Why the IRS Should Automatically Fill In Returns With What It Knows 613
theodp writes "An article in the NY Times begins, 'In the digital age, filing income tax returns should be a snap. Important data from employers and financial institutions has already been sent to government computers. Yet taxpayers are still required to perform the chore of preparing a return from scratch, in many cases paying a software company for the privilege.' Why, if your needs are simple, can't you just download forms pre-filled with whatever data the IRS has received about you, make any necessary adjustments, and automatically get the IRS calculation of your taxes? Sounds reasonable, but the IRS rejected the President's proposal to give taxpayers the option to do so as 'not feasible at this time' due to delays in the receipt of W-2 and 1099 data. However, California managed to offer a pre-filled state tax return, which cost only 34 cents to process compared to $2.59 to process a traditional paper return. Despite the success of the pilot, meager funds have been allotted for the program due to the strength of its political opponents — 'principally, Intuit' — according to the state controller. Intuit argues it would be a 'conflict of interest for government to be both tax collector and tax preparer.'"
This is how it's done where I'm from... (Score:5, Informative)
works fine in Sweden (Score:5, Informative)
If you want to add information, you can just fill in your own form and send it in, but I think its pretty common to just use the pre-filled tax form.
We've had that for years in Norway (Score:5, Informative)
Re:Since I get paid to be paranoid (Score:3, Informative)
And, um, PS: before you go dissing fairtax.org, *actually read their site*; there are several flat-federal-tax proposals out there, some of which *are* snake oil. Theirs does not appear to be, to me.
Re:This is how it's done where I'm from... (Score:5, Informative)
Just wait until you do what I did and live in 4 different states in a year... Seriously 5 tax returns, some owed me, I owed some.
Re:people are lazy (Score:5, Informative)
I don't have a problem with that. You can't save everyone. The amount of efficiency in the average case would be so great, though, that overall I suspect it would offer more money to both the government AND the taxpayer.
Re:people are lazy (Score:2, Informative)
UK Tax Returns (Score:5, Informative)
Here in the UK, most people pay tax through the PAYE (Pay-As-You-Earn) scheme. The only people who regularly don't are the self-employed.
This means that the majority of the working population NEVER need to file tax returns.
However, some people do regularly file tax returns -
1. People asked to do so through random audit
2. If you are considered a 'high-rate' taxpayer (meaning you earn more than about £36,000pa).
But, you can elect to file a tax return even if you earn less than the 'high-rate', and you can often get some money back for overpayments.
I still can't believe the amount of hassle you have to go through in the US each year when it comes to tax-time.
-Nano.
Re:Conflict of interest (Score:2, Informative)
It's a conflict of interest for the clerk at Wal-Mart to tell me how much I owe AND collect my money?
The real conflict of interest is for corporations to give money to election campaigns.
The root cause of this is that corporations have too much power in our system. Corporations buy politicians and they buy court verdicts. It's just wrong, and we need to fix the system, starting with the "golden rule".
In court, make the richer party pay for both lawyers, and eliminate corporate contributions for political campaigns and ballot measures. Then maybe the PEOPLE can run this country.
Re:Conflict? (Score:4, Informative)
http://www.opensecrets.org/orgs/all_summary.php?id=D000026667&nid=3868 [opensecrets.org]
Intuit Inc
Rank: 598th
2008 total combined contributions: $818,259
2008 federal-level contributions: $394,475
2008 state-level contributions: $423,784
That's a pretty good return on the dollar.
Re:This is how it's done where I'm from... (Score:5, Informative)
In Estonia, you log in to the web page of the IRS equivalent, click "Next" a few times, then click "Confirm" and you're all done. No dead trees involved.
Re:This is how it's done where I'm from... (Score:4, Informative)
It can be even worse, too. Some counties have special taxes on residents, too.
Re:How could they justify an audit? (Score:4, Informative)
If you get the advice IN WRITING (I think this means dead trees), you can escape penalties and criminal sanctions. You're still on the hook for interest and taxes.
Re:Conflict? (Score:3, Informative)
Almost every year about this time I post some sort of rant about how wasteful it is that we don't even have a free, official online tax-filing website. It would save filers tons of time, it would save the IRS tons of money. But the tax preparers don't care about that (after all, $1 of intentional government inefficiency is 25 cents of income for them) and somehow, though I can't figure out how, this tiny special interest has the power to dictate government policy.
It's not exactly "official", as you have to go to a third party, but you can file online free. I worked as a tax preparer one year, and from my experience, the reason most clients chose $tax_service instead of doing it themselves (paper or online) wasn't because they couldn't, but because $tax_service offered refund anticipation loans. Which means they get a check for several thousand, less a couple hundred in fees, the next day, rather than waiting a week or more for direct deposit of the full refund.
Re:This is how it's done where I'm from... (Score:5, Informative)
Re:We've had that for years in Norway (Score:4, Informative)
And you say that like it's a *good* thing...
You say that as if the government shouldn't know about it in the first place.
You got income? Income tax.
You got deposits? Capital tax on interest, wealth tax on balance
You got loans? Deductions.
You got property? Property tax.
You got a car? Wealth tax.
All of these are things you would have to declare anyway in order to stay legitimate. In many cases the government can't help but to know about it, employers have to file taxes as well including payroll, for properties and cars the government is the one tracking deeds and our version of the DMV registry and so on. All it does is saving you the paperwork, and there are lots of other taxes and deductions you have to correct yourself, it's not trying to cover everything.
We are in fact rather suspicious of data storage and in favor of privacy protection, right now for example there's a debate on EUs data storage directive. Only the largest party of the ruling government is for, five are against and one is undecided but just recently their biggest region took a "no" vote with great majority. If they too oppose the directive, it would become Norway's first EU veto since 1994. I'm hoping that will happen.
Re:Conflict? (Score:4, Informative)
Getting your taxes right is your responsibility. The IRS can send you a suggestion, and for some significant percentage of the population, the IRS will get it right.
Would they get me right? No, probably not. They don't know the cost basis for my stock sales, and they don't know when I bought those stocks, so they don't know short-term vs. long-term capital gain/loss.
Anyone who can do a 1040EZ shouldn't have to do anything.
Re:This is how it's done where I'm from... (Score:1, Informative)
In Estonia, people spend about 5-10 min to do taxes :)
All you need to do is login with your ID card (or via bank), confirm that all numbers are OK and click "OK". Forms are all prefilled.You have to add your income from investments and that's it.
Re:In US private companies do this, only gov't can (Score:3, Informative)
I completely forgot about this. Last year Turbo Tax let me fill out my taxes based on my company. All I did is select my company from a list and it auto-filled all of my data and I checked it over.
Re:works fine in Sweden (Score:3, Informative)
>Whilst I don't live in Sweden (I'm in the UK), I have to ask quite what your point is?
I do live in Sweden. Let's check your claims...
>The Swedes may pay more in taxes, but in return get free healthcare
Untrue. Low cost only (there are small fees). And (sometimes very long!) queues...
>good roads
Questionable, depends a lot on where you drive! Many smaller roads and streets in towns have suffered badly during the last decades from reduced maintenance.
>low crime free schooling and university
Probably both correct (at least the crime rate is not high)
>(i believe) free (or heavily subsidised) childcare
Heavily subsidised. Very costly for society...
>efficient public transport, and much more.
Questionable, in Stockholm it's great, in most medium cities it's okay, anything more rural it's often quite spotty.
>They're also very highly rated in terms of their low wealth disparity (road fines for example are based on a percentage of your annual income so that a rockstar in a ferrari feels the same sting in their speeding ticket as does a poor person in a skoda)
No, fixed amounts for speeding tickets etc. Fines for "normal" (non-road) crimes (ordered by court) use the day-fine system you describe though.
>, and human development index.
Re:Funny that you mention California (Score:3, Informative)
California decided that I should pay taxes on all my income as a California resident when I wasn't one. I moved back to CA towards the end of a year and got a job, and they decided I had made all that money in California as a resident when I wasn't one, and hadn't. The W-2s told the whole story, though. They had all the information to know better. I just need to re-file now, but I've been putting it off because I intend to hand a bunch of stuff to an accountant all at once "real soon now" and since I'm consulting, no one is trying to garnish my wages.
Intuit are evil ... (Score:4, Informative)
Just got a pop-up from Quicken 2007 telling me that it will cease down-loading data from my bank at the end of April. If I want to keep being able to do this, then I'll have to upgrade to Quicken 2010.
This is the second time that Intuit have made an incompatible change to the download data format (at least while I've been using it). So I'm going to assume that their business plan now includes a forced upgrade every three or so years. Time to start researching non-evil alternatives.
Re:Fair Tax (Score:3, Informative)
I suggest you actually read the fair tax site. The fair tax provides a prebate check for taxes paid up to the poverty line, so the poor pay NO TAXES for spending on basic necessities. Used items are also not taxed.
Try reading what it is before commenting.
Re:UK Tax Returns (Score:3, Informative)
In the UK:
Interest on your bank account is paid net of tax automatically by the bank. If you are an upper rate payer, you declare the interest and pay the extra differential yourself (e.g. you receive gross £5 interest. The bank pays you £4 and the government £1. If you are an upper rate payer, you declare this on your tax return and pay the extra £1). The bank will give you a certificate stating how much interest you received so you can prove the amount you owe if necessary.
EU company dividends are paid after deduction of withholding tax, so you don't need to declare anything there.
We don't get deductions for student loans, mortgage or charity deductions. When you make a payment to charity, you can fill out a Gift Aid declaration. This allows *the charity* to reclaim the income tax that you paid - they benefit rather than you.
Contributions to pensions are deducted from your salary before calculating your tax liability, and growth within the fund is tax free. When you retire and begin withdrawing funds, pension payments are treated just like any other income (i.e first £6k is tax free, next £37k is taxed at 20%, anything above that is taxed at 40%)
Exactly right. MOD PARENT UP. (Score:4, Informative)
The U.S. government is so corrupt that it amazes and scares me. Anything for those who want to make money using the power of government. When Saudis attack, invade Iraq? When Intuit wants something, use any foolish excuse to give it? Put a 6 times higher percentage of the population in prison as any European country? All part of U.S. government corruption.
Re:An invitation to defraud (Score:3, Informative)
I'm sorry, but the US is the only country in the world I have ever heard of where it is a regular thing for people to claim refunds as if it is a normal thing to do.
Re:UK Tax Returns (Score:3, Informative)
The 20% is deducted by default - if in fact you earn less than the threshold for any tax, you notify the bank and they pay you the full gross rate without deductions.
I believe that the deduction is common for all companies - you might need to declare them if you are a top rate earner like the interest on a bank account, but I'm not sure as I've never been one! We have Capital Gains Tax too, if you sell a property other than your main home for example.
The US system of making charity donations deductible to your own benefit seems a little odd to me to be honest. But if it results in higher charity donations as people try to play the system then it may be a beneficial system.
We have ISAs which I think are like IRAs - you pay in money after tax, then any earnings of the ISA fund are tax free. You can put up to a certain amount in each year - I think it will be almost £10k per year from this April but again I haven't checked as I don't have that much free cash!
Public listed companies can have a share save scheme, which is like a 401k but restricted to the company you work for. I put 2.5% of my gross salary into shares, and my employer matches it with 5% more, so I accumulate shares roughly equivalent to 7.5% of my gross salary per year. This is before tax and so reduces your liability. Dividends, and if you hold the shares for over 5 years, then any proceeds you make from selling them are tax free too.
You can invest in a private pension too.
Rather than getting deductions for having children, anyone with children no matter what they earn gets Child Benefit, and then you get Child Tax Credits and Working Tax Credits on a means assessed basis, which phase out as you earn more like you say there too.
I agree that the US has a more complex tax system - the UK isn't simple, but I think HMRC has done a better job of integrating the various parts so that for most people their monthly deductions come out right at the end of the year.
One more nugget that you may find of interest - in the UK, gambling winnings are tax free. So you win £5 million on the lottery, you receive £5 million. Reason being that if it was treated as earnings, then losses would have to be treated as business expenses, and the net benefit of taxing winnings to the treasury would be negative!
Re:After a generation nothing else exists (Score:1, Informative)
Methinks we're not getting all that we pay for, and would be better off if MORE were done by the private sector.
Form 4070 (Score:3, Informative)
I think you know little of how waiters work then. They already don't declare their tips fully.
True but if they don't declare at least 8% of their sales as tip income it will almost certainly trigger an audit. This information is required to be reported on form 4070 [irs.gov] and the IRS knows there is a high propensity to cheat.
Re:This is how it's done where I'm from... (Score:2, Informative)
Re:UK Tax Returns (Score:3, Informative)
Your ISA sounds like our Roth IRA. Then again, we have the regular ones as well. I guess this would be a 'private pension', but I'm not sure I'd call it a 'pension' as it doesn't necessarily have a fixed pay out at the end.
Rather than getting deductions for having children, anyone with children no matter what they earn gets Child Benefit, and then you get Child Tax Credits and Working Tax Credits on a means assessed basis, which phase out as you earn more like you say there too.
For this, I think we have the same thing. It's just a matter of describing it all.
I agree that the US has a more complex tax system - the UK isn't simple, but I think HMRC has done a better job of integrating the various parts so that for most people their monthly deductions come out right at the end of the year.
I don't think the IRS could get it right unless it knew everything you were going to do in the year. I'm filing for about a $465 return from the Federal Government this year. My state refund will be about $245. That's with only having withholding on my jobs income and from no where else.
I really do wish we had a sane tax system and I really would push for a flat tax. As I've said elsewhere, if we had a flat tax it would only need to be 12.7% to collect the same amount of money as we have now (possibly less).
Re:Beneficial to Be Difficult (Score:2, Informative)
Re:What do you think happens today? (Score:3, Informative)
Yes, you're not seeing the huge problem, but it definitely exists. I'm a professional tax preparer as one of my trades. This year, I have done or assisted on over 50 EIC forms so far for people in the range where Earned Income Credit applies and every single one of them has triggered additional IRS mandated questions, usually three or more per case. Questions such as "You are claiming a child under six - who takes care of that child while you are at work?" or "Your self employed income form shows less than typical expenses - have you accounted for all schedule C related expenses?"
I'm not even focused in that area, rather I do mostly corporate and a ultra-specialization involving royalties received by estates of deceased authors. I see these EIC cases mostly only because I instruct 2nd and 3 year preparers who have to deal with them.
Answering these sort of questions means being able to say, for example, "In home daycare conducted during evening to midnight shift hours produces few food and drink expenses compared to the daytime hour equivalent and does not normally require the taxpayer placing their vehicle into business service. These factors make business expenses low." I really can't see most of these clients claiming successfully that they are familiar enough with overall small business trends and average expensing issues that they could make that claim for a legal record, even if they somehow knew it applied to them.
By what we are seeing this early in the tax season, the government has a very great deal it doesn't know, it wants to know it all, and if you are an average lower income filer claiming the Earned Income Credit and you do it via a free online service, your chance of being audited this year just jumped from less than 0.5% to about 7%, possibly higher. In my worst nightmare interpretation of what I'm seeing, the government is emplacing all the preparatory mechanisms needed to declare 5 or 6 million poor people felons by about next November, although a lot of politicans and IRS administrators are assuring people the response is going to be a lot more reasonable than that.
The IRS was originally told to focus on EIC fraud specifically by the 2004 congress, and it's just now really ramping up. At that time, EIC fraud was rated as second to business form fraud, at about 1/4 of the total damages to the tax base for business fraud. People can argue about why the congress in that year demanded renewed focus on the less serious source of fraud rather than the greater one, but that's not why I bring this up. Simply, the government now needs money more seriously than before, and escalating efforts to detect the number one type of fraud are an obvious way to close the tax gap, so even if the IRS is not doing this to small business filers yet, it will very likely come next year or 2012 at the latest.
There's a similar problem for people claiming the 1st time homebuyer's credit, in that the IRS has repeatedly revised the filing requirements to get more documentation, to where now the taxpayer will probably have to provide at least five additional documents to file the credit correctly. Taxpayers may have to wait until they have updated both their driver's liscence and vehicle registration to reflect the new address, and get a certificate stating the home is safe for occupancy on top of the deed and mortgage documents. I'm wondering right now what happens if the taxpayer doesn't drive, and has bought a previously occupied home, where the state doesn't normally do a habitability inspection. It seems likely at least some people who bought a home based on this credit will have a very hard time getting all the forms the IRS now wants.
By the way, for the situations such as you describe in your post, there's a major downside. For example, if the government has records that show you sold stock, they will consider it equally authoritative that you had zero basis
Re:What do you think happens today? (Score:3, Informative)
The proposed change prevents a taxpayer from being dishonest (by informing him of what the IRS already knows of his finances), and only gives him a chance to correct the records.
The proposed system doesn't prevent a taxpayer from being dishonest: it makes it easier, because it informs the taxpayer of exactly which details the IRS is aware, and which they are unaware.
It facilitates the taxpayer knowing what the IRS is unaware of, and thus assists the taxpayer in hiding money in future years..
If the taxpayer is not presented with the info, then they have to be sure to report everything to really be certain they won't be caught red-handed.
Probably the real 'big bad guys' such as insiders at the IRS, criminal orgs, etc, already know major blindspots, where they can elude dtection.
If the IRS always reported everything it knew to the taxpayer... they'd lose a big part of their edge, they'd be opening up insight into the extent of info they get to the general public, resulting in opening up illegal tax fraud to the commoners, instead of just large entities with lots of money....
Re:An invitation to defraud (Score:3, Informative)
The biggest reason for refunds is the Earned Income Credit. it's a replacement for older welfare systems, and it means there are fewer incentives to not work and just drift on welfare. (fewer, not none). Most US poor are either working or legally disabled. While the EIC isn't all that well implemented, it's probably better for the country as a whole than the system which preceeded it.
The second biggest reason for refunds is people don't try to adjust their withholding so as not to give the government a free loan until they file. Some people actually regard withholding as the only way they can save a large sum each year, which is really saying they lack the discipline to open a savings account with that money instead. It's normal in the US for essentially the same reasons not planning for retirement or not having rainy day savings is pretty normal in the US too.
Re:We've had that for years in Norway (Score:3, Informative)
Interest is income, I get that - but you have to pay a wealth tax on money sitting in the bank? How can you ever retire on more than a government pension?
Yes, the maximum rate is 1.1% on wealth above 540k NOK = 93k USD. So you have to make at least inflation + 1.1% to sustain your wealth. Not saying it's fair but that's the way it is. Actually, I find the inheritance tax nastier. The highest inheritance tax bracket is 15% (10% for direct descendants) above 800k NOK = 140k USD, so if you inherit 1,000,000 dollars the government takes almost 150,000$ just like that.