A Postmortem: Some Thoughts on Improving the Process of Filing Taxes

I considered posting this article during the actual tax season, but I decided to wait until the rush of actually filing taxes was over.

Almost all of you who live in the US have filed your income taxes by now. Some of you – the self-employed or functionally self-employed, like I am – have filed first quarter estimated taxes as well. Others may have filed business taxes.

We’ve all gone through a process that, at the very least, involves filling out forms and hoping that others have done their part to make it all right. In other cases, like my own, it involves lots of pages of forms, tons of calculations, the near-requirement of buying software or hiring a specialist, and hoping that you didn’t overlook one out of a thousand little things. Because if one thing is wrong, you’re probably going to get fined and audited.

The process of filing income taxes needs to be simplified. Period.

Please note that I’m not talking about political theories and philosophies here. I fully know that some people out there would like to see lower taxes and reduced government programs, while others would see higher taxes and more/better government programs. I also know that some people would shift the tax burden in various ways, reducing taxes on various income brackets and raising taxes on other brackets.

Instead, I’m talking about the unnecessary challenge and risk of filing taxes for most ordinary people.

Here are five simple suggestions that the IRS could follow to make this process easier for everyone – including themselves.

They should make it possible to file taxes using a web form. Just log on to a secure IRS site using some credentials they’ve sent you, fill in the form online, and perhaps print out a confirmation page and send it in with any papers you need to send. The process of filing taxes could easily be handled by a well-designed web form. Not only that, the data would go straight into their database without any fuss and without middlemen.

They should use the best possible security. One concern I’ve always had with filing taxes is with identity theft in the process of filing it. A highly secure online system, while not eliminating identity theft avenues, does reduce them.

They should auto-fill in as much of the information as they possibly can. If they’re doing this web-based filing, they could auto-fill in a lot of your information based on information filed by organizations that paid you as well as information from your previous year’s tax forms. No more typing in or writing everyone’s names, Social Security numbers, employer information, and so on.

They should simplify electronic payment. If you’re going to receive money, give more options for paying out. If you need to pay, make it easier to pay in when you’re filing. A simple electronic transfer from your bank would be a great choice.

They should not charge for these services. Many people will say that you can just buy software to do all of this stuff. You shouldn’t have to pay for software in order to to a basic tax filing.

Of course, this brings up a few additional questions.

Won’t this destroy the tax filing businesses? Not necessarily. Many people with high incomes might very well still hire professional filing services in order to maximize their return. Similarly, people who want to do it themselves might also get assistant software that will help them identify maximum deductions and so forth. The IRS really has no reason to provide such services, as doing so would reduce their income. When you deduct, you pay less, after all. I would certainly use assistant software.

Wouldn’t this increase IRS costs? In the short term, it might. In the long term, they wouldn’t need people to manually process forms, drastically reducing the manpower needed by the IRS over time. Again, this doesn’t necessarily mean job loss; people could simply not have their positions filled when they leave.

How does this solve the problem with taxes in America? As I stated above, it doesn’t resolve any of the outstanding policy debates about taxes. What it does do is make sure that, whatever the outcome of the debates, it’s easier for people to file their taxes and more efficient for the IRS to process returns. That’s something we can all agree on, I think.

If you enjoyed reading this, sign up for free updates!

Loading Disqus Comments ...
Loading Facebook Comments ...

36 thoughts on “A Postmortem: Some Thoughts on Improving the Process of Filing Taxes

  1. Amanda says:

    You can have direct deposit or withdrawal of tax refund/owed amounts.

  2. Des says:

    “You shouldn’t have to pay for software in order to to a basic tax filing”

    You don’t. A 1040EZ costs $0.44 to mail. The problem is, you are not filing a basic return. Your is more complicated than most.

    Also, tax software IS free if your AGI is under $58k (google IRS free efile). That is most people. Even as a “fiscal conservative” I have no problem saying that those of us who make above average incomes can pay for our tax software.

    I am all for simplifying the tax code, but asking the IRS to (effectively) provide Turbo Tax for free really just sounds like griping.

  3. Ryan says:

    If I recall correctly, the IRS attempted to provide a direct file solution. The tax preparation industry threw a fit though and somehow worked out (or sued for one) an agreement with the IRS.

  4. Jonathan says:

    I work in the Business Outsourcing Industry so see firsthand how much waste their is in using a middle man. The company I work for is actually putting in a bid to process the paper claims mailed to the IRS.

    We live in the information age. I can’t understand why we still have so many middle men in our day to day business. A direct interface to the IRS systems makes a lot of sense, and would reduce significant cost that is currently either paid for by the tax payer or IRS (which I guess means the Tax Payer either way). This does not just apply to paper submissions.

    I also really like the idea of pre-populating as much data as possible. It makes no sense to require a human to enter information that the IRS already has. Makes me wonder what the tax filing process would look like if designed by a process engineer, rather than government bureaucrats.

  5. chris says:

    Easy taxes? Do away with the IRS, tax software, and everything that revolves around it – flat tax.

  6. valleycat1 says:

    I’m with Chris – have employers withhold x% of your paycheck, & be done with it.

    We download the forms from the IRS website, & fill everything in without using tax software (& we have a somewhat complex tax situation).

  7. Carmen says:

    Trent – it’s totally possible and how it works in the UK.

    This year I had all the information I’d need at my fingertips and filed online within 10 minutes. You also have the option whether to file early and they calculate the tax due or file later and calculate it yourself (which isn’t necessary since the system does it for you anyway.) It’s also partially pre-completed with last year’s info such as address etc, but not income figures; they want you to conciously input those yourself.

  8. Marsha says:

    @2 Des–

    Why are you entitled to have me pay for your tax software?

  9. Carmen says:

    Oh, another major difference here is that most employees don’t file taxes. They are deducted at source, by employers. Employees who receive a lot of taxable benefits, have multiple income streams and those within the higher tax brackets often have to file themselves, along with the self employed.

    However, we also have far, far fewer items that are tax deductible.

    I’m actually very surprised that you can’t file online in the US, given that we can. Normally, the US is way ahead of our curve!

  10. Steve says:

    “But what about the tax preparation industry” is a broken window fallacy. Filling out overly unnecessarily complicated paperwork is not adding value to our society or economy. (The same argument would apply to toll collectors.)

  11. RobinH says:

    @Carmen
    Employers do deduct for taxes in the US, and we can also opt to have additional money withheld if we know we have other income coming in on which we’ll owe tax. That saves us from what Trent is doing (because he’s self-employed), filing estimated quarterly tax returns. We’re required to pay in a certain amount of tax during the year, (due quarterly at a minimum). If we owe more than a certain percentage of our income on April 15 when we file for the year, there’s a fine.

  12. Des says:

    @Marsha

    Um, what? I pay for my tax software, because I make too much to qualify for the free version.

    Do you mean “why are poor people entitled to have the wealthy pay for their tax software?” The answer to that would be “for the same reason they pay less in taxes, have more deductions and credits, and qualify for all other low income programs.”

  13. Steve in W Ma says:

    There is a free way to pay the IRS electronically, but you have to sign up for it ahead of time (it takes at least 7 days for your account to activate) and most people aren’t that with it.

    I like most of the ideas you presented in this piece.

    Even though the tax code is complex, I disagree that tax software is necessary. Just go down each of the 80 or so line items on the 1040 long form, reading the instructions for each line item that are in the instruction booklet, and doing any necessary worksheets and additional schedules oon the way, and you’re golden. It really doesn’t take that long either, maybe one and a half hours, and you’ll learn a lot more about your tax situation and taxes in general than you will by relying on software to do it for you.

  14. moom says:

    My key to filing taxes is developing spreadsheets for each tax form. However, a lot of the IRS instructions are very hard to understand. For example the capital gains tax instructions. Most of the rules are easier to understand in Australia but again capital gains tax is not so easy to understand. I’m an economics professor and find it hard to understand, so I can understand why most people who haven’t studied accounting (I haven’t apart from really basic stuff) would find it hard.

  15. Dave M says:

    Trent, how about a post on how insane the personal tax code is in the first place? I used TaxAct online this year and I know I just scratched the surface. I had to wade through 50 pages about energy credits, business losses, capital gains, income not reported, farm income, railroad pensions, education expenses, mortgage interest deductions, exemptions, dependents, gambling losses, credits not fully taken in a previous year but claimed in this year, etc., etc., etc…. What a load of garbage! This makes me want to advocate a basic progressive personal income tax and maybe a national sales tax. AND THAT’S ALL.

  16. Nicole says:

    @ Des: I am an independent contractor, which is very common in my field, and my having a “complicated tax situation” is…whose fault again? Not mine, I didn’t design the system.

    I do not make $58,000 — not by any stretch of the imagination — and yet I did not qualify for any free software. Not that it wasn’t worth every penny for the relief of the migraine I acquired trying to do it myself.

  17. Temi says:

    Trent,
    The IRS does provide free electronic filing options for everyone. As long as you can prepare your own tax return and aren’t looking for software to do it for you, the free fillable forms provide a direct way to file online without going through a middleman. It is free and it is safe and secure. You can authorize a one time debit from a bank account to pay your taxes as well.

  18. Mel says:

    I have experience as both an employee and self-employed in 2 different (non-US) countries.

    At home, both were easy. Employed: I gave my employer a code that indicates if it’s my primary or a secondary source of income, and whether I have a student loan (payments are deducted automatically). I was sent a summary by IRD (equivalent of IRS) each year to check. Self-employed: I looked at my bank account, spent about 10 minutes filling in the form and done. I had the option to do it online but chose not to.

    Here, being employed is basically the same, except without the tax code and the summary comes from each employer. I guess if you had multiple employers it would be more of a problem. Now I’m self-employed, I do have an accountant to do it for me – partially because a language barrier makes it more complicated. My boyfriend’s dad (a slightly nutty maths professor) does his each year and is fined each year due to errors.

    There is a bracket system at home (I imagine similar to US, just with different numbers) and here there’s a flat rate. The flat rate doesn’t necessarily make filing easier! And guess what? The flat rate is in a former communist country…

  19. Houstin says:

    Trent, I enjoy reading your writings and posts.

    I would encourage everyone to ‘google’ Fair Tax. not to be confused with flat tax. For 5-6 years there has been proposed bills in both the House and Senate to implement the Fair Tax so the illegals, drug pushers and prostitutes, etc would also pay taxes on new merchandise they purchase. Now none of them do. In fact only 47% of U.S. residents pay any income tax. Bad scene!

    Bear in mind that th Fair Tax would not hurt or impacrt the poor as is so often said. It would only impact the tax preparing professionals and the 2 million IRS employees. “paying them welfare would save us millions alone”. They need to get a real job.

    Since the bills proposed have been in Washington D.C. the lobbyist have lined the pockets of the politations to NOT bring these to the floor.

    Last election I personally voted against every incumbent at all government levels. Two terms in office for all of them and then they are in the lobbist and special interest pocket.

    The system is broke and Super Glue quick fixes don’t seem to work.

  20. Marie says:

    Free Turbotax.com. I’ve used it for several years. Our returns aren’t complicated – the usual W2′s, mortgage interest, interest income for various accounts and charitible deductions. I have all my paperwork in hand when I start and it usually takes less than an hour. I direct deposit my refund and I have it back within two weeks. My state also offers free online filing. While I’m sure people with more complicated taxes need more assistance, I’ve found this to be the easiest I’ve ever used and I’ve done our taxes for 40 years…

  21. Des says:

    @Nicole

    It could be argued that your complicated tax situation *is* your fault, since you chose to work as an independent contractor.

    Look, I’m not saying the system can’t be improved (it can, and absolutely SHOULD). But I don’t think the interim solution is to offer government-sponsored tax software.

    Think about it this way: who do you think is going to pay for that system the IRS creates? Taxpayers. So, the wealthy will already be subsidizing the poor for the software, it would just be in a more convoluted manner. Next, who is more efficient: the government or competing businesses? Assuming we agree that competitive businesses are (typically) more efficient, then we would be taking the software away from people that compete with one another for your business and putting it in the hands of the IRS. Have you ever tried to work with the IRS? Do you find them particularly customer-service oriented?

    So, you would then have to pay for the same system to be less efficient and less customer-friendly. What do we gain my that change? If we implemented such a system we would all be back here a year from now complaining about how difficult the new IRS online system is to navigate and use. Believe me, it will not be Turbo Tax.

    How about we focus our angst and resources to the actual root of the problem: a tax system in desperate need of an overhaul.

  22. deRuiter says:

    Trent your continued enthusiasm for big government and your touching faith that government can do anything right continues to amaze me. It is our government which has invented this multiple thousand page monstrosity which is the tax code. I’m all for doing away with income tax totally, and having a flat tax (the poor must pay their 15 or 20% too), a consumption tax or a national sales tax, none of which I would countenance IN ADDITION to the income tax.

  23. Kevin says:

    As far as increasing costs goes, keep in mind that simplifying the process of filing taxes will save time for taxpayers. If time = money, that’s a clear win for us, the people who pay the salaries of those who work at the IRS via our taxes.

  24. Kyron says:

    Trent,
    You have 1 good suggestion. “auto-fill as much as possible”.

    All other items are already available.

    go to IRS’ free fillable forms dot org.
    (no fees, you can efile, e-refunds, no income limits, automatic math, self-consistency checks across multiple forms, it will automatically load Schedule D if you have Cap Gains, Schedule A if you want to Itemize, 1099DIV if you have dividends, 1099B if you sold stocks, … pretty much any form you want).

    I used it this year with great results and no hassles.

    (Ofcourse, if <58K AGI, private companies also allow you to file free federal returns)

    Freefillableforms is as good as Turbo Tax or other private tax prep software. Only advantage of other tax prep software is that they dumb down the questions, e.g. "9a. Qualified dividends" to "Did you receive any dividends from any stocks you owned?", "Were they qualified dividends?", etc.

  25. Kyron says:

    Sorry, correction to my previous post. the website is free file fillable forms dot com

  26. jim says:

    I’m trying to figure out why my comments are sitting in moderation…

  27. littlepitcher says:

    I’d advise anyone due a refund to submit a paper return, to prevent identity and mail theft. Don’t store the return online until after the refund arrives.

  28. marta says:

    @jim, you aren’t the only one. I am wondering if it is a bug…

  29. Tom says:

    I agree with #20 Marie – I think if you get the most basic (free) version of TurboTax and work through it, rejecting all the offers of upgrading, you can prepare your taxes for free regardless of AGI. I’m going to try that next year. I’ve been getting the “Deluxe” version and paying for it, and I’m not convinced I can’t do it for free (I have been above the 58k AGI in the past).

    “In fact only 47% of U.S. residents pay any income tax. ”
    I liked the idea of FairTax, but actually your fact is not one. The most recent estimate is 45% of filers owed nothing to the government, not 47% of US Residents pay income tax. Unless you’re talking about illegal aliens or people who only do under-the-table jobs, in which case your “fact” is at best a (possibly) educated guess

    “Trent your continued enthusiasm for big government and your touching faith that government can do anything right continues to amaze me.”

    I thought he was rather careful with his tone here…

  30. George says:

    Investors can have excessively complicated tax forms if they own MLPs and royalty trusts in taxable accounts… those two publicly traded investments can create the need to file 5 different forms.

  31. Johanna says:

    @jim, @marta: I’ve got a comment in moderation too. It was partly to plug Free Fillable Forms (which others have mentioned), and partly to advocate some kind of system in which people are more involved in understanding how their tax liability is calculated.

  32. nebula says:

    I’ve been using freefillableforms for two years now with no problems; the only thing I think is a hassle is that when there is a mistake (usually an unfilled field) it won’t let you file but it won’t tell you where the mistake is, either, so you have to figure it out yourself. But otherwise it is a great way to file your taxes for free!

  33. Mike says:

    Trent: While I agree with your premise, there is federal statute that prohibits the IRS from creating software aiding in the filing of taxes. I don’t have the code section in front of me, but I’ll see if I can find it and post it here later.
    That, however, is the reason a solution like you suggested does not exist. Otherwise, they probably could do it better than some of the 3rd party solutions out there at present.

  34. Sara says:

    For those with an AGI above $58K, Tax Act online is free with no income limits. The free version even allows you to itemize deductions.

  35. Jordan says:

    Hi Trent, as a reader from Australia, I’m often amazed at what I hear of the US tax system. In Australia, almost all employees have estimated tax taken out of their fortnightly salary, and there’s been an online tax lodgment system for at least 5 years. I have used it for the last three years and it’s easy, quick and fast – I would spend no more than 2 hours doing my tax. We have a pretty complicated system with lots of deductions and refund options, but the software is able to cope with it all. I hope you all get an easier tax option soon!

  36. sunny says:

    OOOPS I did not read the previous poster – sorry for the double up…

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>