I’ve got your attention, so I’ll let you off the hook about the title right away—this isn’t about infected paper cuts, exploding pens, or mailbox mishaps. It takes the average American 13 hours to prepare and file their tax return. The average lifespan in the US is 78.79 years, which works out to about 690,000 hours. With 67 million returns filed per year, that is the equivalent of about 1,262 “lives” per tax season. I’m putting “lost” in quotes because time spent doing something enjoyable is never time wasted and, who knows, at least a few preparers might enjoy the filing process.
So what is to be done to stop the bloodshed? Fund the IRS. Embrace technology. Streamline the tax filing process. Shift expectations.
There are a lot of good reasons to fund the IRS that have nothing to do with taxes—like the agency being a main source of diversity in public employment. But even if you think the IRS should be solely tasked with collecting taxes, it needs more funding to do so effectively. As of now, it doesn’t have the in-house technical expertise to develop a free file program and is dependent on contracting with third parties, with seriously mixed results. A lack of easy “free file” disproportionately affects less advantaged taxpayers. Without more funding, this puts the IRS in the unenviable position of having to either pay a third-party tax preparation company per return filed or maintain the status quo.
On that status quo: For a long time, tax preparation services have lobbied hard to prevent the IRS from providing a free and simple online filing system, with great success. The result is a system wherein the IRS claims 70% of taxpayers are eligible for some free file option, but less than 3% of returns are filed that way. The free filing options aren’t very visible, aren’t very good, and aren’t well funded. Indeed, the IRS has consistently seen its funding cut to the point where now nobody quite knows for sure how long it’ll be before they get their refund. No one is benefiting from this system save for the tax preparation industry— from this quagmire springs opportunity.
Forget Simplifying the Code—Streamline the Process
Ask anyone who has ever looked at the Internal Revenue Code (IRC), or paid taxes, or talked to someone that paid taxes, and they’ll tell you: The code is a mess. It isn’t going to be simplified any time soon through legislative and regulatory means. It’s technology’s time to shine.
The IRC is much like computer code. If you had to manually do what even a snippet of simple computer code does, it would take exponentially more time and require significantly more expertise. When I search my photo library for pictures of dogs, I’m returned results in an instant. If I sifted through my library manually, I’d spend the afternoon falling down rabbit holes of past meals and…fireworks? Candles on a birthday cake? I can never tell.
Suffice it to say that the general problem of making complex data manipulation simpler programmatically is a solved problem, so let’s get to it. Assuming the political problem of funding the IRS is solved—because you can do little without that condition being met—what would be the next steps for the agency?
1. Start Pointing AI and Machine Learning at the Code
Projects like OpenAI’s GPT-3 are making huge strides in both generating content, like ad copy and prose, and distilling down complex subjects like computer code in to things readable by ordinary humans. Why not aim it at the IRC? It’ll either be capable of churning out a series of questions that a taxpayer can be asked to complete a return or become so enraged by our pedantisms it’ll refuse to work with us.
Assuming the former, you can derive an astonishing amount of data from yes-or-no questions, as anyone who has ever played twenty questions can attest. The IRC is, at base, nothing more than a series of “if … then” statements. If there is an exchange of property held for productive use in a trade or business for real property of like kind, then no gain or loss is recognized.
That Section 1031 example illustrates simultaneously the simplicity of getting much of the way there and the complexity in getting all of the way there; regulations and case law do a lot of the heavy lifting. This immediately and exponentially expands the scope of the project, and that’s a problem, but most filers don’t have complex tax positions. Being able to immediately separate those complex filers that need more attention from filers with simple returns without spending years developing the platforms the big tax preparation companies have would be a huge win in a short timeframe.
2. Make Use of the Data You Already Have, IRS
The IRS has one huge advantage over the tax preparation companies: data. In most cases, the IRS gets all the same forms you do from your employer. They know how much you made the same way you do: through your W-2, 1099, etc. Prepopulating a return with data already obtained by the agency would go a long way toward cutting down those 13 hours for most filers. Lest this seem like an impossibility, a number of countries in Europe have already adopted so-called “return-free” filing.
One of the earliest adoptees was Denmark, going return-free in 1988. Come tax time, the Danes receive a proposed return that they can either accept or reject the return with modifications; around 75% of returns are filed as received. If that rate was matched in the US, we could save more than 900 tax-lives. The Danish tax code contains fewer tax brackets, few deductions, and no credits. In sum, it’s much simpler than the IRC. We can’t simplify our code overnight, or maybe ever, but we can arrive at the functional equivalent of simpler code for most filers through the implementation of the aforementioned technology.
3. Shift the Conversation on Taxes
Taxes get bipartisan hatred—nobody likes ‘em. It is easy to see why: Whether you pay them or you don’t, whether you pay a lot or a little, it seems the value of your received services remains the same. There is a disconnect in the value proposition of money for services. Things like the phrase “after-tax income” doesn’t help. It suggests your income exists somewhere in a world where it isn’t taxed. Uncle Sam swoops in and takes something out of your paycheck. None of this is good.
And so, come tax time, what are we to expect but filing being a huge hassle?
Taxes being loathed and viewed as tantamount to theft, and then filing being an ordeal, creates a political straw man that is easy to attack to mobilize your base. It is the political equivalent of putting Nazis in your movie—it’s a heuristic to quickly establish a character with no redeeming characteristics. “One for you, 19 for me … ‘cause I’m the taxman!”
The public might be more inclined to support funding the IRS if they understood that filing doesn’t have to be a 13-hour hair-puller; rather, if it was better understood that there is no such thing as before-tax income because taxes are a necessary precondition to receiving income. With most employees subject to withholding, a before-tax salary is a meaningless abstraction that never actually exists. It redounds to the benefit only of the employer, that can advertise a yearly compensation package that you will never receive.
Shifting the conversation on taxes is a long, generational project. It will require ensuring that tax revenue makes it to programs that have significant public approval. It will also both ultimately require and initially benefit from efforts to streamline and improve the filing process.
The bottom line is: The tax filing season doesn’t have to be painful. It is maintained as a source of anxiety to benefit interests that do not align with most taxpayers and feed the bogeyman that is tax itself. Let’s save some lives.
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.
Andrew Leahey is a tax and technology attorney in Pennsylvania and New Jersey.
We’d love to hear your smart, original take: Write for Us