Is the US Tax-Filing System Deliberately Complicated?

Mar 30, 2021 | Blog

According to Chuck Rettig, Internal Revenue Service Commissioner, the IRS is trying to help taxpayers navigate the unusual circumstances related to this year’s tax-filing season. Most of the confusion is due to temporary tax-regulation changes related to the 2020 pandemic. If you visit a tax attorney in San Francisco, one of the things you will likely learn is that the IRS has postponed the normal tax-filing deadline from April 15 to May 17. You can also request an extension, if necessary, until October 15. In spite of these promises from the IRS to help filers with this year’s confusing tax season, many people wonder why no one seems to be making the case for a simple return anymore.

Tax Problems

Past Promises Never Fulfilled

In 1985, then President Ronald Reagan promised a “return-free” tax system speaking of a process that would allow approximately 50 percent of all filers to never have to fill out a tax return again. The framework of this plan included that taxpayers with no complicated issues receive a letter detailing taxes owed or an automatic refund. Filers with more complex returns would use a system similar to the one in place today.

Similarly, Austan Goolsbee, then President Barack Obama’s chief economist, rolled out a plan for a “simple return,” where filers would be given a previously-completed tax form that they could review and correct if necessary. It is estimated that Goolsbee’s system would save American taxpayers over $2 billion annually in tax-preparation fees. Although neither proposal was ever implemented, both illustrate what most tax lawyers and individuals already know: nobody is fond of filling out tax forms. Even though return-free filing is not a complex process, the U.S. appears to be sticking to the costly and time-consuming system currently in place.

More Than 30 Countries Offer Return-Free Filing

As of now, a minimum of 30 countries worldwide allow return-free filing, including the U.K., Spain, Sweden, and Denmark. Interestingly, it appears as if the U.S. could follow suit if it wanted to, since 95 percent of American taxpayers receive multiple information returns giving the government access to their exact income. This data technically offers everything government officials need in order to complete returns for most taxpayers if they would simply embrace this idea.

A Costly Filing System

The tax-filing system used in the U.S. is 10 times more costly than tax systems in over 35 other countries with vigorous economies. In a return-free system, these expenses would disappear, along with the 2.5 billion hours U.S. filers spend annually on tax preparation. Some experts see the time-consuming and expensive tax reporting system in the U.S. as a consequence of the government’s connection with the commercial tax preparation industry. The latter consistently lobbies federal lawmakers to maintain the status quo.

Affiliation Between Congress and the Tax preparation Industry

Several decades ago, Congress told the IRS to offer free tax preparation to low-income filers. “Free File” was the IRS’s response in 2002. Free File was a public-private affiliation between the tax preparation industry and the government. Part of the agreement included the IRS’s refusal to compete with the private sector.

Free File’s public part consists of the IRS herding filers to commercial tax preparation sites. The private part consists of those same sites sending taxpayers to expensive alternatives.

The Treasury Inspector General for Tax Administration stated that partners in private industry use computer codes to obscure free websites and divert unsuspecting taxpayers to sites that charge money.

In 2007, legislation to provide free government tax preparation was rejected by the House of Representatives, and, in 2019, Congress attempted to legally bar the IRS from ever offering free online tax-preparation services.

Federal Lawmakers Lobbied by Tax Prep Companies

Obviously, tax preparation companies lobby federal legislators to keep tax preparation complicated and expensive. In fact, the maker of TurboTax, Intuit, refers to free government tax services as a threat to their business model. A quick example of this is the Earned-Income Tax Credit, which is so complex that 20 percent of eligible individuals never file for it. If those individuals’ tax returns were prepared by the government, that 20 percent would automatically get the tax credit. Many experts believe that the system has been kept complicated because the tax preparation industry predicts vast lost revenue if the government steps in.

Only an IRS tax attorney can offer expert advice on filing taxes and claiming tax credits. If you are confused about your return or need help to file, contact a tax attorney in San Francisco at your earliest convenience.