Making a Better First Impression
Making a Better First Impression
How Government Can Take the Pain Out of Filing Your Taxes
Jitinder Kohli and Michael Ettlinger offer recommendations to simplify the tax system and process less of a hassle for American taxpayers.
Phew! It’s over, at least for another year. By the end of today, everyone (well, almost everyone) will have filed their taxes, and you can feel the tension lifting from the air.
No more searching for information and old receipts. No more trying to make sense of the hundreds of pages of instructions. And no more paying for software or an accountant when you can’t make sense of it yourself.
The process of filing taxes is like a tax itself. It isn’t just the cost of paying for software or professional help; it’s also the time it steals from the American people and the stress and heartache it causes them. This is one tax that clearly needs to be reduced as much as possible. Unlike other taxes, it doesn’t help build roads or provide health care to seniors and veterans. It is just wasteful. Worse still, it can erode people’s faith in government as they grow to resent the hoops they are forced to jump through simply to give the government money.
Making the process as simple as possible requires action:
- Congress should clean up an increasingly complex tax code.
- Congress and the IRS should work together to find ways to make filing as simple as possible.
- IRS forms and instructions could be clearer. The 1040EZ isn’t so “ez.” Maybe we need the IRS to create a 1040VRYEZ that is as intuitive as possible by working closely with those who have simple tax affairs.
- Perhaps the IRS should offer to pre-complete tax forms and send them to individuals for checking in cases where they already have the information they need.
- Employers and financial institutions should ensure that all the information they provide is easy to transcribe over to the tax forms. They should tell you what line number to put the information on the tax form.
The worst first impression
Case of the missing paperwork*
Sarah needs to claim a deduction of her mortgage interest. But her bank didn’t send her the Form 1098 that tells her how much to claim. She called her bank to request the form but it never came, so she called again and got a machine that told her it had been sent. It still had not arrived a week later and so she made another phone call to the bank, which again promised to send it. Still no luck—and Sarah calls again insisting that they give her the information over the phone. Four phone calls, eight weeks, 10 hours of work, and a lot of heartache later, she can finally fill in her tax form.
The weekend before Tax Day was one of the first wonderfully warm days of the year for much of the country. But instead of enjoying the weather, many of us got to spend it working on our taxes. It’s a bit of an ordeal in the best of circumstances.
One thing policymakers should be particularly concerned about is the frustration taxpayers feel when they file taxes can spill over into frustration with the government. The most significant direct interaction most people have with the federal government is when they file taxes. Of course, they also use highways and national parks and benefit from federal spending on education, health, and defense. But filing taxes is one of the few places they have to do something for the government rather than benefiting from government programs.
Which line is it anyway?
Marc has few investments and so thankfully does not need to think too hard about their tax implications. But this year, he was haunted by a mutual fund he sold a few years ago. A class-action suit was brought against the company in 2003, and Marc got $119.43 when it settled last year. But he doesn’t know where on the tax form to include this income. Is it capital gains or ordinary income? What line on the form does it need to go on? The settlement letter isn’t much help—it directs him to a 13-page memo in legal speak that confuses him more—and so he’s left to guess.
If filing taxes feels like a frustrating experience, it will most likely leave a less favorable impression of government. More than 70 percent of Americans believe that people in government “waste a lot of money we pay in taxes,” according to a forthcoming CAP poll. Perhaps if they believed that government wasted less of their time collecting taxes, they would also believe that federal government wasted less of what they collect in taxes.
It’s easy to point a finger at the IRS, but it’s really past Congresses and presidents who have gotten us to this point. There are mountains of unnecessary complexity, mostly caused by tax breaks and political compromises that have been layered on top of each other for decades.
But wherever the fault may lie, it’s time for everyone to work together to make it better. Here’s what we can do:
The $1,000 mistake
Matt and his wife used a computer program last year that told them that it would be better to file separately even though they were married. But the IRS accepted one of the returns and rejected the other because some of the deductions were not available for married people filing separately. The tax bill ended up $1,000 more than it should have been, but they couldn’t change their mind and file together since one of the returns was accepted. They could file an amended return later, so this year Matt has filed two returns—an amended return for 2008 taxes, and a normal one for 2009 taxes. He used a different company’s software this year, and is pleased that he will finally get back his $1,000—after more than 40 hours of work.
Congress should clean up the tax code. Congress should use conventional spending programs rather than tax subsidies to achieve policy outcomes when it is sensible, and get rid of tax breaks altogether if they don’t make sense. There are also many overlapping provisions cluttering tax forms that are designed to achieve essentially the same goal, and Congress should weed those out.
Congress and the IRS should work together to find ways to make filing as simple as possible. Doing your taxes should be relatively easy. Perhaps some small flows of income—maybe payments of less than $150 up to $500 in total—are worth exempting from the system to make life easier for those filing, for example. That way Marc would have been able to take the payment he got from his class–action suit without thinking twice.
The IRS should recognize that the 1040EZ is not all that easy and create a 1040VRYEZ. The IRS should create this very simple tax form and instructions by working closely with those who have simple tax affairs. In the same way that computer companies work hard to make their mass software for consumers intuitive and easy to use, the IRS could develop a form that is so easy to use people don’t feel the need to go to a tax preparer or pay for software.
IRS forms and instructions should be clearer. The IRS already invites suggestions on how to improve forms, and given the importance of transparency, all the suggestions received could be posted online, or perhaps the IRS could run a competition to design simpler forms.
Out of college and into disaster
Katie recently graduated from college. She worked for a nonprofit for the first few months of the year, but then lost her job. She was collecting unemployment insurance for a couple of months and then worked in three different roles as a temporary self-employed consultant for the remainder of the year. A few weeks before Tax Day, she realized she was eligible for deductions for health insurance, transportation, and other business expenses since she was self-employed. But she didn’t have receipts, so she had to try to go through bank and credit card statements. She ended up having to hire an accountant to help her make sense of it, and hundreds of dollars later she finally got her taxes filed.
Employers and financial institutions should ensure that all the information they provide is easy to transcribe over to the tax forms. The information taxpayers receive should be straightforward and explicit, telling you what line number of the tax form each piece of information belongs in.
The IRS should consider autofilling tax forms for some taxpayers. The IRS already has the information on many taxpayers through filings from employers and financial institutions, and perhaps it should offer to pre-complete tax forms and send them to individuals for checking when the taxpayer has taken the standard deduction in the prior year. This is something California already does. Nearly two-thirds of taxpayers currently take the standard deduction, and while some of those have other issues that would complicate their filings, those who do not could benefit from such a system. Some will prefer to do their own taxes as they don’t yet trust the IRS, but that’s their choice. Of course, Congress would need to clear up the tax code to maximize the potential of such a measure.
If Congress, the IRS, and financial institutions work together to make taxes easier to administer, there is enormous potential to save the American people a great deal of time and heartache caused by the current system. But perhaps even more importantly, there is enormous scope with a simpler system to shift public perceptions of government. If the American people felt that filing taxes was easy to do efficiently and professionally, they might also conclude that government is professional and efficient.
*The stories presented here are drawn from conversations with friends and colleagues, but names have been changed to respect their privacy.
Jitinder Kohli is a Senior Fellow and Michael Ettlinger is Vice President for Economic Policy at American Progress.
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Vice President, Economic Policy