To those saying "We should be more like Sweden/Finland!", I'd ask whether those countries have a tax system that is also based on using tax credits and deductions to lower your tax due? I don't know the tax codes in those countries but my guess is that, because they use the tax entity-created system, they do not have such a complicated tax code as the US.
In the US, you have two sides of this: (1) the IRS, and (2) CPAs, CPA firms, and software firms like Intuit who profit from helping customers file taxes. The question always is, "Why would I pay someone to file my taxes?" The answer is, "If they can save you more than their fee, it's worth it." In other words, if they charge $100 but save you $101 in "tax due", you have a net "win" of $1 thus you should hire a professional. Why does this work?
For the CPAs, CPA firms, and software firms like Intuit, you have a professional who is taking your money and offers a reasonable expectation that, as a result of using their software, you will save more money than you pay in fees because they will help you find deductions and tax credits that you would've been hard pressed to find yourself. These companies compete in a free market for your money, both with other software companies and with CPAs/CPA firms. The "winner" (for a particular user/client) is the one who (a) has the best reputation of not getting you audited, and (b) who gets you the best price:deduction ratio.
On the other hand, you have a government entity whose sole charge is to collect revenue. Is their system going to be designed to help you get as many deductions as possible? Are they going to prompt you to deduct moving expenses (just to pick one example)? Maybe, maybe not. The question is legit though and thus causes us all to say, "Wait a minute... maybe, since there is a financial incentive for them not to show me deductions, that they will hide some of that (or make finding it as complex as the tax code)."
If Intuit/et al help you save $5000 in taxes this year by helping you deduct all that you can, Intuit/et al do not make one penny more - that money simply stays in your pocket. And you probably smile, buy a new car/vacation/etc. And you certainly tell your friends, "You should use Intuit!" If the IRS helps you save $5000 that you would have otherwise paid (b/c you did not fully deduct all that you could have), then the IRS loses $5000. That in and of itself highlights the problem. Do you trust the IRS to say, "It's okay if we lose $5000 - you're happy, right? That's what matters!"? Of course not. Having the separation works in the US for this clear conflict of interest.
Again - I don't know the tax code of the Euro countries but I'd be interested to hear if they have a similar setup and how they work around this. It's logical to think that the IRS could invest $500 million building such a system and then no one uses it because paying $30 to Intuit/etc results in a higher refund for the above reasons...
I've lived in Sweden and Iceland, both of which have pre-filled tax returns to be submitted either on paper or electronically. Sweden is particularly easy, all I have to do is to verify the numbers and then send an SMS with a personal code printed on my return. If I need to change anything, I log into the tax office website, make the changes and submit.
I have deductions to offset paid interest. If I hire a person to do some renovation in my home, the tax office pays half of the fee directly to them and I get a deduction as well. I sold my flat this year and will need to pay tax from the winnings, deducting costs. Almost all of this will be pre-filled.
In Iceland I had a slightly more complex tax situation. I filed jointly with my ex wife. Mortages, minimum wage deduction (i.e. you don't pay tax of the amount that is the legal minimum wage), property tax (house, cars), stocks and bonds, bank deposits and earned interest, deductions for rent compensation, was all prefilled.
Compared to this, filing my dead-simple US taxes with one deduction, filling in a two page calculation worksheet, feels like the middle ages.
No matter the complexity of the tax code, there are systems in place for all of them to evaluate and error-check tax declarations. The information is most likely all there already. All you need to have is a way to authenticate tax payers, and a front end.
And if I have a reason to think the tax authorities will not include items that lower my dues, I can always hire an accountant to file for me. I simply give them my "third-party filer access code" and sign the final return.
In Norway, if you qualify for simplified tax return (which I think most people do), you don't have to do anything anymore. You get a default pre-filled tax return that you can access electronically (or on paper if you prefer), and you only have to return it if you need to make changes.
Same in Denmark; you also get the refund automatically paid, if they owe you anything, with interest (0.5%, but still). I screwed up my withholding my first year here (failed to apply for a tax ID at all, so taxes were withheld by default at the highest rate). The next March I got a letter saying, your taxes were over-withheld by large_amount. If this is incorrect, please log in and fix it, otherwise we're going to deposit a huge pile of money in your account in N weeks. Did nothing for a few weeks and the money showed up.
To elaborate: In Sweden, even if you accept the defaults, your creditors and employers will send you statements (sv: kontrolluppgift) of your debts, interest, earnings, income et c that you can easily double-check against the defaults.
Ignore all the deductions and other stuff. It's a mess and should be fixed, but for this simple issue, it's not relevant.
I get W2s, 1099s, 1099-Rs, 1099-INTs, THX-1178s, ABC-123s, etc. I have to manually copy the stuff from boxes 1-30 on each of those onto my returns. I'd file my taxes in January expect it takes weeks for all the various organizations I deal with to make those and send them through the mail.
I shouldn't have to enter any of that. The government already knows it, they'll check my return against it. When I start my return, it should be pre-filled.
It's sad that Intuit and H&R Block fight this; though I'm not surprised. I'd say the government should provide a direct copy of the 1040 form online with this boxes pre-filled. Intuit and H&R Block should make their money by making easier forms and providing guidance.
Note that "keeping the government forms complex" doesn't count as "making easier forms".
I wish all of those would get reported/filled in automatically also. If you have to file for yourself, it's a massive PIA to get all of that info. And in 2013 it's far harder - in the past, I used to get paper copies of everything but this year I received lots of "Please create an account here and then you can download your ABC-123". It takes a day to collect and collate all of the ABC-123s. PIA indeed. And the IRS already has that info - it's double-entry accounting except that it's worse since you are judged on your ability to do it correctly. So yeah, that part of it could certainly be improved!
I don't think they were fighting against online access to IRS data. I think they fought against pre-filled 1040 forms becoming default return without you actually having to do almost anything. The former is innocent and useful, the latter may be a bit more controversial, since the incentive of the IRS is to maximize the taxes, having IRS create the returns may not provide the best option for the people who use it.
> the incentive of the IRS is to maximize the taxes
I'm not sure this is the case. IRS funding is not a static percentage of tax revenue. Sure, the tax money goes into one big pot, but IRS funding is not dependent upon the money they bring in.
Yes, but penalties do so there is a big incentive to maximize income from penalties. I was hit by this recently, by not filing a no-income return, and not certified mailing another return that was lost, but I wasn't alerted until 2 years later when they levied $4k in late fees. It used to be easy to get out of these penalties, but there are several accounts from uppers at the IRS that they have been sitting in meetings discussing cracking down on fee collection, no longer waiving fees etc.
Don't oversimplify. Prosecutors also aren't pay percentages of the sentences they get, still many prosecutors are zealous to get longer sentences. Because it's their job. The job of IRS is to extract taxes, more they do, more successful they are. People like to be successful.
Though IIRC, part of "paying" for PPACA (really, just to get the CBO numbers to work out) involved increasing the IRS enforcement budget on the premise that with more money they could bring in enough additional tax revenue to produce a negative net cost.
> If the IRS helps you save $5000 [via a tax deduction] that you would have otherwise paid, then the IRS loses $5000
Many Americans have a (one-sided) adversarial relationship with the IRS, thinking it is some kind of evil entity that only exists to financially destroy everyone in America.
But the IRS only exists to implement the tax code enacted by the "representatives of the people" (ha), the US Congress. When the IRS saves someone $5,000 because of a deduction that Congress specifically created as a tax expenditure, the IRS doesn't "lose" $5,000, they are simply performing the function that they are required by law to do.
You have to understand that to many people, any money that the government has been unable to obtain from you is money "lost" to the system or is listed as a "cost." These people would disagree with your statement that the IRS didn't lose that $5000. To them the IRS most certainly did lose that money.
To expand on your thought that people view the IRS as the evil entity. They are just misguided, the true enemy is the overly complicated tax code that is rife with abuse by many people within the IRS, Congress, and the private sector to the detriment of the majority.
"Do you trust the IRS to say, "It's okay if we lose $5000 - you're happy, right? That's what matters!"? Of course not. Having the separation works in the US for this clear conflict of interest."
I really think you misunderstand the intent and mentality of the IRS. You seem to be projecting a capitalist objective to their actions with the motive of obtaining the maximum amount of money. The IRS does not have any direct incentives for bringing in more money.
If you are audited and the auditor finds you missed deductions, they will tell you. I would hope that information should be enough force a change in your perspective.
Swedish here. There are deductions you can make but for the majority, it is either simple, or it has been prefilled. For example, for retirement savings of a very specific kind (IPS for Swedes reading this) there is a possible deduction and I believe it is pre-filled. Same thing for interest on house loans (I believe).
For capital gains vs losses, when you trade with stock, you however have to do it "manually" (not pre-filled). (For Swedes: K4 I think is mandatory but can easily be computed by your portfolia broker such as Avanza).
I think today the website that the Swedish tax office provides for you to actually fill in and confirm your tax statements is like a free, online version of what previous generations commercial tax software was about. Every year it includes yet another bit of functionality that simplifies it or handles a new corner case. For the majority it has been very simple for quite some years - send an SMS to confirm the pre-printed statement for example. But if you trade with shares, or if you have a business, or for example own forest (which automatically makes you a business), it is not as simple yet.
Last year I filed all my deductions from renovating and selling an apartment online. There's a fair amount of functionality now (according to the FAQ selling forest, business income, house/apartment sales (K2,5,6) investments (K4) et c) can be done online.
The swedish tax authority also incentivizes people to e-file: if you e-file, you'll get your tax return before midsummer, which in Sweden is a BIG holiday, when most people kick off their summer vacation. Even if you accept the defaults, but file on paper, you'll get your money in August instead of June.
So you're proposing that ~$3 per taxpayer is a huge risk?
I think lots of people will see your point and still believe that a system where the IRS tells you what it thinks is true would be an improvement over the current system (somehow, pre-filled forms, whatever).
My guess is that at least 85% of the population of Sweden does not have any deductions and can just accept the prefilled values from the tax office (employees). For a normal employee there are not so many deductions you can do. I guess travel to and from work is the most common deduction. But if you have a business (not a corp) things is of course very different.
That's what my guess was. In that environment then, a government system clearly works well. I wish I had stats about how many US tax returns have deductions - I'd assume it's close to 100%.
It's actually 35%, if you don't count people who file with just the standard deduction. While technically a "deduction", the standard deduction is pretty dead-simple to compute. It only gets more complicated if you're taking itemized deductions, and that's about 1/3 of taxpayers (though that's still a high proportion of itemized filers compared to many countries).
In Europe taxpayers waste millions with the tax authorities' pre-filled/free filing systems. The major reason for that is that once you have free filing with some data preloaded, human behaviour kicks in and you either spend some time figuring out where to minimize your tax losses (rational economic behaviour) or accept the tax return presented by the tax authorities and go with that even if it means wasting money (irrational behaviour).
To give a sense of how big a problem this is, here in the UK a report came out last year that pointed to £12.6B wasted. In Portugal, waste is around €2B if our math is right.
(Shameless plug): At http://gosimpletax.com we're actually helping taxpayers save as much as possible with as little friction as possible. We're currently operating in the UK & Portugal and would be great to have your feedback if you're in any of these countries.
Given how simple the UK tax system is, and what a large and rising percentage of UK , that number sounds incredibly high...
Regarding your site: The "Learn more" isn't a link. Why not? I don't want to go to your blog, I want a clear statement of what you provide without registering first. I'm not going to register without a very clear idea of what you offer. That I can register for free makes no difference to me when there's no clear statement to explain what I get if I sign up for free, given that the service costs money to use.
Looking at your "pricing" page, I see fear-mongering. "Hours wasted"? Only if your tax affairs are terribly complicated. "Painful and confusing forms"? Only if you failed basic English and arithmetic. I find the UK self assessment (having dealt with the Norwegian one before Norway went "pre-filled"/online) very well designed. "No guidance or help"? The HMRC guides and website are actually very good.
You seem to be positioning yourself for people with lots of money (to be able to save on average 2000,-, given that the average British taxpayer pays somewhere below 4k in income tax and 2.5k NI, and very few pays more than 10k-15k...), who are confused and clueless about the tax system, yet willing to sign up to an online service rather than get face to face time with an accountant...
If that's your intended market, and that actually brings the revenues for you, then your site is well targeted...
Aha so you ought to make software that interacts with the pre-filled forms before they are confirmed and charges 80% fees on all savings you account...
> The "winner" (for a particular user/client) is the one who (a) has the best reputation of not getting you audited, and (b) who gets you the best price:deduction ratio.
As a tiny nitpick, I think that, in this case, it is the absolute difference `deduction - price`, not the relative difference, that matters: given that I have the money available, I'm happier to spend $2000 to get back $2100 than I am to spend $10 to get back $11.
In the US, you have two sides of this: (1) the IRS, and (2) CPAs, CPA firms, and software firms like Intuit who profit from helping customers file taxes. The question always is, "Why would I pay someone to file my taxes?" The answer is, "If they can save you more than their fee, it's worth it." In other words, if they charge $100 but save you $101 in "tax due", you have a net "win" of $1 thus you should hire a professional. Why does this work?
For the CPAs, CPA firms, and software firms like Intuit, you have a professional who is taking your money and offers a reasonable expectation that, as a result of using their software, you will save more money than you pay in fees because they will help you find deductions and tax credits that you would've been hard pressed to find yourself. These companies compete in a free market for your money, both with other software companies and with CPAs/CPA firms. The "winner" (for a particular user/client) is the one who (a) has the best reputation of not getting you audited, and (b) who gets you the best price:deduction ratio.
On the other hand, you have a government entity whose sole charge is to collect revenue. Is their system going to be designed to help you get as many deductions as possible? Are they going to prompt you to deduct moving expenses (just to pick one example)? Maybe, maybe not. The question is legit though and thus causes us all to say, "Wait a minute... maybe, since there is a financial incentive for them not to show me deductions, that they will hide some of that (or make finding it as complex as the tax code)."
If Intuit/et al help you save $5000 in taxes this year by helping you deduct all that you can, Intuit/et al do not make one penny more - that money simply stays in your pocket. And you probably smile, buy a new car/vacation/etc. And you certainly tell your friends, "You should use Intuit!" If the IRS helps you save $5000 that you would have otherwise paid (b/c you did not fully deduct all that you could have), then the IRS loses $5000. That in and of itself highlights the problem. Do you trust the IRS to say, "It's okay if we lose $5000 - you're happy, right? That's what matters!"? Of course not. Having the separation works in the US for this clear conflict of interest.
Again - I don't know the tax code of the Euro countries but I'd be interested to hear if they have a similar setup and how they work around this. It's logical to think that the IRS could invest $500 million building such a system and then no one uses it because paying $30 to Intuit/etc results in a higher refund for the above reasons...