Need That Money

The Flawed US Tax Filing System: Inefficiencies Special Interests and the Need for Reform

The Flawed US Tax Filing System

Taxes are an inevitable part of life in the United States. Every year, the Internal Revenue Service (IRS) expects millions of Americans to file their tax returns by April 15th.

Although the system has been in place for many years, it remains ineffective and problematic, putting taxpayers at a disadvantage. In this article, we will explore the inefficiencies of the US tax filing system, the financial and political motivations behind the status quo, and the resulting consequences.

The Inefficiencies of Form 1040

Form 1040 is the IRSs primary tax form, which every taxpayer must fill out. Unfortunately, this form is extremely complicated, and many taxpayers cannot understand what they are supposed to do.

Additionally, filing a Form 1040 can be quite time-consuming and requires inputting lots of information from various sources. As a result, many taxpayers turn to tax preparation companies, which charge expensive fees to prepare their tax returns.

The lack of transparency of Form 1040 undoubtedly increases the cost of tax preparation, especially for low-income taxpayers.

The Incomplete Picture of Taxpayer Information

Form 1040 requires taxpayers to report their wages, withholdings, deductions, and credits. In reality, this information is not enough to understand the full picture of a taxpayer’s financial situation.

For example, Form 1040 does not account for mortgage interest, charitable donations, and other important deductions. As a result, many taxpayers end up paying more taxes than they should.

The Financial and Political Motivations Behind the Status Quo

Tax preparation companies such as Intuit, known for TurboTax, and H&R Block, benefit from the complex tax filing system. These entities have lobbied against the return-free model, which would make it easier for taxpayers to file their taxes.

These companies use their vast resources to lobby for legislation that benefits their bottom line. Additionally, politicians have opposing views on how taxes should be calculated and collected.

For instance, advocates for a return-free system argue that it would be more efficient, saving taxpayers time and money. Opponents of the return-free model, backed by tax advocacy groups like Americans for Tax Reform, argue that simplification will provide lawmakers with less transparency on how the government collects taxes, thereby leading them to collect more.

The Benefits of the Return-Free Model

Several countries worldwide have implemented a return-free tax system, also known as a pre-populated return. In the United Kingdom, Spain, and the Netherlands, employees receive pre-completed tax returns, which they can then verify.

Its a system that saves taxpayers time and reduces the burden of tax-related paperwork. Advocates of the return-free model argue that the system would save time and decrease the cost of preparing tax returns.

The Simplicity and Cost Savings of Pre-Populated Returns

The return-free modelinvolves the IRS receiving information about taxpayers income directly from employers, banks, and other institutions. The IRS would then use this information to prepare a pre-populated tax return that taxpayers would verify and submit.

The return-free model benefits taxpayers of all income levels, but it’s particularly beneficial for low-income individuals and families. Because the IRS already has the necessary information, low-income households can avoid the fees associated with the tax preparation process.

The return-free model would eliminate the need for tax preparation companies, reducing the cost, and saving both time and money for taxpayers in the long run.

The Lack of Awareness and Utilization of IRS Free File

The IRS provides a free filing service to taxpayers called the Free File program. This program allows taxpayers to prepare and e-file their tax returns at no cost.

Unfortunately, many taxpayers remain unaware of this program, and tax preparation companies continue to dominate the market. These tax preparation companies benefit from a lack of awareness about the Free File program, which many millennials, working parents, and the elderly still don’t know about.

In conclusion, the US tax filing system is in dire need of reform. The current system is fraught with inefficiencies, complexity, and transparency issues.

The return-free model may present a solution to many of these problems, improving the efficiency of the tax filing process and reducing the cost of tax preparation. Still, tax preparation companies continue to lobby against the pre-populated returns model, influenced by financial interests rather than the taxpayers benefits.

Until tax reform becomes a reality, taxpayers must stay informed about the resources available to them, such as the Free File program, eliminating the need for costly tax preparation services.

3) The Problems with Free File

For years, the IRS has provided a free tax filing program called the Free File program. Unfortunately, the Free File program has come under scrutiny in recent years due to the influence of tax prep corporations, the underutilization and underfunding of the program, and the sabotage of program efforts by tax prep corporations.

Corporate Influence over IRS Free File

Intuit, the maker of TurboTax, and H&R Block, two of the largest tax preparation software companies, have exploited the Free File program’s loopholes to drive customers to their fee-based tax preparation services. These tax preparation companies have exploited another IRS programs storefront to lure in taxpayers with gross incomes below $72,000, occasionally directing eligible users to their fee-based products instead of into the Free File program.

The Underutilization and Underfunding of the Program

While Free File presents an excellent opportunity for those who want to prepare and file taxes free of charge, the program isn’t used as much as it could be. One significant problem is that many people who would be eligible for the program simply don’t know it exists.

Additionally, the program has had inadequate funding, and some years have experienced cuts in funding, so advertisements promoting the program are minimal. The underfunding of the Free File program and its associated advertising efforts make it difficult for the IRS to encourage taxpayers to use the program.

The Sabotage of IRS Free File by Tax Prep Corporations

Many tax preparation companies have been guilty of sabotaging the free tax filing program by steering users away from the free service. Taxpayers may unknowingly look up the Free File program online and end up on a site that looks like the IRS’s program but is actually operated by tax preparation companies.

Many of these sites advertise a “free” tax preparation service while tacking on fees for additional add-ons, such as state tax returns and return protection policies. This type of advertising is misleading and creates confusion for taxpayers who believe they are using the Free File program entirely free of charge.

4) The Anti-Tax Movement’s Role in US Tax Filing System

The anti-tax movement has had significant influence over the US tax filing system and the ideas and policies that have helped shape it over the years. The origins of the return-free model and the anti-tax activists’ opposition to streamlined tax filing are both examples of how the anti-tax movement has impacted US tax filing.

The Origins of the Return-Free Model in the US

The return-free model found its roots in the tax reform efforts led by Ronald Reagan. In 1985, Reagan proposed a similar concept to the return-free model, called the “simple” tax return.

Under the proposal, taxpayers with straightforward tax situations would not have to file a tax return. Instead, the IRS would calculate their taxes for them and send them a bill.

The proposal was met with fierce backlash from tax preparers and conservative groups, including what is now known as Americans for Tax Reform. The Anti-Tax Activists’ Opposition to Streamlined Tax Filing

Grover Norquist, founder, and president of Americans for Tax Reform, has been a vocal opponent of proposals to simplify the tax filing process and a return-free model.

The group argues that such policies pose a threat to taxpayers’ privacy. Furthermore, Norquist and other anti-tax proponents contend that allowing the federal government to pre-populate tax forms with taxpayer information could lead to the government overtaxing individuals and businesses.

The Success of Anti-Tax Messaging in Underfunding the IRS

The anti-tax movement has also succeeded in crippling the IRS’s ability to run effectively, leading to underfunding. For instance, the Inflation Reduction Act of 1993 required the IRS to reduce its workforce significantly, cut its budget, and curtail its enforcement efforts.

In recent years, President Biden has proposed to reverse these policies, but the anti-tax movement’s influence is still present. The long-standing opposition to IRS funding by anti-tax groups has made it harder for the agency to reinvest in technology and update its outdated systems, resulting in inefficiencies in the tax collection process.

In conclusion, the problems with the Free File program demonstrate the influence of the large tax prep corporations over the IRS’s policies and initiatives. The anti-tax movement’s opposition to streamlined tax filing and its efforts to underfund the IRS have perpetuated a flawed tax-filing system.

The consequences of this underfunding include a decrease in the IRS’s ability to provide efficient services and a decrease in the taxpayer’s access to programs such as Free File. The history shows that to make progress, the IRS and lawmakers must address the anti-tax movement’s opposition head-on and institute meaningful changes to increase transparency and efficiency in the tax-filing process.

The US tax filing system is in dire need of reform, as the current system suffers from complexity, inefficiency, transparency issues, and the influence of special interest groups. Tax preparation corporations, such as Intuit and H&R Block, have exploited Free File program loopholes, leading to its underutilization and underfunding.

Political opposition to tax reform and the underfunding of the IRS since the Inflation Reduction Act of 1993 have further contributed to inefficiencies. The solution lies in instituting meaningful changes to increase transparency and efficiency in the tax-filing process.

Efforts must be made to eliminate convoluted processes, introduce policies that support taxpayers, and increase investment in the IRS for building a more practical tax-filing system for all Americans.

Popular Posts