Tax Preparation

Individuals spend billions on tax preparation, which is dear and sophisticated

This is a statement from Beverly Moran, Professor Emeritus of Law at Vanderbilt University. She wrote this piece for The Conversation, an independent, nonprofit source of news, analysis, and commentary from academic experts.

The Internal Revenue Service has moved the April 15th deadline to May 17th. If taxpayers still need more time to file federal returns, they can request an extension until October 15.

“This is still a difficult time for many people and the IRS intends to continue doing everything it can to help taxpayers cope with the unusual circumstances surrounding the pandemic while working on important tax administration tasks,” said Chuck Rettig, Commissioner of the IRS.

The announcement may be welcome news for many Americans, but it also raises an important question: Why should taxpayers have to navigate the lengthy and costly tax return system in the first place?

Beverly Moran

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The case for an “easy return”

In 1985, President Ronald Reagan promised a “no-cash” tax system with half of Americans never filing a tax return again. Under this framework, taxpayers with simple tax returns would automatically receive a refund or a letter detailing the taxes owed. Taxpayers with more complicated tax returns would use today’s system.

In 2006, President Barack Obama’s Chief Economist Austan Goolsbee premiered “Easy Returns,” where taxpayers would receive pre-filled tax forms for review or correction. Goolsbee estimated that his system would save taxpayers more than $ 2 billion in tax preparation fees annually.

Although never implemented, the two suggestions illustrate what we all know: Nobody likes to fill out tax forms.

So why do we have to?

The tax preparation industry has kept the system complicated because the potential cost of lost revenue is enormous, writes Beverly Moran.

An expensive and time consuming system

A return-free submission is not difficult.

At least 30 countries including Denmark, Sweden, Spain and the UK allow no-return returns.

Additionally, 95% of American taxpayers receive more than 30 types of informational statements telling the government their exact income. These information returns give the government everything it needs to fill out most taxpayers’ tax returns.

The US system is ten times more expensive than tax systems in 36 other countries with robust economies. But those costs go away in a no-return system, as do the 2.6 billion hours Americans spend each year on tax preparation.

You may be wondering if Congress is just behind the times without knowing it can exempt us from tax preparation? Not true.

As an expert on the US tax system, I see America’s costly and time-consuming tax reporting system as a result of its relationship with the commercial tax preparation industry, which works for Congress to maintain the status quo.

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Business tax preparation

Almost 20 years ago, Congress instructed the IRS to provide free tax preparation for low-income taxpayers. The agency responded in 2002 with “Free File,” a public-private partnership between the government and the tax preparation industry. As part of the deal, the IRS agreed not to compete with the private sector in the free tax preparation market.

In 2007 the House of Representatives rejected laws that allow free tax preparation by the government. And in 2019, Congress attempted to legally prevent the IRS from ever offering free online tax preparation services.

Only a public outcry turned the tide.

The public part of Free File is that the IRS is guarding taxpayers on business tax preparation websites. The private part consists of companies that redirect taxpayers to costly alternatives.

Private partners are using computer code to hide the free websites and bring unsuspecting taxpayers to paid websites, according to the tax administration finance inspector who oversees IRS activities.

Should a taxpayer discover a free alternative to preparation, the private preparers set various restrictions, such as: B. Income or the use of various forms as an excuse to push taxpayers back to paid preparation.

As a result, of the more than 100 million taxpayers eligible for free assistance, 35% pay for tax preparation and 60% don’t even visit the free websites. Instead of 70% of Americans getting free tax preparation, trading companies are reducing that percentage to 3%.

Tax saving and tax evasion

You may suspect that there are valid political justifications for avoiding governments and strengthening the private sector. Judge these arguments for yourself.

One argument used by business tax advisors is that taxpayers are missing out on valuable tax savings by relying on free government preparation.

In fact, the government software would reflect the same laws applied by the paid builders with equal access to tax savings or credits. In addition, tax advisors like H&R Block promise to pay any taxes and interest resulting from a failed audit. As a result, these services have every incentive to take conservative, pro-government tax positions.

A second argument is that government-issued tax returns encourage tax evasion.

In a no-return system, the government reveals its knowledge of the taxpayer’s income before the taxpayer submits the documentation. So the taxpayer knows if the government has missed something and has reason to let it go.

However, taxpayers already know what information forms the government has as they receive duplicates of these forms. The incentive to lie does not increase because the taxpayer avoids weeks of tax preparation.

Empower anti-taxpayers

Finally, there is the anti-tax argument for onerous tax preparation: keep tax preparation uncomfortable in order to raise anti-tax sentiment.

In the past, Republicans have spoken out against high taxes. But after decades of tax cuts, Americans are no longer swayed by this argument.

According to this argument, annoying tax preparation helps to keep the anti-tax fever high. And that fuels public hatred of the government and the tax system.

Unfortunately, the anti-tax contingent’s desire to force Americans to spend time and money on tax preparation coincides with the desire of the tax preparation industry to charge billions in fees.

Tax preparation firms advocate Congress to keep tax preparation costly and complicated.

Indeed, Intuit, maker of TurboTax, the tax preparation software, lists government tax preparation as a threat to its business model.

An example is the Earned Income Tax Credit, a government program for low-income people. The loan is so complicated that 20% of eligible people never apply.

If the government were to prepare people’s tax returns, that 20% would get government support. Even so, Intuit has pushed lawmakers to make lending more complicated, forcing more taxpayers into paid prep services.

So far, the tax preparation industry has kept the system complicated as the potential cost of lost revenue is enormous.

Only public outcry can change the system.

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