million taxpayers, or 

up to 44% of filers.26 

22 The upper-bound estimates (or, in the case of the GAO report, the sole estimate shown) assume that the returnfree option would be limited to taxpayers with income from wages, interest, dividends, unemployment

compensation, pensions, and IRA distributions. Filers who have adjustments to income or itemize deductions would 

be required to file returns. As noted below, some studies make additional assumptions regarding the eligibility for 

return-free options. 23 Lower-bound estimate: The IRS assumes the return-free option is limited to single filers with no dependents and

income derived solely from wages or interest. The IRS estimate assumes that taxpayers who must complete a 1040 

return would still be required to file a return. 

Upper bound estimate: The IRS estimate assumes that filers who reduce their income by the amount of their IRA 

contributions could be exempt from a filing requirement (assuming they meet the other conditions listed in footnote 

22). 24 GAO assumes that filers who claim tax credits other than EITC would still be required to file a tax return. (The

GAO study predates the enactment of the child tax credit.) 25 Lower-bound estimate: Gale and Holtzblatt assume that the return-free option would be limited to taxpayers with 

income derived solely from one job. Taxpayers would still be required to file a return if they (1) claim credits; (2) 

are dependents; and (3) are in the 28 percent or higher rate brackets. 

Upper-bound estimate: Gale and Holtzblatt assume that the return-free option would be extended to taxpayers with

less than $10,000 in net long-term capital gains and itemized deductions for state and local taxes, mortgage interest, 

and charitable contributions (assuming that they meet the other conditions listed in footnote 22). Filers who claim

credits other than EITC would still be required to file returns. (This study also predates the enactment of the child

tax credit.) 26 Lower-bound estimate: Same as the lower-bound estimate described in footnote 25 with the following exception:

taxpayers who claim the child tax credit would not be required to file returns (assuming they meet the other 

specified conditions). 

Upper-bound estimate: Filers who claim credits other than child tax credit and EITC would still be required to file 

returns.

16
Table 1: Gross Income Thresholds for Filing Requirements 

1999 

Filing Status Age Gross Income 

($) 

Single 

Married filing jointly 

Married filing separately 

Head of Household 

Qualifying Widow(er) with 

Dependent Child 

Under 65 

65 or older 

Under 65 (both spouses) 

65 or older (one spouse) 

65 or older (both spouses) 

Any age 

Under 65 

65 or older 

Under 65 

65 or older 

7,050 

8,100 

12,700 

13,550 

14,400 

2,750 

9,100 

10,150 

9,950 

10,800 

Individuals must also file a tax return if they meet any of the following four conditions: 

•

•

•

•

They owe any special taxes including: Social Security and Medicare tax on tips not 

reported to employers; uncollected Social Security and Medicare or Railroad 

Retirement taxes on tips reported to employer or on group-term life insurance; 

alternative minimum tax; recapture taxes; or tax on an individual retirement 

arrangement (IRA), other retirement plan, or on a Medical Savings Account (MSA). 

They receive any advance earned income tax credit payments from their employer. 

They have net earnings from self-employment of at least $400 (and thus owe selfemployment taxes). 

They earn wages of $108.28 or more from a church or qualified church-controlled 

organization that is exempt from employer social security and Medicare taxes. 

Over 87 percent of 1999 filers were legally required to file. In most cases, they were required to 

file because they incurred a positive individual income tax liability, but 6.2 million filers were 

required to file even though they did not owe income taxes in order to claim a dependent or to 

pay self-employment income taxes or other special taxes. (See Table 2.) About 11 percent 

(about 14 million filers) filed a return even though they are not required to do so in order to 

obtain a refund of overwithheld or overpaid estimated income taxes, the EITC, the additional 

17
Table 2: Number of Filers by Reason of Filing a Tax Return in Tax Year 1999 

Characteristics of Filers Millions Percent 

Required to File 

Positive Income Tax Liability Before EITC or 

Additional Child Tax Credit 102.8 80.9 

Special Taxes 0.5 0.4 

Self-Employment Income of More than $400 3.2 2.5 

Church Wages over $108 * * 

Income Above the Filing Threshold 4.1 3.2 

Required to File for Other Reason 0.1 0.1 

Subtotal: Required to File 110.7 87.1 

Other Reason to File 

Refund of Overwithheld Taxes or Estimated Taxes 13.2 10.4 

EITC or Additional Child Tax Credit 

Subtotal: Other Reason to File 

Subtotal: Required or Reason to File 

No Apparent Reason to File 

Not in Any of Preceding Categories 

Total 

0.8 0.7 

14.0 11.1 

124.7 98.1 

2.3 1.8 

127.1 100.0 

Source: Authors' calculations using 1999 Statistics of Income. 

* - fewer than 50,000 filers or less than .05 percent. 

child tax credit, or for other observable reasons. Finally, 2 percent (2.3 million filers) filed a 

return for no apparent reason. Of these filers, 1.4 million used paid preparers, and nearly half 

were age 65 or older. 

Types of Forms. Many taxpayers may choose between filing the standard Form 1040 

and a simpler variant. Nearly 21 million filers (16 percent of filers) filed their 1999 tax return 

using the 1040EZ form or the telephone. The 1040EZ and the telefile options are very simplified 

versions of the standard 1040 form. To be eligible, taxpayers must be single or married filing 

jointly, have taxable income below $50,000, and have income only from wages, salaries, tips, 

taxable scholarships, unemployment compensation, and interest, with taxable interest income 

below $400.27 A few other provisions also apply.28 Filers can claim personal exemptions, the 

27 Beginning with tax year 2002 returns, taxpayers can have up to $1,500 of taxable interest income and still file a 

Form 1040EZ. Nearly a million additional taxpayers can file a Form 1040EZ as a consequence. 

28 The taxpayer must not have been a resident alien during any part of the year, and must not have received any 

advance earned income tax credit payments. 

18
standard deduction and the earned income tax credit (EITC) for workers who do not reside with 

children.29 

An additional 27 million (or 21 percent of filers) filed the 1040A form, a shortened 

version of the 1040. To qualify, households' incomes must come solely from wages, taxable 

scholarships, pensions, IRAs, unemployment compensation, social security, interest and 

dividends. The 1040A allows an adjustment for IRA contributions, personal exemptions, the 

standard deduction including the extra standard deduction for elderly and blind taxpayers, the 

EITC, the child and dependent care tax credit, and the credit for the elderly and disabled. 

Taxable income must be below $50,000. Relative to the 1040EZ, the 1040A requires more 

information and contains several more complicated provisions (such as head of household filing 

status, dependency rules, child-related credits, and even the AMT), but is still fairly simple. 

Among those who filed the 1040A in 1999, there were 2.6 million taxpayers (or 2 percent of 

filers) who qualified to file the simpler 1040EZ. 

The remaining 79 million households (or 62 percent of filers) filed the standard 1040 

form.

30 About 11 million taxpayers (or 8 percent of all filers) filed the 1040 but were eligible to 

file a 1040A or 1040EZ. All told, over 58 million taxpayers (or 46 percent of all filers) either 

filed or could have filed one of the simplified forms. 

Other Filing Characteristics. In tax year 1999, 69 million filers (or 54 percent of filers) 

used a paid preparer to file a return. (See Table 3.) Use of paid preparers varied by the type of 

form filed. Among those who filed Forms 1040, 65 percent used paid preparers. In contrast, 

only 20 percent of those who filed Forms 1040EZ used paid preparers. Conversely, electronic 

filing was higher among those who file the simpler forms. Among the 36 million filers who filed 

electronically, 13 million filed Form 1040A (46 percent of Form 1040A filers) and 10 million 

filed Form 1040EZ (48 percent of Form 1040EZ filers). 

There were also differences in the timing of filing returns. Nearly 63 million filers (or 49 

percent of filers) filed their returns in March or April. Only about 32 percent of filers filed 

earlier than March. Among those who used Forms 1040A and Forms 1040EZ, about half filed 

returns in January and February. 

Most filers received a refund of $100 or more. However, Form 1040 filers were more 

likely to have a balance due: 32 percent of Form 1040 filers had a balance due compared to 10 

percent of Form 1040A filers and 8 percent of Form 1040EZ filers. 

EXEMPTING NON-TAXABLE FILERS AND TAXPAYERS IN THE 15 PERCENT 

BRACKET FROM RETURN FILING REQUIREMENTS 

Using the 1999 Statistics of Income, we examine how many people could be potentially 

eligible to participate in a return-free tax system if only changes in tax administration were made. 

29 Taxpayers in a number of different situations could, in principle, file the 1040EZ but would obtain tax savings by 

filing the 1040A or the 1040. Such taxpayers include those that are age 65 or older, blind, have dependents, have 

adjustments to income other than EITC, and have itemized deductions. It is also possible that some taxpayers file a 

1040 when they are qualified to file a simpler tax form. 

30 This includes about 5 million taxpayers who filed a 1040PC, which looks similar to a 1040 but is computergenerated. The form 1040PC is no longer available. 

19
Table 3: Filers by Filing Characteristics 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 127.1 74.2 5.2 27.0 20.8 

Paid preparers: 

Used 69.3 48.3 3.0 13.9 4.1 

Did not use 57.8 25.9 2.2 13.1 16.7 

Filed by: 

Paper 91.6 61.0 5.2 14.5 10.9 

Electronically 35.5 13.2 n.a. 12.5 9.9 

Filed in: 

January or February 40.8 14.2 1.0 15.5 10.1 

March or April 62.7 40.4 3.0 9.9 9.5 

May or later 23.6 19.5 1.2 1.6 1.2 

Received: 

Refund less than $100 6.0 2.5 0.3 0.9 2.3 

Refund of $100 or more 85.6 43.0 2.9 23.0 16.7 

Balance due 29.2 23.3 1.7 2.6 1.6 

No refund or balance due 6.3 5.4 0.2 0.5 0.2 

Source: 1999 Statistics of Income 

In this section, we consider how many filers could be exempted who either paid no tax in 1999 

or were in the 15-percent rate bracket.31 We focus on this group first because it may be difficult 

to apply progressive tax rates to a combination of income derived from different sources. 

Wage-earners. Almost all employers withhold Federal income taxes on wages and 

transmit these amounts to the Treasury throughout the year. Wage income is generally not 

exempted from withholding unless collecting such taxes would impose significant burdens on 

employers and employees (e.g., domestic/household workers and certain agricultural workers).32 

31 The Economic Growth and Tax Relief Reconciliation Act of 2001 created a new 10 percent tax rate bracket, 

which would include taxpayers who were in the 15 percent bracket under 1999 law. 

32 For more information, see Table D-1 in Appendix D. 

20
Because almost all wage income is already subject to withholding and information 

reporting, many workers could be shifted into a return-free system more easily than the rest of 

the filing population. In 1999, approximately 21.5 million taxpayers (out of 127.1 million 

taxpayers) had income solely from wages, claimed no credits other than the child tax credit, did 

not itemize deductions, and either had no taxable income or were in the 15-percent tax bracket. 

(See Table 4.) For these taxpayers, tax liabilities equal 15 percent of wage income above the 

appropriate standard deduction and exemption amounts minus the child tax credit. 

Table 4: Filers Qualifying for Alternative Return-Free Systems 

By Type of Income and Return 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 127.1 74.2 5.2 27.0 20.8 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not 

claimed as dependent 6.9 0.8 0.2 2.0 3.8 

B) Add dependent filers 9.2 1.1 0.3 2.2 5.7 

C) Add those with earnings from more than one job 21.5 2.4 0.7 4.8 13.6 

Add those with income only from "withholdable sources"* 34.5 5.2 1.3 10.3 17.8 

Add those with EITC 47.5 6.3 1.6 20.5 19.2 

Add those with capital gains distributions 47.8 6.6 1.6 20.5 19.2 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not 

claimed as dependent 1.0 0.2 0.0 0.2 0.7 

B) Add dependent filers 1.1 0.2 0.0 0.2 0.7 

C) Add those with earnings from more than one job 1.8 0.4 0.0 0.3 1.0 

Add those with income only from "withholdable sources"* 3.9 1.3 0.1 0.9 1.6 

Add those with EITC 3.9 1.3 0.1 0.9 1.6 

Add those with capital gains distributions 4.0 1.4 0.1 0.9 1.6 

Total Filers 51.8 7.9 1.7 21.4 20.8 

Percent of Total Filers 41% 11% 33% 79% 100% 

Source: 1999 Statistics of Income 

* Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

21
Even though most wages are subject to withholding, the current system would have to be 

modified in several ways to eliminate a filing requirement in an exact withholding system or to 

minimize refunds or balances due in a tax agency reconciliation system. The current 

withholding formulas are not designed to be exact for dependent filers, dual-career couples, or 

taxpayers who do not work all year or have more than one job during the year. The withholding 

formulas could be modified to meet the needs of taxpayers with more than one job (including 

dual-career couples), but the additional precision would further complicate the computation of 

withholding allowances on Form W-4. 

If only non-dependent filers with income solely from one job were exempted from a 

return-filing requirement, about 6.9 million taxpayers would qualify. If the withholding 

formulas could be fine-tuned for dependent filers but not for filers with earnings from more than 

one job, about 9.2 million filers could be exempted from a filing requirement. 

Other Income Sources. Under current law, income taxes may be withheld on forms of 

income other than wages. Withholding is required on taxable payments from an employersponsored pension or individual retirement account (IRA) unless the recipient elects not to have 

taxes withheld. In 1999, income tax was withheld from certain types of gambling winnings of 

more than $5,000 at a rate of 28 percent. Taxpayers could request that income tax be withheld 

on unemployment benefits (at a rate of 15 percent) or on social security benefits or certain 

agricultural benefits (at a rate ranging from 7 to 31 percent). Under certain circumstances, 

payers were required to withhold income tax, at a 31 percent rate, on interest, dividends, rents, 

commissions, or royalties. These payments were subject to back-up withholding if the taxpayer 

does not provide a valid taxpayer identification number or the IRS notifies the payer to start 

withholding on interest or dividends because these payments have been underreported on the 

taxpayer’s income tax return in the past.33 

Even if payers do not withhold taxes at source, they are required to report payments of 

certain types of income to both recipients and the IRS.34 In 2000, employers sent 243 million 

Forms W-2 to taxpayers and the Social Security Administration (SSA), showing the amount of 

earned income received and taxes withheld, if any, during 1999. In addition, businesses and 

other payers sent one billion information returns (1099s and others) to taxpayers and the IRS, 

indicating the amount and type of income received and taxes withheld, if any. Among the most 

prevalent are information returns for interest income (266 million Forms 1099-INT), brokerage 

sales (241 million Forms 1099-B), dividends (127 million Forms 1099-Div), certain payments by 

state and local governments, including unemployment compensation (63 million Forms 1099-G), 

and retirement benefits (63 million Forms 1099-R). 

If withholding at the source were extended to interest, dividends, pensions, individual 

retirement account distributions, and unemployment insurance benefits, the number of taxpayers 

eligible for an exact withholding system would increase to 34.5 million. Since payers are 

already required to report these sources of income, these taxpayers also could be exempted from 

filing under a tax agency reconciliation system. 

33 The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief 

Reconciliation Act of 2003 reduced statutory tax rates. As a result, withholding rates have also declined. In 2003, 

income tax is withheld from certain types of gambling winnings in excess of $5,000 at a rate of 25 percent. It may 

be withheld from unemployment benefits at a rate of 10 percent or on social security benefits or certain agricultural 

benefits at rates ranging from 7 percent to 25 percent. The backup withholding rate is 28 percent. 

34 See Table D-2 in Appendix D for listing of income subject to information reporting. 

22
 EITC. An additional 13 million taxpayers could be exempted from a return-filing 

requirement if eligibility for the EITC could be determined in the absence of a return-filing 

requirement. Whether a tax agency reconciliation system or exact withholding system is 

adopted, operating an EITC in a return-free system would be facilitated by simplifying and 

conforming its eligibility criteria more closely to other child-related tax benefits. For example, a 

taxpayer currently may claim a child for EITC purposes but not be entitled to claim the same 

child as a dependent. Thus, unless a uniform definition of child were adopted, a taxpayer would 

have to notify employers or the IRS whether a child qualified him or her for each specific childrelated tax benefit before the correct taxes could be withheld in an exact withholding system or 

calculated by the IRS in an agency reconciliation system. 

In addition, eligibility and credit computations are very sensitive to changes in family 

status and income during the year, making it difficult to accurately predict a taxpayer’s EITC in 

advance if an exact withholding system were adopted. The British, who have a PAYE system, 

have responded by establishing a separate claims application process for the Working Family 

Tax Credit (WFTC) or operating its predecessor, the Family Credit, through welfare offices that 

used a similar application process. Thus, they have not been able to totally eliminate some sort 

of filing requirement for WFTC claimants. 

Capital Gains. Capital gains are taxed differently depending on the type and length of 

ownership of assets. Because it would be difficult to determine basis solely by third-party 

reporting, income from capital gains could not generally be brought into a return-free system. 

However, an additional 300,000 taxpayers who receive capital gains distributions from mutual 

funds could be included in a tax agency reconciliation system because this income is reported 

independently by payers. They also could be exempted from a filing requirement under an exact 

withholding system if these distributions were taxed at source, but this could increase 

administrative costs somewhat for financial institutions. 

TAXPAYERS IN HIGHER RATE BRACKETS WHO COULD BE EXEMPTED FROM 

RETURN-FILING REQUIREMENT 

Exempting taxpayers in higher marginal tax rate brackets from a filing requirement 

would be challenging under an exact withholding system. Lacking information on taxpayers’ 

total income from various sources, payers – including banks and other financial institutions – 

would not know the taxpayers’ tax rate bracket. Taxpayers (or the IRS) could provide the payer 

with a withholding code based on prior year’s income or anticipated current year’s income, but it 

could be difficult to adjust this code during the current tax year if there are fluctuations in 

income or changes in family status. Taxpayers may also have privacy concerns about sharing 

information about their tax rate bracket with third parties. Including higher income taxpayers in 

a return-free system would be more feasible in a tax agency reconciliation system, where tax 

liabilities would be computed by the tax agency based on end-of-year income information. 

The number of taxpayers who could be exempted from a return-filing requirement would 

increase, though not dramatically, if those in higher marginal tax rate brackets were also included 

in a return-free system. Among those who could be exempted from a return-filing requirement 

would be 1.8 million taxpayers with income solely from wages and 2.2 million taxpayers with 

income from a combination of wages, pensions, IRA distributions, interest, dividends, capital 

gains, and unemployment compensation. In total, 4 million taxpayers in the rate brackets above 

15 percent would qualify for a return-free system. 

23
Summary. Depending on the extent of changes to current tax administration, a final tax 

return requirement could be eliminated for between 7 and 52 million taxpayers, or up to 41 

percent of the tax filing population without making changes to the fundamental structure of the 

income tax. 

CHARACTERISTICS OF TAXPAYERS POTENTIALLY ELIGIBLE TO 

PARTICIPATE IN A RETURN-FREE SYSTEM 

Of the 52 million taxpayers who could potentially be exempted from a return-filing 

requirement, 42 million (81 percent) currently file the simpler 1040A or 1040EZ forms. All 

taxpayers who currently file a 1040EZ (including those who use the telefile option), as well as 79 

percent of those who file a 1040A, would qualify for the return-free system. Only 12 percent of 

taxpayers who file a 1040 return (including those who file a 1040PC) would be eligible for the 

return-free system. 

Over half of those who would be eligible for a return-free system currently file tax 

returns on their own without the assistance of paid preparers. Among those with income from 

wages only who could qualify for a return-free system, 70 percent do not use paid preparers. (See 

Table 5 and more detailed tables in Appendix E.) 

Among those who file electronically, over half could be eligible for return-free filing. In 

contrast, only about 35 percent of those who file paper returns would qualify for the return-free 

system. Because most taxpayers still file paper returns, only about 39 percent of those who 

would be exempted from a return-filing requirement file electronically. 

As will be discussed in the next chapter, implementation of a tax agency reconciliation 

system might result in some delays of refunds, particularly for those who file early. Any delay in 

refunds is of concern because early filers are more likely to be eligible to participate in a returnfree system. Of the 52 million taxpayers potentially eligible to participate in a return-free 

system, 25 million filed their 1999 tax return in January or February. Among those who filed in 

January or February, over half filed electronically, and over one-third claimed the EITC. 

Although 24 million taxpayers filed their 1999 returns during the remainder of 1999, only 4 

million late filers would qualify for the return-free system. 

Many of the taxpayers who qualify for a return-free system receive tax refunds. Fortyone million taxpayers who could be exempted from a return filing requirement received a tax 

refund of at least $100 on their 1999 returns. Although 29 million taxpayers owed the 

government a balance due when they filed their tax return for 1999, less than one in five of these 

taxpayers would have qualified for the return-free system. 

TAXPAYER ATTITUDES TOWARD RETURN-FREE FILING SYSTEMS 

To learn about taxpayer attitudes toward a return-free system, the IRS contracted with 

Russell Marketing Research to conduct a telephone survey of taxpayers in July and August, 

2000. Potential respondents were selected at random on a nationally-representative basis. To 

qualify to participate in the survey, respondents had to meet certain criteria. First, they had to be 

between the ages of 18 and 64. Second, they had to have filed a tax return for tax year 1999. 

24
Table 5: Filers Qualifying for Alternative Return-Free Systems by Filing Characteristics 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 

Paid preparers: 

Used 

Did not use 

Filed by: 

Paper 

Electronically 

Filed in: 

January or February 

March or April 

May or later 

Received: 

Refund less than $100 

Refund of $100 or more 

Balance due 

No refund or balance due 

51.8 7.9 1.7 21.4 20.8 

21.0 4.6 1.0 11.3 4.1 

30.8 3.3 0.7 10.1 16.7 

31.7 7.7 1.7 11.4 10.9 

20.1 0.3 n.a. 10.0 9.9 

25.2 1.9 0.5 12.8 10.1 

22.3 4.4 1.0 7.4 9.5 

4.2 1.6 0.2 1.3 1.2 

3.9 0.7 0.2 0.8 2.3 

41.3 5.2 1.2 18.3 16.7 

5.5 1.7 0.3 1.9 1.6 

1.0 0.4 0.1 0.4 0.2 

Source: 1999 Statistics of Income 

Third, they had to be potentially eligible to participate in a return-free tax system. For 1999, they 

had to have: 

• Income only from wages, salaries, interest, dividends, capital gains,35 pensions, and/or 

unemployment compensation; 

• No adjustments to income for IRA deductions, self-employment tax, alimony paid, student 

loan interest deductions, or medical savings account deductions; 

• No additional taxes such as self-employment tax, household employment tax, or alternative 

minimum tax; 

• Claimed the standard deduction; and 

• No credits other than the child tax credit or the earned income tax credit. 

Fourth, survey respondents could not be employed as tax preparers. 

35 Survey respondents were included even if they received capital gains from assets other than mutual funds. 

25
In total, about 23 percent of respondents met these criteria. This number is substantially 

lower (about 18 percentage points) than the estimates given earlier in this chapter of the share of 

taxpayers eligible to participate in a return-free system. The age restrictions placed on the survey 

sample explain about half this difference. In addition, it is not unusual in survey research for 

some respondents to “opt out” by deliberately responding incorrectly to one of the screening 

questions. 

During the interview, survey participants were first asked questions regarding their 

general attitudes toward a return-free system. The telephone interviewer described the following 

system to them: 

Under this new system, you would have the option of having the IRS figure your income 

taxes for you. The IRS would compute your income taxes using income reports, such as 

W-2s and 1099s, provided by your employers, banks, and other financial institutions. You 

would still have to provide the IRS with some information, such as your marital status and 

the names and social security numbers of your dependents, so that the IRS could compute 

your tax liability. But you would no longer have to prepare an annual Federal income tax 

return. 

When asked how likely they would be to voluntarily participate in such a system, 39 percent said 

that they would definitely or probably volunteer for it. However, 36 percent responded that they 

would definitely or probably not be willing to participate in a return-free system, while 24 

percent were uncertain and one percent did not know. (See Table 6.) 

Participants were then asked how long the new system would have to be in effect before 

they would feel comfortable trying it out. As shown in Table 7, only 17 percent of respondents 

aid that they would be interested in participating immediately. The remainder would wait at least 

a year before trying the new system.

36 

Based on this simple description of a return-free system, participants were then asked to 

respond to 11 statements describing the benefits and costs of a return-free system. (See 

Table 8.) The most important perceived benefits of a return-free system were: 

• It saves time for the taxpayer; 

• It simplifies tax filing for the taxpayer; 

• It saves taxpayer money in not having to pay a tax preparer; and 

• It insures that everyone pays his or her fair share of taxes. 

The primary barriers to a return-free system were concerns about giving the government too 

much control over taxpayers’ lives and questions regarding how problems would be resolved 

with the IRS. 

36 When asked how long they would wait before they would feel comfortable trying a return-free tax system, 13 

percent say that they would never try the system. Yet, in response to an earlier question, 17 percent say that they 

would definitely not be interested in participating in the return-free system. This difference probably does not 

indicate a change in attitude over the course of the 15-minute survey. Notably, the non-response rate was higher on 

the question regarding the length of time they would wait before trying the new system, perhaps reflecting some 

confusion or uncertainty by survey participants on how to respond to the second question. 

26
Table 6: Likelihood of Participating in a Return-Free System 

Question: If this method of filing federal income tax returns becomes available to 

you, how likely do you think you would be to voluntarily participate and have your 

federal income tax return prepared this way? 

Response: 

Percent of 

Respondents 

Confidence Range 

(Percent) 

Positive (total) 

Definitely interested 

Probably interested 

Neutral (might/might not) 

Negative (total) 

Definitely not interested 

Probably not interested 

Don't know/No answer 

Total 

39 36 to 42

13

26

24 21 to 27

36 33 to 39

17

19

1

100

Source: Russell Marketing Research, Inc., "Findings From Year 2000 Research Into 

Taxpayer Attitudes Toward & Acceptance of a Return-Free Tax Filing System," 

October 12, 2000. 

Number of Respondents: 1,001 

Table 7: Length of Time Return-Free System Would Have to be In Effect 

Before Respondents Would Use It 

Question: How long would this new system have to be in effect before you would feel 

comfortable trying it out? 

Response: 

Percent of 

Respondents 

Confidence Range 

(Percent) 

Would try it immediately 17 15 to 19 

Would wait a year 28 25 to 31 

Would wait a few years 27 24 to 30 

Would wait five or more years 9 7 to 11 

Never 13 11 to 15 

Don't know/No answer 7 

Source: Russell Marketing Research, Inc., "Findings From Year 2000 Research Into 

Taxpayer Attitudes Toward & Acceptance of a Return-Free Tax Filing System," 

October 12, 2000. 

Number of Respondents: 1,001 

Details do not add up to total due to rounding. 

27
Table 8: Attitudes Toward Return-Free Systems 

Question: After I read each statement, please tell me if you "agree completely," "agree 

somewhat," "disagree somewhat," or "disagree completely" with each statement as it applies to 

this optional tax filing method. 

Response: 

Percent of 

Respondents 

Confidence 

Range 

(Percent) 

Respondents agreed completely or somewhat with following statements: 

It saves times for the taxpayer. 81 79 to 83 

It simplifies tax filing for the taxpayer. 78 75 to 81 

Saves taxpayer money in not having to pay a tax preparer. 74 71 to 77 

Insures that everyone pays his or her fair share of taxes. 65 62 to 68 

It takes away the worry from the tax filing process. 61 58 to 64 

It takes away the fear of audits. 51 48 to 54 

It gives the government too much control of your life. 72 69 to 75 

I worry about how you resolve a tax problem. 69 66 to 72 

The IRS calculates taxes to their benefit, not the taxpayer's. 49 46 to 52 

You can't trust the IRS to calculate your taxes this way. 47 44 to 50 

It's just something that taxpayers don't really need. 46 43 to 49 

Source: Russell Marketing Research, Inc., "Findings From Year 2000 Research Into Taxpayer 

Attitudes Toward & Acceptance of a Return-Free Tax Filing System," October 12, 2000. 

Number of Respondents: 1,001 

Survey participants were also asked how much they would be willing to pay in order to 

be exempted from a return filing requirement. Over half (54 percent) said they would not be 

willing to pay anything, while 27 percent would not pay more than $25. (See Table 9.) 

The interviewer began the next section of the survey by describing the alternative ways 

that a return-free tax system could be implemented. First, a final withholding system was 

described: 

All of your taxes would be paid through withholding by your employer. You would let 

the employer know if there was any change in your personal situation – such as the birth 

of a child – during the year that affects your income tax, so that your withholding could 

be adjusted. Because all of your taxes would be paid through withholding, you would no 

longer receive a refund or owe taxes at the end of the year. 

Then, a tax agency reconciliation system was outlined: 

You would still receive a refund or owe taxes at the end of the year, but first you would 

receive a form from the IRS showing how much taxes they calculated for you. You 

28
Table 9: Amount Willing to Pay to Use Return-Free System 

Question: How much would you be willing to pay in order to be able to use the 

new system and not have to file a tax return? 

Response 

Percent of 

Respondents 

Confidence 

Range (Percent) 

$0 

$10 

$25 

$50 

$100 

More than $100 

Don't know/No answer 

54 51 to 57 

12 10 to 14 

15 13 to 17 

6 5 to 8 

2 1 to 3 

* 

10 

Source: Russell Marketing Research, Inc., "Findings From Year 2000 Research 

Into Taxpayer Attitudes Toward & Acceptance of a Return-Free Tax Filing 

System," October 12, 2000. 

Number of Respondents: 1,001 

* - less than .05 percent

Details do not add up to total due to rounding.

would then send the form back to the IRS showing whether or not you agreed with their 

computations. 

Participants were then asked which of these two options they preferred. Nearly twothirds of respondents (65 percent) preferred the tax agency reconciliation system. (See Table 

10.) It is possible that survey participants would have responded less negatively to a description 

of a final withholding system that appeared to provide more privacy protections. For example, 

as described in Chapter II, the British do not provide personal information directly to the 

employer, but instead send this information to Inland Revenue, which then notifies employers of 

which withholding code to use for each employee. Survey participants who favored a final 

withholding system were asked if they would prefer a system in which they provided personal 

information directly to the IRS rather than to employers. However, given the relatively small 

number of respondents who favored a final withholding system, the responses to the follow-up 

question were not reliable. Because the survey was conducted through telephone interviews, 

time constraints on the length of interviews prevented this question being asked of all survey 

respondents. 

Survey participants who had expressed a preference for the tax agency reconciliation 

system were then asked how their views might be affected by delays in receiving refunds. About 

29
Table 10: Preferences on Type of Return-Free System 

Question: This optional return-free system has not been fully developed, and we 

would like your input on how the system could be designed. I'm going to describe two 

different ways this system could be implemented. 

A. All of your taxes would be paid through withholding by your employer. You 

would let the employer know if there was any change in your personal situation -- such 

as the birth of a child -- during the year that affects your income tax, so that your 

withholding could be adjusted. Because all of your taxes would be paid through 

withholding, you would no longer receive a refund or owe taxes at the end of the year. 

B. You would still receive a refund or owe taxes at the end of the year, but first you 

would receive a form from the IRS showing how much taxes they calculated for you. 

You would then send the form back to the IRS showing whether or not you agreed with 

their computations. 

Which of these two do you prefer? 

Response: 

Percent of 

Respondents 

Confidence Range 

(Percent) 

Prefer exact withholding system 

Prefer tax agency reconciliation system 

No preference 

Like both 

Like neither 

Don't know 

19 17 to 21 

65 62 to 68 

15 13 to 17 

2 

13 

2 

Source: Russell Marketing Research, Inc., "Findings From Year 2000 Research Into 

Taxpayer Attitudes Toward & Acceptance of a Return-Free Tax Filing System," 

October 12, 2000. 

Number of Respondents: 1,001 

Details do not add up to total due to rounding. 

57 percent of respondents said that a one-month delay in their tax refund would not affect their 

preference for a tax agency reconciliation system. However, over half (55 percent) of 

respondents said that they would like a tax agency reconciliation system less if refunds were 

delayed two months. (See Table 11.) 

The analysis earlier in this chapter which showed that most taxpayers eligible for a 

return-free system file early, often electronically, is confirmed by the survey findings. Among 

survey participants, slightly over half said that they had filed their tax return in January or 

February, and 56 percent filed electronically. The survey also finds that most of those eligible 

for a return-free system received refunds. Seventy-eight percent of respondents reported 

30
Table 11: Effects of Delays in Refund Payments on 

Preferences for Tax-Agency Reconciliation 

Question: Would you still like this new system more, less, or about the same if your 

refund were delayed by one (two) month(s)? 

Response: 

Percent of 

Respondents 

Confidence Range 

(Percent) 

One-month delay 

Like the new system more 

Like the new system less 

Like the new system about the same 

Don't know/No answer 

Two-month delay 

Like the new system more 

Like the new system less 

Like the new system about the same 

Don't know/No answer 

3 

36 32 to 40 

57 53 to 61 

4 

1 

55 50 to 60 

38 33 to 43 

6 

Source: Russell Marketing Research, Inc., "Findings From Year 2000 Research Into 

Taxpayer Attitudes Toward & Acceptance of a Return-Free Tax Filing System," 

October 12, 2000. 

Number of Respondents: 

1 month (total preferred tax-agency reconciliation system): 651 

2 month (liked system more or same if refunds delayed one month): 414 

receiving a refund, which in most cases exceeded $100. When asked to comment on their 

experiences filing tax returns in 2000, 85 percent said they found the experience to be “very” or 

“somewhat” easy. (See Table 12.) 

Summary. This survey provides new information on taxpayers’ attitudes toward a 

return-free tax system. The survey finds that about 39 percent of those most likely to be 

exempted from a return-free tax system would be interested in participating in such a system. 

The findings also suggest that utilization is likely to be a function of the design and successful 

implementation of the program. Relatively few would take advantage of a return-free tax system 

immediately after implementation. Given a choice between two types of return-free systems, 

most preferred the tax agency reconciliation system. But support for such a system could be 

jeopardized if refunds were delayed by more than one month. 

31
Table 12: Tax Year 1999 Filing Characteristics of Survey Participants 

Characteristic 

Percent of 

Respondents 

Method of Filing 

Electronic 

Telefile 

Paper return prepared on computer 

Paper return not prepared on computer 

Don't know/No answer/Refused 

Type of Return Filed 

1040EZ 

1040A 

1040 

Don't recall/No answer/Refused 

Preparation of Return 

Paid preparer 

Prepared by taxpayer, friend, or relative 

Don't recall/Refused 

Filed Return in: 

January or February 

March or April 

May or later 

Haven't filed yet 

Don't recall/No answer/Refused 

Final Tax Liability 

Received refund of up to $100 

Received refund of more than $100 

Owed a balance 

Neither owed nor received refund 

Don't recall/No answer 

Attitude Toward Filing 1999 Tax Return 

Very easy 

Somewhat easy 

Somewhat difficult 

Very difficult 

Don't know/Don't recall/No answer 

34 

22 

7 

35 

2 

30 

24 

20 

26 

50 

50 

* 

51 

41 

2 

1 

4 

8 

70 

14 

3 

5 

44 

42 

10 

3 

2 

Source: Russell Marketing Research, Inc., "Findings From Year 2000 

Research Into Taxpayer Attitudes Toward & Acceptance of a ReturnFree Tax Filing System," October 12, 2000. 

Number of Respondents: 1,001 

* - less than .05 percent

Details do not add up to total due to rounding.

32
Chapter IV: IMPACT OF RETURN-FREE SYSTEMS ON COMPLIANCE BURDENS 

AND ADMINISTRATIVE COSTS 

The current income tax systems impose burdens on individuals, employers, other third 

parties, and the government. Taxpayers, for example, must spend time learning about the tax 

law, compiling and maintaining tax records, preparing their returns, and copying and 

transmitting the final returns to the IRS. The IRS estimates that in tax year 2000, individual 

taxpayers spent 3.21 billion hours complying with the tax code and incurred an additional $18.8 

billion of out-of-pocket expenditures. Applying a dollar value to each hour of time burden 

(between $15 and $25 per hour) yields a total compliance cost that varies between $67 billion 

and $99 billion.37 This estimate of compliance costs, however, does not account for post-filing 

interactions with the IRS.38 Additional costs are borne by third parties and the Federal 

government.39 

Interest in return-free tax systems is motivated, in large part, by beliefs that these burdens 

would be substantially reduced by the elimination of a filing requirement. This chapter discusses 

some of the factors that may affect the impact of a return-free system on compliance and 

administrative costs in the United States. A key consideration is whether a return-free tax system 

would reduce total costs of operating the income tax or if it would merely shift costs from 

taxpayers to other affected parties, including businesses, banks, and state and federal 

governments. 

EXACT WITHHOLDING 

To our knowledge, no one has estimated the effect of an exact withholding system on 

compliance and administrative costs in the United States income tax system. In the absence of 

such an analysis, the net effects of an exact withholding system on compliance and 

administrative costs appear to be ambiguous. An exact withholding system could, for example, 

reduce some compliance costs because fewer taxpayers would have to file returns. On the other 

hand, some taxpayers might have to provide more information throughout the tax year than they 

currently do in order to ensure that the correct amount of taxes was withheld. Similarly, an exact 

withholding system would reduce some types of administrative costs (for example, return 

processing costs) but could also increase others (for example, processing of Form W-4s). 

Taxpayer Compliance Costs. Up to 52 million taxpayers might no longer be required 

to file annual tax returns under an exact withholding system. At a minimum, these taxpayers 

would not have to complete and transmit returns to the IRS. Some types of post-filing 

37 John L. Guyton, John F. O’Hare, Michael P. Stavrianos, and Eric J. Toder, “Estimating the Compliance Cost of 

the U.S. Individual Income Tax,” Paper presented at the National Tax Association 2003 Spring Symposium, 

Washington, D.C., May 30, 2003. 

38 After filing a return, taxpayers may receive notices from the IRS regarding mathematical or clerical errors, 

underreported income, and deficiencies. 

39 Little information is available on the costs incurred by third parties. The cost to the Federal government is 

reflected in the nearly $10 billion budget of the IRS, but this amount covers the IRS’s costs of administering all 

taxes, not just operating the individual income tax. The IRS does not separately track the costs of operating the 

income tax. Further, other government agencies have a role in administering the income tax. For example, the 

Department of Labor certifies employers, who hire disadvantaged workers, as eligible for the Work Opportunity Tax 

Credit and the Welfare-to-Work Tax Credit, although the credits are applicable to federal income tax liabilities. 

33
interactions would also decline. An exact withholding system should reduce the number of 

notices sent to taxpayers regarding mathematical or clerical errors on their returns or 

underreported income. 

However, the total decline in compliance burden may not be large. As noted above, the 

IRS estimates that taxpayers incurred between $67 billion and $99 billion in total compliance 

costs. However, about 60 percent of the costs were incurred by self-employed taxpayers, who 

would not be eligible to participate in an exact withholding system. 

In addition, many of the taxpayers who would be eligible to participate in an exact 

withholding system would retain some of the responsibilities of the current system. As under 

current law, they would be required to file Form W-4s providing information that would be used 

to determine the correct withholding formulas for their income. However, even though most 

wages are subject to withholding, the current system would have to be modified in several ways in 

order to eliminate an end-of-year return filing requirement. These changes would cause some 

compliance costs to increase, offsetting the benefits from eliminating a filing requirement. 

First, the Form W-4 would have to be expanded to include information on filing status 

and the names and taxpayer identification numbers of spouses and dependents. To obtain the 

correct withholding rates in an exact withholding system, taxpayers may also be required to 

report whether they are employed at other jobs and to provide an estimate of other sources of 

income. Additional information and computations would be required on the Form W-4 to 

accurately adjust withholding for the child tax credit. 

Compared to the current system, taxpayers would generally be required to report less 

information on an expanded W-4 than they would on tax returns. But workers might have to file 

Forms W-4 whenever their family or financial status changed in a way that affected tax liabilities 

(e.g., if they marry, divorce, or have a baby). They might also have to share more personal and 

financial information with their employers in order to determine the correct withholding 

allowances, raising privacy and security concerns. 

Further, the current withholding formulas are not designed to be exact for dependent 

filers, dual-career couples, or taxpayers who do not work all year or have more than one job 

during the year. The withholding formulas could be modified to meet the needs of most 

taxpayers, but the additional precision would further complicate the computation of withholding 

allowances on Form W-4. 

Although the United States has never had a return-free tax system, we have had experience 

trying to fine-tune withholding formulas. When the IRS introduced a new, more accurate Form 

W-4 in 1987, as required by the Tax Reform Act of 1986, it was quickly withdrawn in response to 

criticism from taxpayers, employers, and the Congress who found the new form complicated and 

burdensome. However, it is possible that reaction might be more favorable, if changes in the 

withholding formulas were combined with the elimination of an end-of-year filing requirement. 

To some extent, the effect of an exact withholding system on compliance costs will 

depend on states’ reactions. Currently, 41 states and the District of Columbia have a personal 

income tax. Most states use information from the federal income tax return to determine state 

income tax liabilities. Without a federal income tax return, many taxpayers would still have to 

make the same computations they currently make in order to file their state and local tax returns 

34
unless each state and locality made conforming changes to their income tax systems. These 

costs, too, could be alleviated if states also adopted an exact withholding system. 

Third-Party Costs. An exact withholding system would build on the current system of 

income tax withholding on wages and certain other forms of income. However, to increase the 

number of individuals eligible to participate in a return-free system, it might be necessary to extend 

mandatory withholding requirements to more sources of income. Mandatory withholding would 

expand the scope of an exact withholding system but would create new administrative costs for 

financial institutions and other payers. Past attempts to extend withholding requirements to nonwage income have met with significant resistance from banks, financial institutions, and other 

businesses. 

It is possible that recent technological advances may have alleviated some of these 

concerns. The increased usage and substantially lower costs of computer processing of business 

financial records may have made withholding more feasible than when last attempted 20 years 

ago. To further reduce administrative costs, relatively small payments and some payers (such as 

individuals who have seller-financed mortgages) could be exempted from the withholding 

requirements. (Affected taxpayers would still be required to file tax returns at the end of the year 

in order to report these payments.) 

Administrative Costs. Under an exact withholding system, IRS costs might decline as a 

result of processing fewer returns and targeting more of its enforcement efforts on employers than 

individual taxpayers. An exact withholding system would reduce some administrative costs 

because fewer returns would have to be processed. It could improve compliance at lower 

administrative costs relative to the current system 

Administrative costs could decline if voluntary compliance improved under an exact 

withholding system. Data from the 1988 Taxpayer Compliance Measurement Program (TCMP) 

suggests a link between withholding requirements and voluntary compliance. Evasion rates vary 

considerably by type of income, with compliance highest for income that is subject to 

withholding by a third party. The most important example is wage and salary income, where 

employers subtract taxes from employees’ paychecks and send the funds directly to the IRS. 

Over 99 percent of wage income earned by filers was correctly reported to the IRS in 1992. 

Compliance is lower for income that does not have taxes withheld, but that is reported 

separately to the IRS by a third party when payments are made. The underreporting rate is about 

two percent for interest income and between four and eight percent for social security benefits, 

dividends, pensions, capital gains, and unemployment compensation. Compliance rates are 

lowest for income that does not have taxes withheld and is not reported separately to the IRS. 

Underreporting of income from farm and non-farm proprietors is about 30 percent. In the 

informal supplier sector (including baby sitters, garage sales, flea markets, etc.), underreporting 

exceeds 80 percent. 

These data suggest that voluntary compliance might improve under an exact withholding 

system, particularly if more sources of income were subject to mandatory withholding. Greater 

reliance on withholding could also enable the Wage and Investment Division of IRS to target its 

audit resources more efficiently on a relatively small number of employers, representing many 

workers, rather than on millions of individual taxpayers.40 

40 As noted, these findings are based on the Taxpayer Compliance Measurement Program that examined a sample of 

35
However, an exact withholding system might entail new costs, which could offset some or 

all of these savings from voluntary compliance and refocused enforcement efforts. For example, if 

taxpayers were required to file an expanded Form W-4 directly with the IRS rather than employers 

(thus addressing the privacy concerns potentially raised by requiring employees to provide 

employers with more information about their financial and family status), the IRS would have 

added responsibilities and administrative costs. The IRS would be required to quickly process the 

form, compute the appropriate withholding code, and then notify the employer (and possibly the 

taxpayer) of the appropriate code. For some taxpayers, this process could be repeated during the 

year if they experience changes in their financial or family status. 

TAX AGENCY RECONCILIATION 

Both the IRS41 and General Accounting Office

42 examined the effect of a tax agency 

reconciliation system on compliance and administrative burdens. In their studies of return-free 

systems, both the IRS and GAO assume eligibility is limited to taxpayers whose tax returns could 

be prepared based on information reports already required of employers and other payers. The two 

studies find that over 50 million taxpayers (or nearly half of taxpayers) would be eligible to 

participate in the return-free system. Both studies assume that participating taxpayers would be 

required to send an information form or postcard to the IRS containing their taxpayer identification 

number, filing status, number of dependents, and certification of eligibility. Over one billion 

information reports would have to be filed earlier and processed and perfected much sooner by the 

IRS in order to complete returns by April 15. Under these scenarios, the IRS would then match the 

information provided by the taxpayer to information provided by employers and other payers, and a 

tax return would be generated. Each participating taxpayer would receive a copy of the return. If 

the taxpayer disagreed with the tax assessed, he or she could send back a copy of the return with an 

explanation. Refunds or tax bills would be issued after taxpayers have had an opportunity to 

respond to the agency-prepared return. 

Despite the similarities of the return-free system envisioned, the IRS and GAO studies 

derive very different cost estimates for the system. The IRS estimates that the new system, once 

fully phased-in, would cost the federal government, on net, more than $175 million a year ($284 

million in 2001 dollars), and that it would reduce annual taxpayer burdens by 8.8 million hours. 

In contrast, the GAO estimates that the same system would yield net savings of $37 million ($60 

million in 2001 dollars) to the federal government, while reducing taxpayer burden by 155 

million hours a year. To some extent, the widely disparate estimates may reflect improvements 

in IRS processing over the decade separating the release of the two studies. But the 

discrepancies also reveal some of the great uncertainty involved in estimating the costs of 

implementing significant administrative reforms. 

Number of Participants. Estimates of the number of likely participants in a return-free 

system affect the estimates of both aggregate compliance burdens and administrative costs. Yet, 

IRS and GAO estimates of participation are markedly different. 

returns filed for tax year 1988. Changes in tax laws, the economy, or demographics may have caused compliance 

behavior to change since 1988. The IRS has begun a new study of compliance, called the National Research 

Project, which is studying compliance behavior for a sample of tax year 2001 returns. 

41 U.S. Department of the Treasury, Internal Revenue Service. 

42 U.S. General Accounting Office. 

36
Both the IRS and GAO studies agree that some taxpayers would be unwilling to participate 

in a return-free system. Under the current system, many taxpayers file very early, often paying 

paid tax preparers for assistance and even paying additional amounts for electronic filing and 

refund-anticipation loans in order to get earlier access to their tax refunds. But under the returnfree system, even if the IRS could produce tax returns by April 15, tax refunds would be delayed 

for the many taxpayers who currently file early. Taxpayers with a preference for early refunds 

may not choose to participate in the return-free system. Other taxpayers might be reluctant to 

participate because they distrust the IRS to prepare their tax returns. Still others may not 

participate because they may be unaware of either the new system or that they are eligible to 

participate. Thus, it is reasonable to expect that participation in the return-free system would be 

less than 100 percent of those eligible. 

At the time the studies were conducted, neither the IRS nor the GAO studies had any survey 

information regarding the number of likely participants in a return-free system.43 The GAO 

study’s cost and burden reduction estimates are based on an upper-bound assumption of 100 percent 

participation among eligible taxpayers. In contrast, the IRS study assumed that 45 percent of 

eligible taxpayers would choose to participate, thus increasing its estimates of net costs and 

lowering its estimates of burden reduction relative to GAO’s. The IRS assumption appears the 

more reasonable of the two, given the findings of the telephone survey described in Chapter III. 

Taxpayer Compliance Costs. Participants in a return-free system would no longer be 

required to complete standard tax forms. Nonetheless, they would still incur some compliance 

costs. They would have to read and understand the instructions regarding eligibility to 

participate in a return-free system. They would have to periodically provide information to the 

IRS regarding changes in family status. They would also have to review the return completed by 

the IRS, and either sign and return it (if they concurred) or file an objection (if they did not). 

While both the GAO and IRS studies concur that a return-free tax system would reduce 

compliance costs, they disagree on the magnitude. The IRS study assumes that a return-free 

system would reduce compliance costs by 10 minutes for taxpayers who would otherwise file a 

Form 1040EZ and 30 minutes for taxpayers who would otherwise file a Form 1040A. In 

contrast, the GAO study estimated that participating taxpayers would reduce time spent on return 

preparation tasks by, on average, 3 hours. 

The difference is due, in large part, to the very different baseline estimates of the amounts 

of time it takes to prepare returns in the current system. IRS assumed that only filers who currently 

use the Forms 1040A and 1040EZ would participate in a return-free system. Further, they 

assumed it would take 26 minutes to complete a Form 1040EZ and 60 minutes to complete a Form 

1040A under the current system in 1985. In contrast, GAO (using updated IRS estimates) assumed 

that it would take nearly 3 hours to complete a Form 1040EZ and almost 7 hours to complete a 

Form 1040A. GAO also assumed that some Form 1040 filers (who were assumed to take an 

average of nearly 12 hours to complete a return) would also be exempt from a return filing 

requirement.44 

43 Although survey data on taxpayer attitudes were unavailable until recently, findings from an IRS focus group was 

available at the time that GAO conducted its study and are included in their report. In 1993, the IRS conducted a 

taxpayer focus group in which participants were asked about their views on a tax agency reconciliation system. 

Participants expressed distrust of the IRS and doubts about the reliability and fairness of a tax agency reconciliation 

system. 

44 Both studies use IRS estimates of the costs of preparing tax returns. The differences in the baseline estimates 

37
On the other hand, GAO may have understated the costs to taxpayers of participating in a 

return-free tax system. Their burden estimates include the amount of time filers would spend 

keeping records, learning about tax laws, and preparing the taxpayer information form. Their 

estimates, however, do not include time spent reviewing the tax return prepared by the IRS. (The 

IRS does not detail the assumptions underlying their estimates of the burden associated with the 

new system.) 

Under a federal agency reconciliation system, calculation of state tax liabilities (and receipt 

of refunds by taxpayers or payment of balances due to state treasuries) would be delayed, for 

taxpayers who reside in states that use information from the federal income tax return. 

Alternatively (as under the exact withholding system), taxpayers could be required to effectively 

calculate the federal amounts themselves in order to complete their state tax returns. Both studies 

refer to the additional burdens for taxpayers but neither includes these costs in their estimates. 

Third-Party Costs. Both the GAO and IRS studies agree that additional burdens would 

be imposed on employers and other third-parties. While employers and other third-parties must 

provide taxpayers with information on income paid during the calendar year by January 31 of the 

following year, they are generally not required to file information returns with the IRS until the 

end of February. It then takes the IRS and SSA more than seven months to validate and edit the 

more than one billion information returns sent by payers.45 

Both IRS and GAO conclude that employers and other payers would have to be required 

to file their information returns with IRS by January 31 to avoid significant delays of refunds 

under a tax agency reconciliation system. (Still, even with an earlier reporting date for 

information reports, some delays in refunds may be inevitable, particularly for the many eligible 

claimants who file in January and February.) All information returns would have to be filed (and 

then processed by the IRS) – not just those for taxpayers who opt for the return-free system. 

However, neither study accounts for additional costs and burdens on employers, financial 

institutions, and others required to file information returns if it becomes necessary to move up 

the date of filing information reports to the IRS and SSA. 

could reflect the fact that the IRS report was based on 1985 tax returns while the subsequent GAO report was based 

on 1994 returns. More likely, the differences are due to changes in the IRS methodology for estimating hourly 

costs. The 1994 time cost estimates are derived using a model developed by the IRS by Arthur D. Little based on a 

survey of 6,200 taxpayers who were asked about their experiences completing 1983 tax returns. Information from 

the ADL study was not available at the time the IRS conducted its study of return-free filing systems. The IRS is 

currently updating its model of taxpayer burden based on new survey data, which will better reflect legislative and 

technological changes since the 1980s – including the development of electronic filing and other technological 

advances that may have eased filing burdens. (For a description of the ADL study, see Arthur D. Little, 

Development of Methodology for Estimating the Taxpayer Paperwork Burden, Final Report to the Department of the 

Treasury, Internal Revenue Service, Washington D.C., June 1998.) 

45 Beginning in February, SSA and IRS also validate and edit more than one billion information returns provided by 

payers. However, these validated and edited information returns are not generally accessible to match against tax 

returns until July. Indeed, even though the IRS begins receiving weekly W-2 information via magnetic tape from 

SSA in February for the current tax year, less than one percent of 1999 W-2s were posted to the IRS masterfile by 

April. Over the next several months, the pace accelerates, with the IRS posting to the master file approximately 88 

percent of all 1999 W-2 records by the end of July and 99 percent by the end of September. While payers send other 

information returns directly to the IRS, only about 46 percent of valid 1099s were processed by the end of April. 

This percentage grows to 95 percent by July and 99 percent by September. Delays in the processing of information 

returns are caused by transcription of paper information returns, payer extensions for filing returns, and payee 

corrections to information returns (for example, the IRS may detect a missing or invalid taxpayer identification 

number and request that the payer supply a corrected number). 

38
Administrative Costs. Both the GAO and IRS studies agree that the IRS would 

perform many of the same tasks that it currently undertakes, including the processing, editing, 

and matching of roughly one billion information returns, in a return-free tax system. Both 

studies also agree that these tasks would be accelerated and compressed under the new system. 

Both studies also estimate that more than half of taxpayers would still file a conventional 

tax return during the period between January and April, implying that the IRS would still face at 

least one-half of its normal return processing workload during the same time period that it was 

processing the information returns. But unlike the GAO study, the IRS study’s estimate accounts 

for the additional resource burden placed on IRS and SSA as they try to process one billion 

information returns during the normal filing season and within a 30 to 60 day time frame. To 

handle these additional pressures, the IRS study anticipates the need to hire and train new 

employees, purchase more equipment, and lease or build new facilities in order to house the new 

employees and equipment. The IRS study finds that the “most dramatic” impact of a return-free 

system would be the requirement for significant increases in staffing, equipment and facilities for 

no more than a few months a year. GAO, while recognizing the potential bottlenecks in the 

system, suggests that technological advances will ease many of these burdens.46 Neither study, 

however, considered options that would change tax return filing deadlines or slow the processing 

of conventional returns as ways to reduce costs. 

IRS and GAO also differed in their calculation of post-filing costs. The GAO study 

estimates that 275,000 taxpayers (out of 51 million) would disagree with the IRS calculation of 

their tax liability. This estimate is based on assumptions concerning the number of likely errors in 

information returns under the current system. While the IRS study does not contain a comparable 

estimate of the number of disagreeing taxpayers, it notes the possibility that the accelerated 

processing of information returns would result in a greater number of errors relative to current law. 

In addition, late filings of information returns by employers and other payers could also result in 

incomplete and inaccurate tax returns. 

The GAO study assumes that the IRS would save $15 million in enforcement costs, 

because 51 million taxpayers would no longer be subject to the underreporter program which 

identifies misreporting of income on tax returns. However, the IRS study assumes that they would 

still have to check IRS-generated returns as part of the underreporter program because of the 

potential of late filings of information returns. 

46 Increasing the number of payers who electronically send information returns to SSA and IRS would facilitate the 

creation of a tax agency reconciliation system. Under current law, employers and other payers who have 250 or 

more employees are required to file information returns by magnetic tape or electronically. Most information 

returns are filed on magnetic media (such as computer tapes), which are physically shipped to the IRS or, in the case 

of W-2s, SSA. Nonetheless, some information returns are still filed on paper with either the IRS or SSA. In 2000, 

nearly one in four W-2s were filed on paper with SSA, while only three percent of information returns were filed on 

paper with the IRS. 

Over the past decade, the number of information returns filed electronically with the IRS has grown dramatically – 

from 4 million in 1992 to 218 million in 2000 – thus improving IRS’s ability to process information returns more 

quickly. In order to encourage payers to file information returns electronically, the Internal Revenue Service 

Restructuring and Reform Act of 1998 extended the due date for filing such returns to March 31. Magnetic media 

and other forms of information returns must still generally be filed by February 28. 

39
SUMMARY 

A comparison of the IRS and GAO studies highlights the uncertainty in estimating the 

changes in administrative and compliance costs. The IRS and GAO studies’ estimates differ not 

only in terms of magnitude but also as to whether a return-free system would result in savings or 

costs to the Federal government. The divergent cost estimates are caused, in large part, by 

different assumptions regarding the cost of infrastructure investment to facilitate the transition 

from the current system to a tax agency reconciliation system. The cost estimates also differ due 

to very dissimilar assumptions regarding take-up rates. While both studies contain similar 

estimates of the numbers of taxpayers who would be eligible to participate, neither the IRS nor 

GAO studies had reliable information at the time the reports were written regarding the number 

of taxpayers who would choose to participate. In the absence of such information, the two 

studies assumed very different participation rates, which affected both their burden and cost 

estimates. 

40
Chapter V: ALTERNATIVE PROPOSALS TO REDUCE TAXPAYER BURDEN 

The goal of a return-free tax system is to reduce burden on taxpayers. The analysis in the 

previous chapters suggests that a return-free tax system will shift burdens from taxpayers to, among 

others, their employers, financial institutions, state and federal governments. But without 

fundamental changes to the income tax, the effects of a return-free tax system on total compliance 

and administrative costs are uncertain: a return-free tax system may reduce, not change, or even 

increase total compliance and administrative costs. There are more immediate steps that can be 

taken to reduce taxpayer burden and administrative costs. The Treasury Department and the IRS 

have recently announced several initiatives to reduce burden by encouraging taxpayers to file 

electronically and simplifying the tax code. By reducing taxpayer confusion and computational 

steps, these proposals would reduce compliance costs. In the longer-term, these initiatives also 

eliminate several barriers toward the development of a less burdensome return-free tax system, by 

increasing reliance on electronic transmission of tax information and reducing complexity. 

ELECTRONIC FILING 

Electronic filing can reduce taxpayer burdens by reducing tax return preparation time, 

speeding payments of tax returns, reducing certain types of errors on returns, and providing the 

taxpayer with acknowledgment from the IRS that their returns were received. Since the mid-1980s, 

the IRS has taken a number of steps to encourage taxpayers to file electronically. In the IRS 

Restructuring and Reform Act of 1998, Congress set a goal of having at least 80 percent of all 

Federal tax and information returns be transmitted electronically. 

Pre-2003 Initiatives to Encourage Electronic Filing. In 1986, the IRS initiated the first 

pilot of electronic filing. At that time, a handful of professional tax preparers electronically 

transmitted 25,000 individual refund returns through third party transmitters. By 2002, IRS e-file 

programs had evolved so that more than one-third of individual taxpayers now files electronically. 

To facilitate this growth, numerous enhancements and features have been added to the program over 

the years. 

For example, beginning in 1992, the telefile system has allowed eligible taxpayers to file 

Forms 1040EZ using a touch-touch telephone. Telefile is free, available seven days a week, and 

typically can be completed in less than 11 minutes for unmarried filers (about 15 minutes for joint 

filers). A confirmation number is provided at the end of the call to verify that the IRS has received 

the return. During the 2002 filing season, 4.1 million taxpayers used the system, down from its 

peak of nearly 6.0 million taxpayers in 1998. 

The decline in participation in the Telefile program has been more than offset by the 

increase in On-Line filing. In 1996, the IRS introduced another filing option for individuals when it 

allowed taxpayers to file On-Line via their home computer. To participate, taxpayers need a 

modem, IRS-accepted tax preparation software and an On-Line service provider or transmitter. 

Beginning with a limited pilot in 1995 with about one thousand On-Line returns being filed, the 

program has grown to over 9 million in 2002. 

Recently, the IRS piloted several electronic payment options, as well as alternatives to 

written signatures. After initially offering payment by direct debit and credit card in 1999, during 

the second year of operation 235,664 taxpayers filing balance due returns paid by authorizing 

that either their checking or savings account be debited as part of their electronic return. In 

41
addition, taxpayers made 203,658 tax payments using their credit cards in 2000. The IRS also 

conducted two pilots, which provided a paperless filing experience for nearly seven million 

taxpayers in 2000. These pilots, involving the Practitioner e-file and On-Line filing programs, 

tested the use of a Personal Identification Number (PIN) as the taxpayer’s signature in order to 

eliminate the need to file the paper jurat. Based on IRS’ experience with the PIN pilots, a SelfSelected PIN program was implemented for the 2001 filing season. 

As summarized in Table 13, the combination of new filing options and the continued 

enhancement of practitioner e-file and taxpayers increasing acceptance of technology has 

resulted in significant growth in electronic filing since 1986. 

New Initiatives to Accelerate Electronic Filing. Although the number of taxpayers 

filing returns electronically has increased each year, its rate of growth began to slow in 2001. In 

addition, most taxpayers who file electronically do so in order to receive refunds more quickly. 

Relatively few taxpayers use electronic filing when they owe taxes at the end of the year. 

Concerns about cost and loss of privacy may be factors that explain the slow-down in the 

utilization of electronic filing. Some taxpayers pay up to $12.50 to file electronically, while the 

cost of sending a paper return can be as inexpensive as the cost of a first class stamp. Other 

taxpayers are reluctant to file electronically because they do not want to send personal tax 

information to the IRS via a third party. 

In 2003, the Administration has taken two steps to encourage more taxpayers to file 

electronically. On January 16, 2003, the Department of the Treasury and Office of Management 

and Budget (OMB) launched a new Web site featuring private-sector partners that will allow 

most taxpayers to prepare and file their taxes online for free. The Web site is the result of 

public-private partnership with a consortium of tax software companies, the Free File Alliance, 

LLC. Each Free File Alliance member company sets taxpayer eligibility requirements for its 

own program. These requirements differ from company to company. Generally, eligibility will 

be based on factors such as age, adjusted gross income, state residency, military status, or 

eligibility to file a Form 1040EA or the EITC. The agreement requires the Alliance, as a whole, 

to provide free services for at least 60 percent of taxpayers during each filing season. This will 

enable as many as 78 million taxpayers to file their taxes online at no cost. In its first four 

months of operation, nearly 3 million taxpayers used Free File. 

The IRS does not determine Free File Alliance membership, but members must meet 

certain IRS standards. As part of the e-file application and testing process, the IRS must approve 

the Free File Alliance members’ proprietary tax preparation software. Each Alliance member 

must obtain third-party privacy and security certification. Alliance members must also adhere to 

all federal laws regarding taxpayer privacy. 

Before the launching of the Free File web site, some software and tax preparation 

companies provided some free services to low-income taxpayers. The free services, however, 

were not consistently available or widely publicized. The agreement brings all the free services 

to one location, IRS’s Free File homepage, and allows taxpayers to compare the free services 

available. 

To encourage electronic filing, particularly among those with a balance due, the 

Administration’s FY 2004 budget included a proposal to extend the return filing and payment 

date for electronically filed individual income tax returns to April 30. The due date for returns 

filed on paper would remain April 15. 

42
Table 13: Individual IRS e-file 

(In Thousands) 

YEAR PRACTITIONER TELEFILE ONLINE TOTAL 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 

2002 

25 

78 

583 

1,161 

4,204 

7,567 

10,919 

12,334 

13,502 

11,126 

11,971 

14,083 

17,668 

21,223 

25,236 

28,988 

33,286 

125 

149 

519 

680 

2,839 

4,686 

5,955 

5,664 

5,161 

4,419 

4,176 

1 

158 

367 

942 

2,458 

5,026 

6,838 

9,428 

25 

78 

583 

1,161 

4,204 

7,567 

11,045 

12,482 

14,021 

11,807 

14,968 

19,136 

24,580 

29,346 

35,423 

40,245 

46,891 

Source: Electronic Tax Administration – "A Strategy for Growth" (December 

2000) and Internal Revenue Service Data Books 2001 and 2002. 

SIMPLIFICATION 

The FY 2004 budget contains a number of proposals to simplify the tax system, thus 

reducing burden on taxpayers. They include proposals to create a uniform definition of 

qualifying child, eliminate the phase-out of adoption tax benefits, and allow section 179 

expensing to be made or revoked on amended returns. By adopting uniform definitions across 

tax provisions and reducing taxpayer computations, these proposals would reduce compliance 

burdens and administrative costs. 

Simplification would also help facilitate the implementation of a return-free tax system. 

For example, harmonizing the definition of a child would ease the transition to a return-free 

system. Because eligibility criteria differ widely under current law, taxpayers would have to 

indicate to the IRS whether a child qualified for each of the five child-related tax benefits before 

their taxes could be computed under a return-free system. But if a uniform definition of child 

were adopted, taxpayers would generally only have to provide the child’s name and social 

security number, and the IRS could determine most or all of their child-related tax benefits. 

The Administration will continue to work with Congress to enact legislation to simplify 

the tax code. 

43

 Appendix A: BRITISH INDIVIDUAL INCOME TAX SYSTEM47 

Unit of taxation: Individuals. 

Income: There are three categories of income: 

• Savings (interest) income. 

• Dividend income. 

• All other income. 

Capital gains on owner-occupied housing are completely exempt from taxes. Prior to April 

1998, other capital gains were taxed on an inflation-adjusted basis. Since 1998, the amount of 

gain that is taxable is reduced by a factor that varies with the length of ownership and type of 

asset. For the tax year beginning April 1999, only realized gains in excess of 7,100 pounds per 

person ($11,30048) are subject to taxation. 

Deductions: Certain job expenses, including professional organization fees, can be deducted. 

Contributions to qualifying employee pension plans of up to 15 percent of total earnings are 

eligible for tax relief. 

Taxpayers can receive tax relief on donations to charities. The taxpayer deducts the basic rate (22 

percent) from the donation, and the charity receives the amount from Inland Revenue. 

Taxpayers who pay tax at the higher rate can receive additional tax benefits through their tax 

returns. Taxpayers may also make contributions out of pre-tax income through payroll deduction 

plans (“payroll giving”). 

Beginning in 1999, taxpayers have been allowed to make contributions to individual savings 

accounts (ISA). In 1999, taxpayers could make up to 7,000 pounds ($11,140) in contributions to 

ISAs.49 Earnings from ISAs are exempt from taxation, and there are no limitations on how long 

savings must be held in the accounts. 

Until April 2000, alimony payments were deductible from total income. Currently, these 

payments are only deductible if one of the parties was 65 or over as of April 2000. 

Until April 2000, tax relief was available at 10 percent (15 percent before 1999) for interest paid 

on the first 30,000 pounds ($47,760) of loans used to purchase a private residence in the United 

Kingdom. For example, a taxpayer with a ten percent rate mortgage would pay nine percent 

interest, and the lender would collect the remaining one percentage point of interest from the 

government. 

47 Description of British income tax system derived from several sources, including (1) PricewaterhouseCoopers, 

Individual Taxes: Worldwide Summaries, 1990-2000, New York, John Wiley & Sons, Inc., 1999; (2) the Inland 

Revenue website: www.inlandrevenue.gov.uk_home.htm; and (3) interviews with Inland Revenue, October 1997. 

48 British tax parameters for 1999-2000 are converted into U.S. dollars using the rate of exchange on April 6, 1999 

(the beginning date of the tax year in the United Kingdom), which was 1 British pound = 1.592 U.S. dollar. 

49 In April 2000, the maximum amount of contributions to an ISA was reduced to 5,000 pounds ($7,900) 

45
Personal allowances: Each taxpayer receives a personal allowance. For the year beginning April 

1999, the personal allowance was 4,335 pounds ($6,900) for individuals under 65. (Older 

individuals are entitled to larger personal allowances.) There is also an allowance for blind 

persons (1,380 pounds in 1999-00, or $2,200). 

In addition, married couples are entitled to a “married couple” allowance. In 1999, the amount 

was equal to 1,970 pounds ($3,140) if both spouses are under 65. For all eligible taxpayers, the 

value of the allowance is equal to 10 percent of 1,970 pounds. The couple could elect to divide 

the married couple allowance between them equally or to allocate it wholly to either spouse. 

Except for taxpayers aged 65 or older, the married couple allowance was repealed after April 

2000. 

Unmarried individuals who live with a child under age 18 were entitled to an additional personal 

allowance equal to the married couple allowance. This additional personal allowance was also 

repealed after April 2000. 

Rates: There are three rates on most income (rates for year beginning April 6, 1999) 

Taxable income (pounds) Rate 

Over Not over 

1,500 10 

1,500 28,000 23 

28,000 40 

Savings income (interest) is taxed at 20 percent for income up to 28,000 pounds ($44,575) and 

40 percent above that. 

Dividends are taxed at 10 percent for income up to 28,000 pounds and 32.5 percent above that. 

Credits: Effective in 2001, taxpayers with children under 16 may be eligible for a new 

nonrefundable children’s tax credit worth up to 442 pounds ($63550). 

Beginning in 1999, taxpayers have been eligible for two refundable tax credits – the Working 

Families Tax Credit and the Disabled Person’s Tax Credit. They replace the Family Credit and 

Disability Working Allowance, which were administered by the Department of Social Security. 

A detailed discussion of the Working Families Tax Credit follows in the addendum. 

Administration: Most taxpayers pay taxes through the pay-as-you-earn (PAYE) system or 

through withholding at source. However, some taxpayers are required to file a tax return under 

a self-assessment system. These include individuals with self-employment income or other 

complicated tax affairs (e.g., capital gains) as well as all other taxpayers in the 40 percent tax 

bracket. Since 1996, all taxpayers are required to keep records of their income for at least 22 

months after the end of the tax year, so that they can file a tax return if required. 

PAYE system: New entrants into the workforce must complete a Form P46. The P46 contains 

information on the firm (such as the firm’s PAYE reference number) and the employee (such as 

50 British tax parameters for 2001-2002 are converted into U.S. dollars using the rate of exchange on April 6, 2001 

(the beginning date of the tax year in the United Kingdom), which was 1 British pound = 1.4383 U.S. dollar. 

46

0 
his or her national insurance number, date of birth, and date of employment). The employee 

must also indicate whether this is his or her only job. The employee may also choose to provide 

information on items that affect tax liability directly to Inland Revenue. 

The employer sends the P46 to Inland Revenue. Based on the P46 (and possibly other 

information provided by the employer or directly by the individual), Inland Revenue calculates 

the taxpayer’s tax-exempt amount and assigns the appropriate “tax code” to the individual. The 

tax code tells the employer which allowances and tax rates to use when computing the 

individual’s withholding. Inland Revenue then sends both the employer and the taxpayer the tax 

code. In addition, the taxpayer receives a notice showing how the allowances were determined. 

However, the employer may not be able to determine from the tax code how the individual’s taxexempt amount and tax rate were determined. 

When a person leaves a job, his or her employer must complete a Form P45, which includes the 

employer’s PAYE reference number, the employee’s national insurance number, the last day of 

employment, the tax code as of the last date of employment, and total pay and tax to date. 

Copies of this form are sent to Inland Revenue and to the employee. The employee, in turn, 

gives a copy to his or her new employer. 

Once an employee provides the employer with a Form P46 or P45 or at the beginning of a new 

tax year, the employer begins a Form P11 (also known as a Deductions Working sheet). Each 

employee has a separate Form P11. It contains a weekly or monthly detailed record of the 

employee’s National Insurance and PAYE income and tax payments. For most PAYE workers, 

tax liability is calculated on a cumulative basis (i.e., based on earnings up to the most recent tax 

payment). 

At the end of the tax year (April 5th), the employer must complete the Form P11 for each 

employee. The completed P11 must be retained by the employer for at least three years. Key 

information on total earnings, national insurance contributions, and PAYE withholding from the 

P11 is then summarized and entered into a Form P14, which is sent to Inland Revenue. Forms 

are due by mid-May. 

The P14 is first processed by the social security office in order to obtain necessary information 

regarding national insurance contributions. Inland Revenue then begins processing of the P14. 

Between 85 percent and 90 percent are processed by Inland Revenue by October. During 

processing, information from the P14 is compared to the most recent information regarding the 

taxpayer’s tax code in the Inland Revenue records. Discrepancies may result in correspondence 

with the employee or, in some cases, the employer. 

Withholding at source on non-wage income: Taxes are withheld at source for certain forms of 

non-wage income. For example, banks and other financial institutions withhold income tax on 

interest income at the 20 percent rate. Individuals who do not have a tax liability (because their 

personal allowances exceed their income) can file a form with their bank to stop withholding. 

Shareholders receive a tax credit for taxes paid by the company on profits used to pay dividends. 

They receive a voucher with their dividend checks showing the amount of the tax credit that 

applies to the dividend. (Both the dividend and the tax credit are included as income.) The tax 

credit, which is ten percent of the dividend income, reduces or eliminates the shareholder’s 

income tax liability on the dividend. 

47
Self-assessment system: The tax year ends on April 5th. Tax returns (or a notice to complete a 

tax return) are sent out in April. The core tax return is eight pages and may be supplemented by 

additional schedules for specific forms of income. Tax returns are due by September 30th if the 

taxpayer wants Inland Revenue to either calculate the tax liability for them or to collect the 

outstanding tax liability (if less than 1,000 pounds or $1,590) through the next year’s PAYE 

code. All other taxpayers must complete their tax return by January 31st of the following 

calendar year. 

Addendum: Working Family Tax Credit 

Low-income individuals in the United Kingdom have been eligible for cash subsidies based on 

their work effort and family responsibilities since the late 1980s. Between 1988 and 1998, 

workers were eligible for a Family Credit (FC). Like the U.S. earned income tax credit (EITC), 

the FC was targeted to low-income workers with children, and the amount of the credit was 

based on earnings and hours worked. However, the British administered the FC through the 

welfare system rather than through the tax system, limiting the information on family structure 

and household earnings necessary for the tax authorities to administer the PAYE system. 

In 1999, the FC was replaced by the Working Families Tax Credit (WFTC). Like the EITC, the 

WFTC is administered by the tax agency, and like both the FC and the EITC, the WFTC is based 

on family income (not just individual income) and varies with family size. Nevertheless, most 

British taxpayers continue to be exempted from any tax filing requirement, and the unit of 

taxation for the individual income tax remains the individual. 

In April 2003, the WFTC, disabled person’s tax credit, and children tax credit were replaced by 

two credits: the Child Tax Credit and the Working Tax Credit. Relief for families with 

children is now provided through the Child Tax Credit. Eligibility for the basic Working Tax 

Credit is based on employment status and annual income, without regard to the presence of 

children. Supplements are provided to workers who are married or single parents, work fulltime, have a disability, or pay for child care. Credit amounts are based on income during the 

2001-2002 tax year. 

Administration 

Workers apply for the WFTC (or the new WTC) by sending an application, including supporting 

documentation (e.g., pay stubs), to Inland Revenue. The Tax Credit Office notifies the worker’s 

employer (or the higher-paying employer if the individual has more than one job) if he or she is 

eligible. The Tax Credit Office tells the employer how much credit is to be paid, but will not 

provide the employer with other information such as the type of credit to be paid. 

Employers pay out the credit in workers’ paychecks in installments. The employer reduces total 

payments of PAYE tax, national insurance contributions, and student loan deductions by the 

amount of credits paid to workers. If the employer still does not have sufficient funds to cover 

the costs of tax credits, the employer may apply to Inland Revenue for additional financing. 

Self-employed individuals receive the credit directly from the Tax Credit Office. 

48
Appendix B: SWEDISH INDIVIDUAL INCOME TAX SYSTEM51 

Unit of taxation: Individuals. 

Income: There are three categories of income: 

• Employment income includes wage and salaries, fringe benefits (in-kind benefits from 

employers), and pension income. 

• Business income includes income from private businesses (e.g., sole proprietorship or 

partnership), farms, property used in business, and all capital income and certain capital gains 

relating to business activities. 

• Capital income includes net interest, dividends, capital gains, and income from real property 

not used in a business. 

Only 50 percent of the capital gains or losses on sale of owner-occupied residences are included. 

The remainder of the gain can be deferred if the taxpayer invests sales proceeds in a new 

permanent lodging in Sweden. 

The taxable gain on the sale of shares is the net profit, defined as the sales price less the average 

purchase price for all shares owned by the taxpayer in the same company. Generally, only 70 

percent of a capital loss is deductible. 

Alimony payments are includable in the income of the recipient. 

Deductions: 

• Employment income – Costs of traveling between home and office are deductible to the 

extent such costs exceed SEK7,000 ($86552). Certain expenses incurred during a temporary 

absence or employment away from the individual’s principal place of residence are 

deductible. 

• Business income – All expenses attributable to business activities are deductible. 

• Capital income – Interest expenses on loans that are not attributable to any other source of 

income, e.g., business, are deductible from capital income. Also deductible are management 

costs for the administration of investments to the extent the costs exceed SEK1,000 ($125). 

• General deductions (not related to specific income) – Deductions may also be allowed (up to 

a ceiling) for personal pension insurance premiums and contributions to restricted pension 

savings. Alimony paid is deductible. 

• Personal allowances – Each taxpayer receives a basic allowance of SEK8,700 ($1,075) to 

SEK18,100 ($2,235) (1999 amounts). 

51 Description of Swedish income tax system derived from (1) PricewaterhouseCoopers, Individual Taxes: 

Worldwide Summaries, 1990-2000, New York, John Wiley & Sons, Inc., 1999; and (2) correspondence with Fiscal 

and Customs Affair Department, Swedish Ministry of Finance, December 8, 2000. 

52 Swedish tax parameters for 1999 are converted into U.S. dollars using the rate of exchange on December 31, 

1998, which was 1 Swedish krona = .123411 U.S. dollar 

49
Rates: Rates vary with the type of income. 

• Net employment and business incomes are added, and from this sum the general deductions 

and personal allowances are deducted. The tax table for 1999 is as follows: 

Taxable income Rate 

Over Not over 

0 SEK219,300 ($27,065): 200SEK ($25) 

SEK219,300 SEK360,000 ($44,430): 200SEK+20 percent of excess over 

SEK219,300 

SEK360,000 28,340SEK+25 percent of excess 

over 360,000 

• Capital income is taxed separately at a flat rate of 30 percent. 

In addition, municipal (local and regional) income tax is levied on total taxable income at flat 

rates that vary across municipalities from 27.01 to 34.35 percent. 

Administration: At the beginning of a new tax year, the National Tax Board issues each 

individual a preliminary tax bill stating which tax table should be used for withholding purposes. 

Tax is withheld by the employer and paid to the National Tax Board. 

Self-employed persons pay their own preliminary tax. They are required to file a preliminary tax 

return only if their income is expected to deviate by more than 20 percent from income during 

the current year (that is, the year prior to the year in which the tax will be levied). Otherwise, 

they receive a bill for preliminary income tax equal to 110 percent of the latest assessed amount 

(the tax on income from two years earlier). 

Taxes on interest and dividends are withheld at source. 

By the end of January, employers, financial institutions, and other payers are required to report 

wages and salaries, interest, dividends and other payments during the previous year to both 

taxpayers and the National Tax Board. The National Tax Board next calculates each individual’s 

tax liability for the prior year on the basis of income reports received from employers and 

financial institutions and then sends taxpayers printed tax returns no later than April 15. 

Taxpayers review and correct their returns and send them back to the National Tax Board. The 

National Tax Board then reviews the final tax return and sends the taxpayer a refund or final bill. 

Final tax returns are generally filed by May 2. For individuals who report business income or 

own shares in closely held companies and certain other categories, the filing date is March 31. 

The National Tax Board assesses income taxes by applying the appropriate tax rates to the 

aggregate taxable income from the various sources. A final tax bill is issued to the individual in 

August (for simplified returns) or December. Any remaining income tax liability must be paid 

by the individual within 90 days. 

50
Appendix C: DANISH INDIVIDUAL INCOME TAX SYSTEM53 

Unit of taxation: Individuals. 

Income: There are three categories of income: 

• Personal income includes wage and salaries, fringe benefits (in-kind benefits from 

employers), all business income, alimony, and child support (above a certain threshold). 

• Investment income includes interest income less interest expenses, dividends from certain 

foreign companies, most net taxable capital gains, and (through 1999) notional rent from 

owner-occupied residences. (As of 2000, rental value is no longer included in taxable 

income. Instead, a local property tax now applies to owner-occupied residences.) 

• Share income is comprised of dividends and gains or losses on the disposal of shares in 

Danish and foreign companies if owned for at least three years. 

Certain types of capital gains are exempt from taxation. Capital gains on owner-occupied 

residences are exempt if the property is less than 1,400 square meters (about 10,000 square feet). 

The full amount of capital gains on owner-occupied residences is included in taxable income for 

properties greater than 1,400 square meters. Capital gains on shares in quoted companies are 

also exempt from taxation if owned for at least three years and if total shares are below a certain 

threshold. 

Deductions: Allowed for certain business expenses (including traveling expenses and 

memberships in professional associations), gifts to associations (up to a limit), alimony, child 

support, interest payments, and contributions or premiums paid under certain pension schemes. 

Personal allowances: Each taxpayer receives a personal allowance. The personal allowance not 

fully used by one spouse may be transferred to the other spouse. 

Rates: There are three state rates. 

Total taxable income equals the sum of personal income and investment income, net of 

deductions (or allowances). In 1999, it is taxed at 7.5 percent (the bottom rate). 

The aggregate of personal income (wages, salaries, in-kind benefits) and positive net investment 

income in excess of DKK151,000 ($23,73554) for a single taxpayer and DKK302,000 ($47,465) 

for a married couple (1999 values) is taxed at 6 percent (the middle rate). Deductions 

(allowances) are not subtracted from income. 

The tax base for the top rate of 15 percent is all personal income and positive net investment 

income (in excess of DKK23,200 ($3,650) for one person and DKK46,400 ($7,300) for married 

couple). The top rate is levied on income in excess of DKK258,400 ($40,615). Deductions 

(allowances) are not subtracted from income. 

53 Description of Danish tax system derived from (1) PricewaterhouseCoopers, Individual Taxes: Worldwide 

Summaries, 1990-2000, New York, John Wiley & Sons, Inc., 1999; and (2) Correspondence with Danish Ministry 

of Taxation, Central Customs and Tax Administration, July 2, 2001. 

54 Danish tax parameters for 1999 are converted into U.S. dollars using the rate of exchange on December 31, 1998, 

which was 1 Danish krone = .157171 U.S. dollar 

51
Local income taxes are calculated on taxable income at flat rates ranging from 24 percent to 33 

percent. 

The combined (state and local) income tax rate cannot exceed 59 percent. 

In addition, dividends from domestic companies and gains on sale of shares owned at least three 

years of up to DKK36,000 ($5,660) or DKK72,000 ($11,320) for a married couple are taxed at 

25 percent. Dividends and gains on the sale of shares in excess of this amount are taxed at 40 

percent. Special rules apply to dividends and capital gains from foreign companies. (Share 

income is not included in the tax ceiling calculation.) (In 2001, the tax rates were increased from 

25 percent to 28 percent and from 40 percent to 43 percent.) 

Members of the Danish Christian Church pay church tax. The rate is between .4 and 1 percent of 

taxable income. 

Administration: A month before the beginning of a new tax year, the Danish Ministry of 

Taxation issues each individual a pre-assessment of their income for the coming year. The 

assessment is based on either the prior year’s tax return (which reflects income from two years 

earlier) or the assessment for the current year if it has been modified to reflect changed 

circumstances. Tax is also assessed, and tax deduction cards are issued. The employers 

withhold income tax from each employee’s salaries based on that assessment, as indicated by the 

tax deduction cards. Further, taxpayers must pay advance taxes in ten equal installments 

throughout the year. 

Taxes on dividend income are withheld at source at the 25 percent tax rate. 

At the end of each year, employers, financial institutions, and other payers are required to report 

wages and salaries and other payments during the previous year to both taxpayers and the Danish 

Ministry of Taxation. The tax authorities next calculate each individual’s tax liability for the 

prior year on the basis of income reports received from employers and financial institutions and 

then send taxpayers printed “draft” tax returns in March. Taxpayers review and correct the draft 

returns and send them back to the Danish Ministry of Taxation. The taxpayer is required to add 

to this draft any other income or deductions. If the tax return is not correct, it must be corrected, 

signed, and filed by May 1 either over the Internet, by telephone, or by ordinary mail. 

Taxpayers with “complicated” returns must file tax returns by July 1. Such taxpayers include 

business owners, self-employed persons, share holders, certain limited partners, and others with 

“special” tax issues. 

Refunds of overpaid taxes are repaid to the taxpayers with interest after April 1. Taxpayers may 

apply for an earlier payment of refunds but forgo the interest payment. 

Taxpayers may pay any outstanding tax liability without interest until July 1. (Beginning in 

2001, payments in excess of DKK 40,000 ($5,07555) may be subject to a small interest charge.) 

Any remaining tax liability is collected in three equal installments, with interest, in September, 

October, and November. 

55 Danish tax parameters for 2001 are converted into U.S. dollars using the rate of exchange on January 2, 2001, 

which was 1 Danish krone = .126831 U.S. dollar 

52
Appendix D: WAGE REPORTING AND INCOME REPORTING FOR TAX YEAR 1999 

53
Table D - 1: Wages Exempt from Income Tax Withholding 

(A) Wages included in gross income for income tax purposes but exempted from withholding 

• Agricultural workers who are not subject to FICA withholding 

• Domestic workers 

• Individuals not working in the course of the employer’s trade or business who are paid less 

than $50 for service and are employed by employer for less than 24 days during the current 

or preceding quarter 

• Employees of foreign governments and international organizations 

• Members of a religious order performing services for the order or associated institution. 

(Clergy fees and contributions received are included in income unless earned as agent as of 

religious order.) 

• Newspaper carriers under age 18 delivering to customers 

• Newspaper and magazine vendors buying at fixed prices and retaining excess from sales to 

customers 

• Individuals not working in the course of the employer’s trade or business who are paid in any 

medium other than cash. 

• Employer’s cost of group-term life insurance 

• Cash or noncash tips of less than $20 a month 

• Fishermen who receive cash remuneration for certain services of less than $100 per trip or 

who receive a share of the boat’s catch 

(B) Wages excluded from gross income for income tax purposes and exempted from 

withholding 

• Certain combat zone compensation for members of the Armed Forces 

• Foreign earned income if excludable from gross income 

• Amounts paid to, or on behalf of, an employee or his or her beneficiary to an individual 

retirement account pursuant to a simplified employee pension 

• Employer’s reimbursement of an employee’s moving expenses 

• Certain educational assistance, dependent care assistance, fellowship or scholarship, or 

nontaxable fringe benefits 

• Benefits provided the employer in the form of medical care reimbursement made to or for the 

benefit of an employee under a self-insured medical reimbursement plan 

• Employer contributions to accident and health plans 

• Peace Corps volunteers, basic living and travel allowances are excluded from gross income 

for income tax purposes. 

54
Table D - 2: Types of Information Returns 

(Volumes in Millions) 

Form CY 2000 Vol. Description 

1098 80.5 File if receive $600 or more in mortgage interest from an 

individual in the course of a trade or business. Also use for points 

paid directly by a borrower (including seller-paid points) for the 

purchase of a principal residence and for refunds and 

reimbursements of overpaid mortgagee interest. 

1098-E 9.7 Filed by financial institutions, governmental units, or educational 

institutions that, in the course of a trade or business, receive 

interest of $600 or more on a student loan that is used solely to pay 

for qualified higher education expenses. 

1098-T 23.0 Filed by an educational institution that receives qualified tuition 

and related expenses on behalf of a study. 

1099-A 0.4 Filed by persons who lend money in connection with their trade or 

business, and if full or partial satisfaction of the debt, acquire an 

interest in property that is security for the debt. Must also be filed 

if the person has reason to know that the property securing the debt 

has been abandoned. 

1099-B 241.0 Filed by brokers to report sales (including short sales) of stocks, 

bonds, commodities, regulated futures contracts, foreign currency 

contracts, forward contracts, and debt instruments. Also used to 

report of exchanges of property or services through barter 

exchanges. 

1099-C 0.8 Filed by financial institutions, credit unions, and federal agencies 

for each debtor on which a debt of $600 or more was cancelled. 

1099-DIV 126.6 Filed by corporations for each person (1) who received payments 

of $10 or more in distributions – including dividends, capital gains, 

or nontaxable distributions – on stock; (2) for whom any foreign 

tax was withheld and paid on dividends and on other distributions 

on stock if the recipient can claim a credit on the tax; (3) for whom 

any federal income tax was withheld under backup withholding 

rules; and (4) who received payments of $600 or more as part of a 

liquidation. S corporations use this form to report distributions out 

of accumulated earnings and profits. 

55
Table D - 2 continued 

Form CY 2000 Vol. Description 

1099-G 63.1 Filed by governmental units to report payments of $10 or more for 

unemployment benefits, state and local tax refunds, and payments 

of $600 or more in taxable grants. 

1099-INT 266.4 Filed for each person who received payments of $10 or more in 

interest, including interest on certificates of deposit, U.S. savings 

bonds, Treasury bills, Treasury notes, and Treasury bonds. 

Interest paid in the course of a trade or business reportable when 

the amount totals $600 or more for any person. 

1099-MISC 74.7 Filed by payers for each person to whom at least $10 in gross 

royalty payments or $600 of rents or services in the course of a 

trade or business was paid. 

1099-OID 5.1 Filed by issuers of bonds or certificates of deposit to report original 

issue discount of $10 or more. 

1099-PATR 1.8 Filed by cooperatives to report distributions of $10 or more to 

patrons. 

1099-R 63.0 Filed by payers to report any distributions of $10 or more from 

retirement or profit-sharing plans, individual retirement accounts 

(IRAs), simplified employee pensions (SEPs), annuities or 

insurance contracts. 

5498 MSA 0.1 Filed for each person a Medical Savings Account or Medicare & 

Choice MSA was maintained. It is used to report the contributions 

made during the year to an IRA and the fair market value of the 

IRA or SEP account on December 31. (This form is due by May 

31 of the year following the year of contribution). 

W-2 243.4 Filed with Social Security Administration and recipient by 

employers. Reports wages, tips, other compensation, withheld 

income and FICA taxes, and advance earned income credit (EIC) 

payments. 

W-2G 5.4 Certain gambling winnings is provided to recipients of gambling 

winnings of $600 or more from horse racing, dog racing, jai alai, 

lotteries, raffles, and drawings; gambling winnings of $1,200 or 

more from bingo or slot machines; and gambling winnings of 

$1,500 or more from keno. 

56
Table D - 2 continued 

Form CY 2000 Vol. Description 

5498 88.8 Individual Retirement Arrangement Contribution Information is 

filed for each person who had an individual retirement arrangement 

to report contributions, Roth conversions and the fair market value 

of the account. 

1099-MSA 0.1 Distributions from Medical Savings Accounts (Distributions from 

an MSA or Medicare and Choice MSA to an account holder. An 

MSA distribution is not subject to taxation if used to pay for 

qualified medical expenses or if rolled over into another MSA. 

1099-LTC 0.1 Long-Term Care and Accelerated Death Benefits is filed if 

payments are made under a qualified long-term care insurance 

contract which provides coverage of qualified long-term care 

services only to individuals who have been certified by a 

health-care provider as being terminally or chronically ill. 

1099-S 4.0 Proceeds from Real Estate Transactions are filed to report the sale 

or exchange of reportable real estate. 

1099-SSA/RRB 47.8 (Social Security Benefit Statement) are filed by the Social Security 

Administration and the Railroad Retirement Board to show the 

amount of retirement payments made to individual recipients. This 

type of reporting is made via magnetic media. 

Schedule K1 4.1 Form 1041, Beneficiary's Share of Income, Credits, Deductions, 

(Form 1041) etc. is filed with Form 1041 to report the beneficiary’s share of 

income from an estate or trust. 

Schedule K1 17.0 Form 1065, Partner's Share of Income, Credits, Deductions, Etc. 

(Form 1065) is used by filers of Form 1065 to report each partner's share of 

the partnership's income, credits, deductions, etc. 

Schedule –K1 5.2 Form 1120S, Shareholder's Share of Income, Credits, 

(Form 1120S) deductions, etc. is used by filers of Form 1120S to report each 

shareholder's pro rata share of the corporation's income, 

credits, deductions, etc. 

Foreign 1.5 Information returns are filed by foreign corporations that pay 

interest or dividend income to U.S. citizens. There is no 

standard format for transmitting such information to the IRS. 

Subtotal 1,373.6 

57
Table D - 2 continued 

Other Information Return Forms including Currency Transaction Reports: 

Form CY 2000 Vol. Description 

Form 1096 4.5 Annual Summary and Transmittal of U.S. Information Returns, is a 

"payer" transmittal document used to transmit paper "payee" 

documents. 

Form 4789 13.1 Currency Transaction Report, is filed by financial institutions to 

report cash amounts received in excess of $10,000. 

Form 8362/8852 0.4 Currency Transaction Report by Casinos/Currency Transaction 

Report by Casinos-Nevada, are filed by casinos to report either 

currency received or currency disbursed in excess of $10,000. The 

Form 8852 filing numbers are embedded in the Form 8362 

numbers in Document 6961. 

8300 0.1 Filed by persons engaged in trade or business that receive more 

than $10,000 in cash in one transaction (or two or more related 

transactions). (Must be filed by the 15th day after the 

transaction, and a similar statement must be provided to the 

payer on or before January 31 of the calendar year following 

receipt). 

Form 8027 0.1 Filed by large food or beverage establishments to report 

annual receipts from food or beverage operations and tips 

reported by employees. 

Subtotal 18.2 

Grand Total 1,391.8 

Sources: MCC IRP Reformat Run (405.02-12) 

W-2 Control Report (413-05-41) 

IRP Counts for 1099-SSA/RRB (405-0A-40) 

58
Appendix E: CHARACTERISTICS OF FILERS POTENTIALLY QUALIFYING FOR 

ALTERNATIVE RETURN-FREE SYSTEMS 

59
Table E - 1: Filers Qualifying for Alternative Return-Free Systems:

Used Paid Preparers 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 69.3 48.3 3.0 13.9 4.1 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 2.3 0.5 0.1 0.9 0.8 

B) Add dependent filers 2.8 0.7 0.2 0.9 1.0 

C) Add those with earnings from more than one job 6.5 1.5 0.4 2.0 2.6 

Add those with income only from "withholdable sources"† 11.4 3.3 0.8 4.1 3.3 

Add those with EITC 19.7 4.0 0.9 11.0 3.8 

Add those with capital gains distributions 19.9 4.1 0.9 11.0 3.8 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 0.3 0.1 * 0.1 0.1 

B) Add dependent filers 0.3 0.1 * 0.1 0.1 

C) Add those with earnings from more than one job 0.5 0.2 * 0.1 0.2 

Add those with income only from "withholdable sources"† 1.1 0.5 0.1 0.3 0.3 

Add those with EITC 1.1 0.5 0.1 0.3 0.3 

Add those with capital gains distributions 1.2 0.5 0.1 0.3 0.3 

Total Filers 21.0 4.6 1.0 11.3 4.1 

Percent of Filers 30% 10% 34% 81% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

60
Table E - 2: Filers Qualifying for Alternative Return-Free Systems:

Did Not Use Paid Preparers 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 57.8 25.9 2.2 13.1 16.7 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 4.6 0.3 0.1 1.2 3.0 

B) Add dependent filers 6.4 0.4 0.1 1.3 4.6 

C) Add those with earnings from more than one job 15.1 1.0 0.3 2.8 11.0 

Add those with income only from "withholdable sources"† 23.0 1.9 0.5 6.2 14.5 

Add those with EITC 27.8 2.3 0.6 9.5 15.4 

Add those with capital gains distributions 27.9 2.4 0.7 9.5 15.4 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 0.8 0.1 * 0.1 0.5 

B) Add dependent filers 0.8 0.1 * 0.1 0.5 

C) Add those with earnings from more than one job 1.3 0.3 * 0.2 0.8 

Add those with income only from "withholdable sources"† 2.8 0.8 0.0 0.6 1.3 

Add those with EITC 2.8 0.8 0.0 0.6 1.3 

Add those with capital gains distributions 2.8 0.9 0.0 0.6 1.3 

Total Filers 30.8 3.3 0.7 10.1 16.7 

Percent of Filers 53% 13% 32% 77% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

†

 Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

61
Table E - 3: Filers Qualifying for Alternative Return-Free Systems:

Paper Returns 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 91.6 61.0 5.2 14.5 10.9 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 4.2 0.8 0.2 1.4 1.8 

B) Add dependent filers 6.0 1.1 0.3 1.5 3.2 

C) Add those with earnings from more than one job 13.8 2.4 0.7 3.3 7.4 

Add those with income only from "withholdable sources"† 23.6 5.1 1.3 7.6 9.6 

Add those with EITC 28.8 6.2 1.6 10.7 10.3 

Add those with capital gains distributions 29.0 6.5 1.6 10.7 10.3 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 0.6 0.2 * 0.1 0.2 

B) Add dependent filers 0.6 0.2 * 0.1 0.2 

C) Add those with earnings from more than one job 1.0 0.4 * 0.3 0.4 

Add those with income only from "withholdable sources"† 2.6 1.2 0.1 0.7 0.6 

Add those with EITC 2.6 1.2 0.1 0.7 0.6 

Add those with capital gains distributions 2.6 1.2 0.1 0.7 0.6 

Total Filers 31.7 7.7 1.7 11.4 10.9 

Percent of Total Filers 35% 13% 33% 79% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

†

 Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

62 
Table E - 4: Filers Qualifying for Alternative Return-Free Systems:

Electronic Returns 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 35.5 13.2 n.a. 12.5 9.9 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 2.7 * n.a. 0.7 2.0 

B) Add dependent filers 3.2 * n.a. 0.7 2.5 

C) Add those with earnings from more than one job 7.7 * n.a. 1.5 6.2 

Add those with income only from "withholdable sources"† 10.9 * n.a. 2.7 8.1 

Add those with EITC 18.7 0.1 n.a. 9.8 8.9 

Add those with capital gains distributions 18.8 0.1 n.a. 9.8 8.9 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 0.5 * n.a. 0.0 0.4 

B) Add dependent filers 0.5 * n.a. 0.0 0.4 

C) Add those with earnings from more than one job 0.8 * n.a. 0.1 0.6 

Add those with income only from "withholdable sources"† 1.4 0.2 n.a. 0.2 1.0 

Add those with EITC 1.4 0.2 n.a. 0.2 1.0 

Add those with capital gains distributions 1.4 0.2 n.a. 0.2 1.0 

Total Filers 20.1 0.3 n.a. 10.0 9.9 

Percent of Total Filers 57% 2% n.a. 80% 100% 

Source: 1999 Statistics of Income 

* less than .05 percent 

†

 Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

63
Table E - 5: Filers Qualifying for Alternative Return-Free Systems:

Filed in January or February 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 40.8 14.2 1.0 15.5 10.1 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 3.7 0.2 0.1 1.2 2.2 

B) Add dependent filers 4.5 0.3 0.1 1.2 2.9 

C) Add those with earnings from more than one job 9.7 0.6 0.2 2.4 6.5 

Add those with income only from "withholdable sources"† 14.5 1.1 0.4 4.6 8.5 

Add those with EITC 23.6 1.5 0.5 12.4 9.2 

Add those with capital gains distributions 23.7 1.6 0.5 12.4 9.2 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 0.5 0.0 * 0.1 0.4 

B) Add dependent filers 0.5 0.0 * 0.1 0.4 

C) Add those with earnings from more than one job 0.8 0.1 * 0.1 0.5 

Add those with income only from "withholdable sources"† 1.5 0.3 * 0.3 0.9 

Add those with EITC 1.5 0.3 * 0.3 0.9 

Add those with capital gains distributions 1.6 0.3 * 0.3 0.9 

Total Filers 25.2 1.9 0.5 12.8 10.1 

Percent of Total Filers 62% 13% 50% 83% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

64
Table E - 6: Filers Qualifying for Alternative Return-Free Systems:

Filed in March or April 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 62.7 40.4 3.0 9.9 9.5 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 2.6 0.4 0.1 0.7 1.4 

B) Add dependent filers 3.9 0.6 0.2 0.8 2.4 

C) Add those with earnings from more than one job 10.0 1.4 0.4 1.9 6.2 

Add those with income only from "withholdable sources"† 16.7 3.0 0.8 4.7 8.2 

Add those with EITC 20.2 3.6 0.9 6.9 8.8 

Add those with capital gains distributions 20.4 3.8 0.9 6.9 8.8 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 0.4 0.1 * 0.1 0.2 

B) Add dependent filers 0.4 0.1 * 0.1 0.2 

C) Add those with earnings from more than one job 0.8 0.2 * 0.2 0.4 

Add those with income only from "withholdable sources"† 1.9 0.7 0.1 0.5 0.6 

Add those with EITC 1.9 0.7 0.1 0.5 0.6 

Add those with capital gains distributions 1.9 0.7 0.1 0.5 0.6 

Total Filers 22.3 4.4 1.0 7.4 9.5 

Percent of Total Filers 36% 11% 33% 75% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

65
Table E - 7: Filers Qualifying for Alternative Return-Free Systems:

Filed in May or Later 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 23.6 19.5 1.2 1.6 1.2 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 0.6 0.2 * 0.2 0.2 

B) Add dependent filers 0.8 0.2 * 0.2 0.3 

C) Add those with earnings from more than one job 1.9 0.5 0.1 0.4 0.8 

Add those with income only from "withholdable sources"† 3.2 1.1 0.2 0.9 1.0 

Add those with EITC 3.6 1.2 0.2 1.2 1.1 

Add those with capital gains distributions 3.7 1.2 0.2 1.2 1.1 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 0.1 0.1 * 0.0 0.0 

B) Add dependent filers 0.1 0.1 * 0.0 0.0 

C) Add those with earnings from more than one job 0.2 0.1 * 0.0 0.1 

Add those with income only from "withholdable sources"† 0.5 0.3 * 0.1 0.1 

Add those with EITC 0.5 0.3 * 0.1 0.1 

Add those with capital gains distributions 0.5 0.3 * 0.1 0.1 

Total Filers 4.2 1.6 0.2 1.3 1.2 

Percent of Total Filers 18% 8% 20% 76% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

66
Table E - 8: Filers Qualifying for Alternative Return-Free Systems:

Received Refund Less Than $100 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 6.0 2.5 0.3 0.9 2.3 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 0.4 0.1 * 0.1 0.2 

B) Add dependent filers 1.2 0.2 0.1 0.2 0.8 

C) Add those with earnings from more than one job 2.5 0.3 0.1 0.3 1.7 

Add those with income only from "withholdable sources"† 3.7 0.6 0.2 0.7 2.2 

Add those with EITC 3.8 0.6 0.2 0.8 2.3 

Add those with capital gains distributions 3.8 0.6 0.2 0.8 2.3 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent * * * 0.0 * 

B) Add dependent filers * * * 0.0 * 

C) Add those with earnings from more than one job * * * 0.0 * 

Add those with income only from "withholdable sources"† 0.1 * * * * 

Add those with EITC 0.1 * * * * 

Add those with capital gains distributions 0.1 * * * * 

Total Filers 3.9 0.7 0.2 0.8 2.3 

Percent of Total Filers 65% 26% 59% 85% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

67
Table E - 9: Filers Qualifying for Alternative Return-Free Systems:

Received Refund of $100 or More 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 85.6 43.0 2.9 23.0 16.7 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 5.8 0.6 0.1 1.7 3.4 

B) Add dependent filers 7.2 0.7 0.2 1.8 4.5 

C) Add those with earnings from more than one job 16.9 1.7 0.5 3.8 10.8 

Add those with income only from "withholdable sources"† 25.6 3.2 0.8 7.5 14.0 

Add those with EITC 38.4 4.3 1.1 17.7 15.4 

Add those with capital gains distributions 38.5 4.4 1.1 17.7 15.4 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 0.8 0.1 * 0.1 0.6 

B) Add dependent filers 0.8 0.1 * 0.1 0.6 

C) Add those with earnings from more than one job 1.3 0.3 * 0.2 0.8 

Add those with income only from "withholdable sources"† 2.8 0.8 0.1 0.6 1.3 

Add those with EITC 2.8 0.8 0.1 0.6 1.3 

Add those with capital gains distributions 2.8 0.8 0.1 0.6 1.3 

Total Filers 41.3 5.2 1.2 18.3 16.7 

Percent of Total Filers 48% 12% 40% 80% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

68
Table E - 10: Filers Qualifying for Alternative Return-Free Systems:

Balance Due 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 29.2 23.3 1.7 2.6 1.6 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 0.6 0.1 0.0 0.2 0.3 

B) Add dependent filers 0.7 0.2 0.0 0.2 0.3 

C) Add those with earnings from more than one job 1.9 0.4 0.1 0.5 0.9 

Add those with income only from "withholdable sources"† 4.3 1.1 0.2 1.6 1.3 

Add those with EITC 4.3 1.1 0.2 1.7 1.3 

Add those with capital gains distributions 4.4 1.2 0.3 1.7 1.3 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed as 

dependent 0.2 0.1 * 0.1 0.1 

B) Add dependent filers 0.2 0.1 * 0.1 0.1 

C) Add those with earnings from more than one job 0.4 0.2 * 0.1 0.2 

Add those with income only from "withholdable sources"† 1.0 0.5 0.1 0.2 0.2 

Add those with EITC 1.0 0.5 0.1 0.2 0.2 

Add those with capital gains distributions 1.0 0.5 0.1 0.2 0.2 

Total Filers 5.5 1.7 0.3 1.9 1.6 

Percent of Total Filers 19% 7% 18% 73% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

69
Table E - 11: Filers Qualifying for Alternative Return-Free Systems:

No Refund or Balance Due 

1999 

Units in Millions 

Type of Filer All 1040 1040PC 1040A 1040EZ 

All filers 6.3 5.4 0.2 0.5 0.2 

No taxable income or in 15 percent bracket: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 0.1 0.0 * 0.0 0.0 

B) Add dependent filers 0.2 0.0 * 0.0 0.1 

C) Add those with earnings from more than one job 0.3 0.0 * 0.1 0.1 

Add those with income only from "withholdable sources"† 1.0 0.4 * 0.4 0.2 

Add those with EITC 1.0 0.4 * 0.4 0.2 

Add those with capital gains distributions 1.0 0.4 0.1 0.4 0.2 

28 percent and higher brackets: 

Wage income only, no itemized deductions or credits other than child credit 

A) Only those with earnings from one job and not claimed 

as dependent 0.0 0.0 0.0 0.0 0.0 

B) Add dependent filers 0.0 0.0 0.0 0.0 0.0 

C) Add those with earnings from more than one job 0.0 0.0 0.0 0.0 0.0 

Add those with income only from "withholdable sources"† * * 0.0 0.0 0.0 

Add those with EITC * * 0.0 0.0 0.0 

Add those with capital gains distributions * * 0.0 0.0 0.0 

Total Filers 1.0 0.4 0.1 0.4 0.2 

Percent of Total Filers 17% 7% 24% 84% 100% 

Source: 1999 Statistics of Income 

* - less than .05 percent 

† Withholdable sources include pensions, IRAs, interest, dividends, and unemployment benefits. 

70