Why Is Tax Filing So Expensive for Americans?

Feb 18, 2022 | Blog, Uncategorized

Virtually any tax-planning professional would agree that filing taxes in the United States is both expensive and complicated. This leaves many people wondering why the issue never seems to be addressed.

Simple Tax Returns Spoken Of but Never Implemented

In 1985, former President Ronald Reagan spoke of a “return-free” tax system, which would require only half of taxpayers to actually fill out returns. With this process, those filing simple returns would receive a refund automatically or a letter detailing how much they owed. Those who needed help from an Internal Revenue Service tax attorney, or had otherwise complicated returns, would use the system in place today.

In 2006, former President Barack Obama’s chief economist, Austan Goolsbee, suggested a type of simple return where filers would receive tax forms that were already completed that they could then review and correct if necessary. Although neither plan was ever implemented, the two proposals highlight the fact that Americans do not like the notoriously complicated system they must use to file taxes.

Controversial Diversion to Costly Services

Any Bay Area tax attorney could probably tell you about “Free File,” which consists of the IRS herding taxpayers to professional tax-preparation sites. However, from there, many of those commercial establishments divert taxpayers to costly alternatives. This dynamic has sparked a public outcry.

Controversy also exists regarding the relationship of the IRS with the commercial tax-preparation industry. These establishments typically lobby Congress to maintain the status quo, as any radical changes would significantly impact their profits.

Return-Free Filing Is Not Complicated 

Despite the various controversies concerning return-free filing, it is not a difficult process. This is especially true when compared with the current process used by most filers. A good example of complex filing is a government program for low-income taxpayers, called the earned-income tax credit. This credit is so complicated that it is estimated that 20 percent of eligible citizens never file for it, thereby missing out on thousands of dollars that they could have saved.

Return-free filing is implemented in approximately 30 countries, including the United Kingdom, Spain, Sweden, and Denmark. By comparison, the system used in the United States is ten times more expensive than tax systems used in these countries. With the return-free system, those costs would disappear.

Free Tax Filing Available but Underused 

The Treasury Inspector General for Tax Administration (TIGTA”) has stated that private tax preparers sometimes use computer codes and other sleight of hand to hide information about free websites and even divert filers from such sites and reroute them to paid sites.

Consequently, 35 percent of the 100 million taxpayers who qualify for free help wind up paying to have their taxes prepared and 60 percent never even visit the free websites. This means that instead of a high percentage of taxpayers receiving free preparation services, commercial companies have whittled that figure down to about 3 percent.

Tax Evasion a Concern

Those who believe there are valid policy justifications for keeping tax preparation in the private sector sometimes argue that taxpayers might miss out on essential savings if they depend on free government preparation. Another argument suggests that returns prepared by the government encourage tax evasion. For example, with the no-return system, the government tells taxpayers in advance what it believes they owe. Therefore, if taxpayers know something was overlooked, they have motive to ignore the mistake.

It remains to be seen if changes will eventually be implemented, or if government assistance with filing will become more popular in the future. Google “tax attorney near me” if you suspect filing your return might be a complicated process, or if you simply want foolproof tax-planning advice.