Tuesday, April 19, 2022

People Should Not Have to Waste Time on Tax Filing, But Republican Politicians Like it This Way

by Neil H. Buchanan

Yesterday, April 18, was the last day to file returns with the IRS for the 2021 tax year.  Well, not really, as I will explain below, but that is how this is generally reported in the news.  Normally, April 15 would have been the relevant date, but because that fell on Good Friday this year, the relevant decision makers decided that the US Treasury should not wage a War on Easter and thus pushed the filing date back.  (Ah, remember those halcyon days when people who tried to be sensitive to non-Christians' sensibilities were accused of waging a War on Christmas -- instead of today's preference on the right to attack non-conservatives as pedophiles?!)

There are two competing points that I want to make here about tax filing.  First, it is nowhere near as difficult as people make it out to be, with the IRS doing an amazing job of simplifying the process, against all odds.  But second, tax filing should be nowhere near as difficult as it still is -- and the reason it continues to be needlessly difficult is entirely the doing of the Republican Party, which continues to pursue its stealth-tax-cuts-for-the-rich strategy that long predates Donald Trump's time in electoral politics.

Before getting to those two points, I should clarify what I meant when I wrote above that April 15/18 is not in fact the tax filing deadline.  The deadline this year is October 17, six months after the supposed due date, so long as the taxpayer files an extremely simple form (a form that the IRS accepts with no questions asked in almost all cases).  All a person has to do is estimate how much she will owe in taxes and make sure that her tax withholding was at least 90 percent of that amount.  If it looks likely that a person will be short of 90 percent, submitting a payment with the request will prevent a penalty.

Let us stop for a moment and marvel at how pro-taxpayer this rule is.  The extension does not require the taxpayer to pay interest for the extra six months that they do not pay their tax due.  Indeed, the rule sets up a very simple strategy that amounts to taking an interest-free loan from the government.  Even though most people want to be owed a tax refund, the financially savvy move is to plan to under-withhold so that the tax owed will be that remaining 10 percent in October.  For example, if the expected tax obligation for the year is $10,000, then it is smart to have $9000 withheld, file the extension in April, and pay the last $1000 in October.

If a person guesses too low, they will not be prosecuted, with the only consequence being a small underpayment penalty.  That means that risk-averse people will not walk right up to the 90 percent threshold, but that is small potatoes in any case.  The other issue is estimating annual tax due, but that in fact is also quite simple, even for people who itemize their deductions, because the most basic information can be fed into a free online tool to estimate taxes, with the time-consuming side issues not making a big difference in the final tally.  It is understandable that people want to take advantage of any legal provision that will reduce their taxes, but the marginal gain relative to what is easily computable up front is quite small.  This is an estimate, not a final answer.

Even if the IRS had been adequately funded, taking the six-month extension along with the decision to under-withhold would be the smart play.  In recent years, however, it has become even more important not to be owed a tax refund, because the IRS is so badly backed up that it can take months or even years for the Service to process a refund payment.  The taxpayers who owe money when they file their forms will not have to worry about any of that.

And for those who are owed money, it turns out that it is more important than ever to file electronically.  The Republicans' decision to defund the IRS has resulted in very long waiting times for paper submissions to work through the system.  Fortunately, the IRS no longer charges for online filing (there used to be an income cutoff for free filing); and even though FreeFileFillableForms is a private subcontractor (and thus not as secure as the IRS), the system is fairly straightforward and even easy.

I have been using the FreeFile system for the past three tax years.  It is deliberately set up to be more difficult than it needs to be, but it does have the advantage of being online and to have all of the forms and instructions available at the press of a button.  Because the system is not run by the IRS, however, there is a weird two-step process in which hitting the Enter key results in an email announcing that the forms have been successfully submitted to FreeFile and have been queued to be approved by the IRS, with an answer from the IRS to come within the next two days.  The second email says that IRS has either accepted or rejected the submission.

When I describe the system as needlessly difficult, however, it is not merely that silly extra step.  I am also referring to the lack of full interconnection between the various forms.  For example, in this year's filing, my submission was initially rejected, but the rejection email included a link to an explanation of what I needed to fix.  After making the required changes and re-submitting, however, I received another rejection notice, but this time the link led to an explanation that said that I would have to ask the IRS why it was rejected.  With the IRS so badly understaffed, that was bad news.  Fortunately, a day later the FreeFile site showed an error message that was mostly in computer code but included just enough information for me to figure out what I needed to do.  Just this morning, I received confirmation that I had successfully submitted my forms.  (Because of a change in my financial situation last year, my best efforts to under-withhold did not result in my owing money, so it made sense for me to file now.)

As always, I am using my situation to illustrate a larger point, which in this case is that the system is not only needlessly convoluted but pointlessly incomplete.  That last error that I had to fix turned out to be the failure to enter the result from Schedule SE onto a line in Schedule 2.  That was surprising, because the system is generally set up to do such cross-entries automatically.  There is also a "do the math" button, but it only does some of the math.  Weirdly, the computation of the tax due, based on Taxable Income, is not an automatic computation, even though it is entirely mechanical.

Having said all of that, this is an enormous improvement over the paper filing system, and it certainly means that no one should spend money on tax filing software from companies like TurboTax.  (More on them in a moment.)  And the fact is that about 95 percent of Americans do not itemize their taxes, so even my relatively uncomplicated situation is at the worse end of the spectrum.  Against all odds, the IRS has been able to create an online system that is almost indescribably better than what we once reluctantly took for granted.

So, as I wrote at the beginning of this column, the American tax system is in fact surprisingly easy to navigate, with all kinds of opportunities to get things right without being penalized, and even an interest-free loan feature available every year.  Even so, what I have described here is still completely unnecessary -- and Republicans like it that way and are fighting to make sure that it does not get any better.

No other country that Americans would ever consider comparing to the US makes anyone do anything like what Americans must do to file taxes.  And we do not have to do it, either.  That little glitch that I mentioned above regarding my 2021 taxes -- the software did not automatically transfer an amount that it had computed from one form to another -- is merely a subspecies of the larger issue, which is that employers, banks, and others already provide to the IRS nearly all of the information necessary to compute a person's taxes.  Even before computer technology became central to our lives, it would have been possible for the IRS to take all of the information that had already been sent to it -- for most people, that would simply be salary, filing status, tax withheld, and maybe mortgage and property tax payments -- and do all of the administrative work (and the math) for us.

California ran a pilot program early in this century that sent out such pre-filled forms for taxpayers to approve or amend, and it was wildly popular.  Because of the threat that it posed to their profits, the tax prep software makers -- based in California's Silicon Valley, of course -- went nuts and lobbied to kill the program.  Stanford tax law Professor Joseph Bankman actually used his own money to pay a lobbyist in Sacramento to fight to expand the program, but David did not slay Goliath that day.

Even so, Intuit and the other companies making a buck off of people's tax confusion would not have received a hearing in the halls of power if not for the Republican Party's inherent hostility to taxes.  Despite making endless promises to simplify people's taxes, Republicans have long accepted the old conservative argument that paying taxes should be painful -- not just in the sense of having lower take-home pay but in being as annoying and inconvenient as possible.
 
In the extreme, some Republican leaders have even argued that tax withholding should be banned, so that people would have to come up with all of their tax payments at one time every year.  Counting on people's myopia, Republicans imagined that people would not have enough money set aside, which would generate a backlash.  But thus far, that has been unpopular even with the Republican base -- the same people who, inconveniently for conservative ideologues, warn politicians to "keep yer government hands off my Medicare."
 
Although Republicans have not been able to make tax filing as infuriating as they would like it to be, they do everything they can to make our lives unduly complicated.  Having been denied funding for upgrades, the IRS still runs some computers on 1950's-era programs like COBOL.  Meanwhile, Republicans have cut the IRS's inflation-adjusted budget by about 20 percent over the last decade or so, which is why there is such a backlog.  In previous years, about one million forms from the previous year would not yet have been finalized by this point in the filing season; but this year it is six million.

Texas's increasingly unhinged governor, Greg Abbott, recently proved that he was willing to inflict pain on his state's citizens, and even its businesses, by setting up a secondary set of border checks to stop trucks coming from Mexico into the United States.  Why?  To check for illegal immigrants, silly!  Nothing that he was doing had any real point other than performative stunt-driven politics, but Abbott gleefully harmed Texans and other Americans by forcing trucks to sit for hours or days in the hot sun while the contents -- often fresh fruit and vegetables -- went bad.  Abbott's scheme was new, but the willingness to make a political point by gratuitously making people worse off is hardly new to his party.

And it is not only a matter of making people waste time and money to file their taxes.  As I noted above, this is all part of a stealth tax cut.  Crippling the IRS does not merely make people incorrectly blame the IRS for the Republicans' decisions, after all.  Crucially, it reduces the Service's ability to enforce the tax laws, such that the government's lawyers lack the resources to go after super-rich tax cheats, who in turn reward the Republicans with campaign support.  Meanwhile, because of a law that Republicans passed years ago, the IRS is required to spend something like 40 percent of its enforcement budget to audit the anti-poverty Earned Income Tax Credit program.  Why?  To penalize the working poor.

Again, no country that we think of as "advanced" forces its citizens to do anything like what Americans routinely must do.  Any politician in the US who tries to make it possible for the IRS to do its job is immediately vilified for being pro-tax, and Republicans smile while the public's anger is aimed at the government employees who are being prevented from helping the American people.  Even in a world filled with new and increasingly insane kinds of cynicism, this old-school cynical play still takes the blue ribbon for Worst in Class.

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