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FWIW, here's an email I sent to Prof. Bankman last April: --- I read with interest your letter about the Tax Filing Simplification Act of 2016, and your artic

by hundt 10y ago

FWIW, here's an email I sent to Prof. Bankman last April: --- I read with interest your letter about the Tax Filing Simplification Act of 2016, and your article "Simple Filing for Average Citizens: The California ReadyReturn." I agree that the tax filing burden on taxpayers is far too high, and I am encouraged that legislators are trying to do something about it. But I am concerned about the details of actually accomplishing this given the complexity of the federal tax code, even for what appear to be "simple" situations. For the past five years I have volunteered with the IRS's Volunteer Income Tax Assistance program and helped low-to-moderate income taxpayers file their taxes. One of the first things I learned was how frequently a taxpayer's total tax is affected by factors other than what is on their W-2 or otherwise reported to the IRS. Examples include: - complex calculations of "support" to determine whether a live-in relative is a dependent - exact payments, and nature of payments, made to schools (generally not accurately reported on the 1098-T) - business expenses - which months the taxpayer had health insurance (often not reported correctly, or reported to a different person) and, if no insurance, whether an exception to the penalty applies - what portion of the property taxes paid by the mortgage company on behalf of the taxpayer was for ad valorem taxes (the only kind that is deductible) - what gambling losses are there to offset the gain reported on a W-2G? - [litany of qualification questions for various education benefits] - which exceptions apply to an early distribution from a 401(k) Although each of these individually sounds like a corner case, my experience is that in aggregate a large percentage (perhaps more than half?) of the tax returns involved information that the IRS has no way of knowing. So for advocates of IRS-prepared returns, of which I understand you to be one, I wonder what the response to these issues is? I can think of three: 1. The IRS should assume whatever results in the maximum tax liability, and it is up to the taxpayer to determine whether they can reduce their liability further. 2. The IRS should guess based on some combination of factors, and the taxpayer is responsible for verifying the guess (and is assessed penalties if they don't fix an incorrect guess?). 3. We should drastically simplify the tax code so these issues go away. Each response has some obvious problems. Anyway, this is just something that has been on my mind, so I hope you don't mind this email out of the blue to try to solicit feedback from someone who might have given the issue some thought. --- He never responded, so I am still left wondering the same questions.

avar 10y ago
I've never had to file US taxes so this might be a stupid question, but how exactly are the people in your example worse off with ReadyReturn? Isn't ReadyReturn just e.g. summing up their reported wages for the return, which they'd need to do accurately anyway if they were filling it in from scratch? Yes, if you have a pre-filled in tax return nothing that the government doesn't know about & which might be deductible is going to be on there, but that's the situation you were in already, wasn't it? Now you'll have more time to fill that out, instead of doing menial work like manually summing up your monthly payslips to arrive at a yearly total. Or is ReadyReturn somehow structurally flawed in allowing you to either file for a simplified pre-filled in return with no amendments, or having to do an old-style return from scratch? When I file my taxes in The Netherlands all the concerns you've raised are addressed through a system where most of the information is pre-filled in. I.e. they know how much I make so that number is on there, but they might not know about a few other deductibles, those are established through a series of questions you answer. E.g. "do you own a house" -> "what type of mortgage" -> "do you pay a land use fee?" -> that's a deductible (to cite one made-up example). Most importantly it establishes a workflow where if something is a deductible (unless it's something really obscure, manual returns still exist), it's going to be on the online tax form. So even if the initial implementation is bad just establishing that process is worthwhile, because there'll be political pressure to make it better next year, and the year after that.
- hundt 10y ago
  It's not a stupid question at all. In practice the U.S. tax code is not quite as simple as "Here is the tax burden for your income level; tell us if you have any deductions." Right off the bat, you need to determine your "filing status" (single, married, head of household, and some less common options) from a list of five choices, each of which has different rules for all the calculations that follow. Furthermore, for a large portion of people making modest incomes, various tax credits, most notably the "Earned Income Tax Credit" but also education and child-related credits, cause enormous swings in their taxes, for example perhaps from $1,000 to -$3,000 (many people pay negative income taxes). None of these things can be determined by information the government has. So for many people any "provisional" return that the government is likely to create will be very inaccurate. Now, you suggest that maybe this would just be some sort of provisional return that could be adjusted to match your correct situation. That is a fine idea. But in order to make that convenient, the government would basically need to develop their own implementation of TurboTax. That has its own issues (is the government likely to do a good job? will they apply the laws in a biased way?) but even if they are resolved we are still talking about a vastly greater effort than "just give people a pre-filled return." So I would ask advocates for simplifying tax filing to either admit that they are demanding that the government author its own fully-featured tax preparation software, or explain how they will otherwise address the complexity of the U.S. tax code.

by hundt 10y ago

avar 10y ago

I've never had to file US taxes so this might be a stupid question, but how exactly are the people in your example worse off with ReadyReturn? Isn't ReadyReturn just e.g. summing up their reported wages for the return, which they'd need to do accurately anyway if they were filling it in from scratch? Yes, if you have a pre-filled in tax return nothing that the government doesn't know about & which might be deductible is going to be on there, but that's the situation you were in already, wasn't it? Now you'll have more time to fill that out, instead of doing menial work like manually summing up your monthly payslips to arrive at a yearly total. Or is ReadyReturn somehow structurally flawed in allowing you to either file for a simplified pre-filled in return with no amendments, or having to do an old-style return from scratch? When I file my taxes in The Netherlands all the concerns you've raised are addressed through a system where most of the information is pre-filled in. I.e. they know how much I make so that number is on there, but they might not know about a few other deductibles, those are established through a series of questions you answer. E.g. "do you own a house" -> "what type of mortgage" -> "do you pay a land use fee?" -> that's a deductible (to cite one made-up example). Most importantly it establishes a workflow where if something is a deductible (unless it's something really obscure, manual returns still exist), it's going to be on the online tax form. So even if the initial implementation is bad just establishing that process is worthwhile, because there'll be political pressure to make it better next year, and the year after that.

hundt 10y ago
It's not a stupid question at all. In practice the U.S. tax code is not quite as simple as "Here is the tax burden for your income level; tell us if you have any deductions." Right off the bat, you need to determine your "filing status" (single, married, head of household, and some less common options) from a list of five choices, each of which has different rules for all the calculations that follow. Furthermore, for a large portion of people making modest incomes, various tax credits, most notably the "Earned Income Tax Credit" but also education and child-related credits, cause enormous swings in their taxes, for example perhaps from $1,000 to -$3,000 (many people pay negative income taxes). None of these things can be determined by information the government has. So for many people any "provisional" return that the government is likely to create will be very inaccurate. Now, you suggest that maybe this would just be some sort of provisional return that could be adjusted to match your correct situation. That is a fine idea. But in order to make that convenient, the government would basically need to develop their own implementation of TurboTax. That has its own issues (is the government likely to do a good job? will they apply the laws in a biased way?) but even if they are resolved we are still talking about a vastly greater effort than "just give people a pre-filled return." So I would ask advocates for simplifying tax filing to either admit that they are demanding that the government author its own fully-featured tax preparation software, or explain how they will otherwise address the complexity of the U.S. tax code.