The Other Individual Mandate: Tax Prep
Where, as they say, is the outrage? For all of the indignation over the new health insurance mandate, I am amazed at the serenity at which we accept another (near) mandate: That we must pay somebody to help us do our taxes.
The government does not specifically require us to hire paid tax preparers or buy commercial software, of course. But it has, in effect, left millions of taxpayers with no real choice. Congress has created a tax code that makes it nearly impossible for many Americans to file returns without paid help. And even those who could (most non-itemizers for instance) are so intimidated by the whole process that they pay people to help them anyway.
Thus, in 2005, 89 percent of individual taxpayers either used commercial software or hired paid preparers to help them do their civic duty. Just 11 percent, according to my colleague Eric Toder, filed returns on their own.
Yet, we just shrug and pay our $59 for commercial software or pony up between a few hundred and a few thousand dollars to paid preparers. No constitutional challenges. No state attorneys general at the barricades. Many of us, in fact, are likely to spend more money hiring a human being to do our taxes than we’ll pay in penalties for refusing to buy insurance ($95 in 2014 increasing to $695 by 2016). Indeed, I’m willing to bet that more of us will pay somebody to prepare a tax return than will purchase medical coverage, despite the insurance mandate.
What’s worse, many of those we trust to do our returns are incompetent or worse. Professor Larry Lokken, a Tax Policy Center affiliated scholar, wrote a couple of nice blog posts last year on this troublesome business. At least the private companies from which we’ll have to purchase insurance are minimally competent.
When you buy insurance, you receive an obvious benefit. What do you get for the dough you put out for tax prep? New IRS data suggest that doing taxes on your own has become so difficult and time-consuming that paying someone actually drives down your compliance costs. A strong case can be made that it is in fact not possible for many of us to file a tax return without paying for help. Don’t believe me? Try to manage the Alternative Minimum Tax on your own.
On April 8, Elaine Maag and Bill Gale of TPC, John Guyton of the Internal Revenue Service, former H&R Block executive Robert Weinberger, and I will be discussing some of the implications of paid tax prep. You’re welcome to register here to join us in person or on the Web (and unlike commercial tax software, it’s free).
There are plenty of ways to fix filing hell. Here are two possible solutions: Simplify the tax code by dumping complex special interest tax breaks (which would also have the benefit of lowering rates); Or, the IRS could make filing a lot easier by automatically filling in the information you get on your 1099s and W2s on an electronic 1040. That could at least help people with very simple returns. I know, Intuit will do everything it can to kill this idea and conservatives will rail about Big Brother—except the government already has all this information.
In the meantime, where is the Tea Party? Where are the whack-a-doodle radio and TV talkers? Where is the mavericky former governor of Alaska? Where is the outcry for a simpler tax system? Where is the outrage?
Case in point: http://www.fairmark.com/news/10040401-return-errors.htm
While other posters have a point about the low cost of tax software, I'm not going to argue with you about the maddening complexity of our taxes. They are, in my view, a kind of full employment program for accountants. But you're off the mark in blaming Tea Party and conservative types for not tackling this “mandate”. Conservatives have argued for at least all of my 41 years that taxes are too complex, and that we should simplify them somehow, either with a flat tax or a national sales tax or with some other simplifying mechanism. Remember that it was during the Reagan Administration that the 1040EZ was introduced. It's disingenuous to indicate that conservatives don't care about this issue when, in fact, we've been making a VERY big deal out of it for years.
We're a CPA firm, and we had a new client last week who would have lost out on the $8000 home buyers credit because he closed on his house November 6th, 2009 and his income was $97k, $2k over the limit to qualify for the credit at that specific date, which had the income levels raise to $125k on November 7th. So if he would have waited one more day (he didn't have an accountant to ask last year, and the Realtor gave him incorrect info), he would have qualified for the credit. But by having the extra information we did, we were able to do something very unorthodox, we amended his 2008 return and put the credit there, when he made only $72k, well below the $95k threshold, and thus he was able to qualify for the full $8000.
I doubt Turbo Tax or Tax Act would have figured that out. I personally feel that the IRS doesn't object to programs like Turbo Tax because people do end up paying more in taxes.
Totally agreed …
You probably paid more to your preparer than you paid in taxes because you had a good preparer. The only thing wrong is how ungrateful/rude you seem to appear.
This is a terrible article. Tax preparation is a whole industry, that employs thousands of people, and yes the tax code is complex, as it should be considering its a code that covers 250 million Americans. Using this article's logic, why charge so much to build a house, that should be easy and simple also. And while we're at that, why charge so much to buy a car, it's just metal that's been arranged to move in a direction at speed.
Some things cost money, and rather than splurge on things we don't need like 52 inch TV's and houses that are way too big, perhaps people should budget accordingly for the important things, say a good meal, a house and tax preparation.
Imagine if tire manufacturers lobbied against filling potholes so they could sell more tires. Or if private emergency services got local agencies to cut funding for fire departments so people would end up calling private services first. And what if private schools pushed to reduce public school money so more families would flee the public system? Or what if taxicab companies managed to get a rail line placed just far enough from an airport to make public transportation prohibitively inconvenient? Pick your favorite of these outrages, and take note of how it makes you feel. You'll experience it again when you read the next story – and this one, unfortunately, is true.
California's ReadyReturn repealed in 2005 because of pressure from tax-preparation industry lobbyists.
http://www.wired.com/wired/archive/14.05/posts.html?pg=7
Where is the outrage?
Outrage is no longer permitted. If you exhibit outrage against anything the government does, you are now an extreme right-winger and racist.
I paid more to my preparer than I paid in taxes. There is something wrong with that.
There is another cost of complexity that is not being mentioned here by commentors, besides the fact that it is much easier to buy software or hire someone than it is for most non-accountants to file their taxes.
The complexity of the rules and regulations ensures, additionally, (a) that paid preparers are quite likely to make many, often 'simple' mistakes (considering that even 'high-end' accounting specialists basically ask their clients to send in all the data, then enter in TurboTax themselves),
and even more importantly (b), the complexity ensures that there often IS no clear or 'correct' answer to any number of tax situations. Income is bad enough (digging through old files trying to find the basis for those 1.7 shares of a spin-off of a spin-off of T), but deductions are hell.
I work in academia, which means I travel a lot for research, which is sometimes reimbursed in part by different sources, but much of which is paid myself; I work in one state but have a home and spend summers and sabbaticals in a distant other state, my university sometimes sends me for a term to yet another site to work (sometimes overseas, sometimes to the US), and I also happen to have an inherited property in my old hometown that I rent out.
The complexities of my 'tax home', which travel is deductible when, how to handle my deductions, etc., etc., are full of uncertainties and judgment calls.
If the IRS code were software, one could be sure that it was abysmally verified.
And state taxes are worse, because the states still live in the 19th century and assume that everyone lives and works all the time in one place, and perhaps 'moves' all those things once a year. (The NYTimes recently had an article, additionally, about how states are becoming increasingly aggressive about claiming taxes for individuals who 'worked' in the state only 2-3 days! Do I really want to file 6 or 7 state income tax returns??? Oy!)
So I use Turbo Tax, take the deductions it calculates, try to be honest about my net costs and income from travel, etc., read the rules and apply things I see, and hope for the best. I'm quite certain that if I gave my data to 10 preparers, I'd get 10 different sets of returns (probably by a substantial amount). And all of this for a five-figure total income.
The saving grace, if there is one, is that the IRS has not, so far, been very aggressive about examining and contesting returns in my range…because figuring out the 'correct' return would take more time and cost them more than they could possibly recover by challenging most of my choices.
Awww, come on. I use a tax program that costs $12.95 (TaxAct). I'm sure it pays for itself by finding deductions, I didn't know I was eligible for. It's certainly saves me a lot of aggravation and simple math errors.
Well anonymous, your reply makes much more sense (and is shorter) than Gleckman's inane blog post. The fact is that, under the current system, the IRS cannot do my taxes for me and they cannot possibly know how much I owe. But…this fact does NOT mean that the tax system is too complex. As we know, “simplicity” is not the primary goal of a tax system (or for just about any other system or thing), so to claim that there should be “outrage” over its complexity is similar to claiming that there should be outrage that people have different hair styles–after all, wouldn't it be much simpler if we got rid of hair stylists and we all shaved our own heads?
It's possible for them to do the taxes for you, but Turbo Tax has a free federal version for everyone to use. I think various other tax preparation software has a free version as well. If you have taxes easy enough for the Feds to file a return for you, it a hour tops to do and it will be free. For those types of people the federal tax code is quite simple to interpret anyways.
The cost with those software's usually come when you e-file for state taxes. In California you can file for free directly to the state government, or just print out the state taxes and do them manually.
For the record, I have done taxes manually and it wasn't very hard. Simple calculations and a table to look up how much tax you owe at the end. The reason why I use free software is because they guarantee the calculations are right, so I have a much lower risk of botching something. I also like e-filing better than paper filing.
tanstaafl – the whole point is that the government already has all of your W-2 and 1099 information. It could – as they do in England – do your taxes for you and send you a refund or a bill. You would only need to file a return if you disagreed with their assessment.
Your car analogy is wrong. In our tax system, it's as though your mechanic knows what's wrong with your car but won't tell you; instead you hire someone who tries to figure it out too. Then the mechanic comes back and either disagrees or agrees with the person you hired. That is a moronic system.
I pay someone to fix my car–does that mean that cars are too complex? I pay someone to fix my leaky pipes–is plumbing too complex? I pay someone to fix my shoes–are shoes too complex? I pay someone to cut my hair–is hair too complex? What an absolutely idiotic opinion to hold–that taxes are too complex because middle and upper class Americans must pay someone to help them file.
Since the health care “mandate” is effectively the same thing as raising taxes and offering a tax credit, here are some other “mandates”:
You will pay more tax if you don't have a mortgage, don't buy a new water heater, or don't buy a new hybrid car – exactly the same outcome as if you don't buy health insurance.
The government may offer tax free preparation and efile via the private companies. They still try to offer to services for a fee during the process which i disregard. Now I file mine for free online via the tax preparer website. Since I am familiar with the tax codes, it is not too hard to figure it out. Only if there is a way to efile directly to the IRS
I paid only $28 for smog testing yesterday and it comes due only every other year. Safety testing is another matter – it is annual but only $18 (and is often included with an oil change).
The answer to this problem is neither automation or simplification, but to shift most complexity to employers – who probably could benefit from either an automated IRS tool or professional accounting help. In other words, this is yet another reason for not only tax reform, but the kind that exempts the vast majority of families from having to file at all. No family making under $150K should ever have to file – rather their employers should file a business income tax (including wages), provide health care (unless we get single payer) and pass along a child credit to the employees as part of wages. The only role for most people in the process is to be given an opportunity to compare what their employer says they are getting for a credit with what the employer tells the government – just to make sure the employer is paying out all credits.
You have raised this before and your argument still ignores two *huge* pieces of relief. First, the government offers *FREE* tax preparation and e-filing if your adjusted gross income is $57,000 or less in 2009. Second, the VITA program is also available to help.
I never pay more than $25 for tax software, and that's a reasonable price for checking my work on such an important task, even if that's all the software did.
The most wasteful personal mandate is smog testing. I pay over $50 each time to smog test my cars. The total is over $1000 by now. No car I own has ever failed a test. Ever. Yet I still have to pay and pay and pay. You'd think I deserve some time off for good behavior. The garage operators' campaign contributions must have been quite persuasive to legislators.