Seeing red

Many international jurisdictions are avoiding the hassle and risk of traditional tax filing by implementing pre-filled tax returns. Why shouldn’t Canada?

Congratulations. You’ve survived the ordeal of another tax season. And it is an ordeal. For all of the Canada Revenue Agency’s red tape reduction initiatives, many of which are touted as being forward-thinking, the fact remains that tax compliance in Canada is much more complicated than it has to be.

You know the status quo all too well. The average taxpayer waits for his or her various and sundry tax slips to be delivered by mail, organizes them and then drops them off with his or her accountant. All the relevant data can then be entered into a tax filing program. Of course, even if the taxpayer has everything needed to file the return, there’s always the risk of human error during the data entry phase.

But there are better ways, such as pre-filled tax returns. Many tax jurisdictions avoid all the hassle and risk by providing the taxpayer with his or her tax return the same way a credit card statement is sent — via email or an Internet portal. And why not? After all, the tax authorities already have all the slip information summarized and reconciled in their computers. It’s how they check the return.

Under such an enlightened system, taxpayers are allowed to file or accept the return as provided to them, or modify and refile.

This is not new. Denmark started the move to pre-filled tax returns in 1988; since then, more and more advanced tax jurisdictions have adopted it, including almost half the revenue bodies in the Organization for Economic Co-operation and Development (OECD). Like Denmark, New Zealand and Sweden also fully prepare tax returns (or equivalents) for the majority of their personal taxpayers.

Some benefits of pre-filled tax returns noted by the OECD include a substantially reduced compliance burden for taxpayers; greater certainty for taxpayers that they have fully reported their income and properly claimed their deduction entitlements; an improved image of the revenue authority due to the more personalized service being given to taxpayers; faster processing of information; quicker refunds of overpaid tax; and the elimination of much of the work by revenue bodies related to taxpayer error and/or traditional post-assessment verification.

Taxpayer satisfaction improves as well. When California launched its version of a pre-filled return called ReadyReturn as a pilot program in 2005, more than 90% of surveyed participants said they saved time by using it and that it was more convenient than any system they had previously used. More than 97% said they would use it again the following year. Most notably, only 0.3% of ReadyReturn filings contained errors, versus 3.1% for other filings. It has been vastly expanded in application.

The benefits of pre-filled returns appear so obvious that cynics sometimes claim the only reason the CRA has not implemented them is because it’s in the red tape business and doesn’t want to risk the loss of revenue from fewer interest and penalty charges.

I am not saying this system would work for everyone, and it would certainly disrupt the current business model for some tax practitioners. But pre-filled returns leverage technology in the right way. It is a reality that we have to face.

Think about it. The information on every tax slip you receive is summarized and sent to the government, which is how compliance errors are typically identified. Even so, instead of joining a growing trend and simplifying the tax filing process, pre-filled returns are not even on the CRA’s radar. Why not?