Surely many people have income or deductions which the IRS does not know about.
For example, capital gains depend on facts which are not on an IRS filing.
Perhaps Canada has a more complex tax system, but it’s 50 years since I filed a “simple” tax return – and I’m not rich by any means.
It would feel kind of creepy to me. Like the government saying “We already know everything about you.”
I mean, they probably DO, but let’s not rub in in my face, ok?
Obligatory link to today’s Straight Dope article:
Permalink to the column:
ETA: Ninja’d! :smack:
The IRS can file a “substitute return” the same way the Canadian government can file an “arbitrary assessment”. They only file if you would owe (or the government thinks you would owe) money.
Canada’s tax system is less complex than the American one… at least for most people.
In the UK, the government is now doing most people’s taxes (and I believe you must file your taxes electronically if you want to or must do them by yourself). I’ve heard it called “the death of the tax return” but that’s somewhat overstated. The UK (like the US and Canada) has a pay as you go system for most people, so it works. The Briton has to say yes or no (the column shows other European countries doing the same).
As someone who works in a CPA office that primarily does tax returns, and will most likely be a CPA by the end of the year, I find this suggestion truly risible. The IRS gets all the information about your income and withholding, sure, but they don’t have a clue what your deductions are. If you’re claiming the standard deduction, then your itemized deductions don’t matter, but what about exemptions? How does the IRS know if your nephew has been living with you since his parents died? Even if he’s living at the same address as you, perhaps his grandparents are providing the money and are the ones that should get the exemption. The IRS simply has no way to know about each person’s individual situation. They cannot be Big Brother.
One might say that’s a reason in favor of getting rid of most of the tax code so that what remains the IRS can figure out easily, but consider that most of the tax code isn’t there for shits and giggles - most of it is there to deal with inequities that a simpler tax code would cause to arise. Sure, some of the tax credits (Child Tax Credit, Earned Income Credit) are about addressing issues beyond simple income taxation, but by far the largest part of the tax code deals with making sure everyone is dealt with fairly.
A simple example of this that came up today (on a small scale). A couple paid property taxes and state income taxes in 2015, and deducted them on Schedule A, with total itemized deductions being around $2000 more than the standard deduction. In 2016, they received from the state a partial rebate of the property tax because of their low income that year, as well as an income tax refund. Additionally, they sold their house and some of the property taxes that they paid in 2015 were allocable to time periods in 2016, and so the buyer reimbursed them for them. All combined, they recovered around $2,500 in expenses that they had previously deducted. Thus, they had to declare these recoveries as income this year - but only in the amount that actually would have caused their taxes to go up, so only $2,000, since that was the amount of benefit that they got from itemizing their deductions.
There’s actually another step that complicates it even more, but that’s something that might be justifiably eliminated from the tax code. The above is, at least in the system we’re using, clearly what is necessary in order to be fair to both the taxpayer and the government. One way around this would be to eliminate the standard deduction entirely, and force everyone to itemize, which would mean that all recovered deductions would be income when recovered. But that would just make things more complicated for the vast majority of people who take the standard deduction right now.
All said, the IRS encourages voluntary compliance backed with semi-random audits. Taxpayers get whatever deductions, exclusions, and exemptions they determine they are eligible for, and the IRS verifies what it can automatically, and relies on the audit process to keep people mostly honest for the rest of it.
If you are among the mass of people who only have a W-2 and do not have enough expenses to itemize deductions, then the IRS could do your taxes for you. I definitely would be all for a system where you could simply tell the IRS to take your W-2 and your dependents and send you your refund (or a bill), but the IRS doesn’t get the budget to be able to support that kind of operation. The IRS is so short-budgeted that it’s estimated that for every dollar they paid in salary for auditors, they could recover at least two dollars in underpaid taxes. Obviously there are diminishing returns, but they are well short of the equilibrium point.
There are, however, Volunteer Income Tax Assistance (VITA) programs) throughout the nation that help lower-income people with their taxes. I worked a couple hundred hours for one such organization running a VITA program while going to school, and it was good experience to have on my resume even if as a CPA I will probably never deal with people with incomes of that level in my practice. It took one day of training to learn to do, perhaps another half-day for those without any knowledge of accounting at all. The IRS gives them software to use, and lets the community they are in provide the funding in order for them to provide a place of operations and the hardware (printer, computer) and paper. This is a more “American” solution of letting the free market of people’s charity dollars do the deciding of what things to support that some people feel the government should be doing themselves.
Tax reform won’t happen, because of special interest groups (aka lobbyists) who live off of the ridiculously complicated tax code and donate large amounts of taxpayers’ preparation fees to legislators. I’d like to know just how many congress-critters are in office thanks in part to H&R Block, et al.
Congratulations … that’s a long road you’ve been on … and thank you for the informed rundown … and don’t you worry any, there’s still plenty of folk like me who do their own taxes every year who just screw them up so bad … God, I feel sorry for the CPA I take my books to when I retire … what a fucking mess !!!
“Whaddya mean I can’t depreciate my rig three times … do you know how much taxes that saved me over the years ???”
With the vast increases in computing power in the last few decades, making “custom” tax forms would be unbelievably cheap compared to the other operations of the IRS. They already have all of the data, and they are already processing it enough to find obvious fraud.
[QUOTE=gordintoronto]
Surely many people have income or deductions which the IRS does not know about.
[/QUOTE]
One thing I think hasn’t been explicitly said: In all of these schemes, the taxpayer is free to reject the IRS-prepared return and substitute their own assessment if there is something the IRS hasn’t taken into account. This is just the IRS giving you the opportunity to say “yep, that’s right” and having to do your own math.
The “Tax error in your favor, collect $500.” problem would arise. Some not-too-bright person gets their IRS prepared form. Sees they’re getting an extra $500 back. Clicks the okay button and takes the money.
A lot of these people think that if they get caught all they have to do is claim that the IRS told them this was the right amount. Not a working strategy, of course, but there’s enough idiots that this would be a problem. (Look at all the work the IRS is struggling with now with people filling tax returns claiming thousands in fake exemptions/etc. It’s become an actual business with scammers splitting the money with their clients.)
Tax simplification is also doomed to failure under the current system. All those multitudes of deductions and such are there because someone lobbied for them and they are unlikely to be happy when they go away. Fake tax “simplification” proposals like “flat tax” have a completely different agenda. Hundreds of new pages are added to the tax code each year and there’s nothing on the horizon to stop that.
Canadian politicians cannot be bought so cheaply as US Congressmen.
What’s idiotic about that? And the solution to that problem is to not give people $500 that they’re not supposed to have.
A permanent solution would be to eliminate the income tax. The poor and very poor don’t make enough to pay in and the ultra-rich, presidents, and mega corps can find enough loopholes to not pay much more than that. Figure out another politically palatable source and go for it.
I think the point is that the +$500 back IRS-prepared return is the one that is wrong (because there is some income that the IRS doesn’t know about or something) and that the taxpayer uses the fact that the IRS said “his bill” was such a number as proof that he doesn’t have to report the extra income and pay more.
I don’t see how having IRS-prepared returns would make that problem much worse, other than specifically advertising “hey, the IRS doesn’t know about this portion of your income, so try to get away with not reporting it!”.
[QUOTE=PoppaSan]
Figure out another politically palatable source…
[/QUOTE]
Such as?
No, the solution to that is to close those loopholes. It’s not like it’s difficult; we know what most of them are. In fact, most of them had to be put in there specifically: Just take them back out.
Why doesn’t the government just send a bill ?
For what amount ?
If I buy and sell cars for a living…buy a car for $9,000 and sell for $10,000…how much should the tax bill from IRS be ?
Should the bill be for the tax amount on $800,000 worth of income ( since I sell 80 cars in a year ) or should it be on $80,000 income since the difference is only $1,000 per car.
Plus, don’t I have car lot expense ?
In other words, nobody would be in business if IRS taxed a private businessman on GROSS income .
It’s called a “sales tax”. I think – I could be wrong – that there would still be businesses if the tax system was replaced with one based only on sales tax.
The Army frequently had a hard time calculating my pay, even though it was the same amount twice a month, and you think the irs could be trusted to pre-calculate everyone’s taxes? There would be a lot of mistakes made and they would strangely almost always favor the government.