After two unprecedented tax seasons in the depths of the Covid-19 pandemic, Americans are inching toward the end of the first “normal” season. But while this year’s tax filing season has felt more like business as usual, it has also revealed the many ways in which the current state of our tax ecosystem is woefully unprepared to address the complicated financial circumstances of millions of taxpayers.
As recently as a few years ago, it would have been impossible to imagine that large swathes of the American public would have to report the daily expenses of their gig economy jobs on their taxes or closely monitor their earnings from trading cryptocurrencies. And new programs that provide financial relief to American families—like the Economic Impact Payments during the pandemic or the expanded Child Tax Credit—are increasingly administered through the tax code, adding yet another layer of complexity.
Technology has reshaped the world in recent years, and our tax ecosystem hasn’t kept up. The IRS is still far too reliant on paper forms that cannot be digitally scanned; the National Taxpayer Advocate recently reported that the agency’s backlog of paper returns sits at nearly 15 million. For tax preparation services like Jackson Hewitt, it is often more efficient to fax a client’s forms to the IRS than submit them digitally—an anachronism in a world where money and information move freely across the globe in an instant. As a result, far too many taxpayers have frustrating experiences with the tax ecosystem, whether it’s a long delay in processing their refund or an unexpected bill coming due at tax season.
There are steps the IRS can take right away to enhance its partnerships with tax preparers and streamline the taxpayer experience. For instance, allowing preparers to help their clients validate certain key data points in advance of filing a return would help avoid the time-consuming error resolution process. The agency should also improve transparency by providing preparers and filers with more information about where returns stand, similar to the dashboards used by some states. These steps would provide crucial assistance to taxpayers at a time when the IRS is only able to assist roughly one in 10 taxpayers seeking help. Smarter public-private collaboration today can help America’s robust tax preparation industry fill the customer service gap facing millions of Americans at tax time.
But while there is more the IRS can and should do to streamline the taxpayer experience, it’s not as if the agency is simply dragging its feet and resisting the tides of technological innovation. Instead, it has been deeply underfunded for years, and as a result has lacked the resources necessary to keep up with changes in how consumers expect to engage with the tax ecosystem. And while the IRS recently announced plans to hire 10,000 more frontline workers in an effort to address its backlog of unprocessed tax returns, increased funding—like the 18% boost proposed in President Joe Biden’s latest budget—is critical to helping the agency update its technology and improve customer service.
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Another area where modernization is long overdue is regulatory standards for paid tax preparers. Regulatory standards for paid tax preparers haven’t kept up with these changing times. Jackson Hewitt requires its Tax Pros to comply with strict training and education standards prior to and throughout each tax season. But not everyone plays by these rules, including “ghost preparers,” who often circumvent oversight in order to engage in tax fraud and to facilitate noncompliance with tax laws.
Bipartisan legislation like the Taxpayer Protection and Preparer Proficiency Act would address this problem by granting the IRS greater authority to regulate tax preparers and create national tax preparer standards, including minimum competency standards. With essentially no minimum standards to become a tax preparer under current law, and no timely or effective way to stop known fraudulent preparers, too many Americans are exposed to unethical tax preparers who file inaccurate returns, misuse taxpayer identities, and steal taxpayer refunds.
All of this activity disproportionately contributes to the tax gap, the difference between taxes owed and taxes paid by both businesses and individuals. Each of the trends I have highlighted—the increasing complexity of the tax code, underfunding in tax administration, and the absence of minimum standards for paid tax preparers—has played in role in the expanding tax gap. But while the IRS commissioner estimates the tax gap could be as high as $1 trillion per year, we still have a limited understanding of the true scope and causes of the problem.
Increased funding for the IRS and increased attention to the tax gap issue can help the agency take the steps needed to fully understand the causes of the tax gap and begin the important work of closing it.
Modernizing our tax ecosystem is a win-win. It will streamline the experience of filing taxes and receiving refunds for millions of taxpayers, reducing their frustration with the entire system. Investments in improving tax administration and closing the tax gap also offer incredible bang for the federal government’s buck; by some estimates, every additional dollar spent on the IRS generates up to $6 in newly collected taxes, money that is already owed under the existing tax code.
For millions of Americans, tax filing is one of the most significant financial moments of the year. Anyone working in our industry can tell you that nothing compares to the look on the faces of taxpayers when they learn they will get a tax refund of hundreds or thousands of dollars, money that can be life-changing for struggling families or small business owners. It’s on all of us working in the tax ecosystem to strive to break down the barriers that cause frustration in tax filing, helping modernize the taxpayer experience and making the tax ecosystem better for all.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Gregory Macfarlane is the chief executive officer of Jackson Hewitt Tax Service Inc., one of the largest tax-preparation services in the U.S.
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