No One Is Happy With Taxes - So What Can You Do?

It has been a common remark over the past few years that taxes seem to have gotten tricky. Whether it be the complex kerfuffle of the child tax credits, the stimulus payments during the pandemic lockdowns, or simply never seeming to get your tax return check from the IRS, no one is happy with taxes as they stand today. However, the feeling of discontent is not without cause. Yesterday, it was reported in multiple outlets and confirmed by the IRS that the IRS had destroyed over 30 million paper tax return documents in their backlog. At the same time, many people around the country were upset to find out that their taxes would have to be filed on extension, or otherwise that their preparers had simply raised prices beyond what they felt comfortable or able to pay. So what the heck is going on and how on earth did taxes get so messy? Today we’re talking about the changes in the tax landscape over the past few years, what that’s doing to you, and what you can do about it.

End or Fund the IRS?

The IRS as an institution might be the least beloved government agency. After all, no one particularly likes paying taxes, completing their tax filings, or paying more taxes later on than they’d already paid. To say the IRS is unpopular is an understatement, and unfortunately, that shows up in their annual funding. The IRS has existed in a perpetual administrative hiring freeze and lockup for well over 30 years. The software that handles most tax return processing and the responses sent out by the IRS was coded over 40 years ago, written on Cobolt (a coding language no one uses anymore), and has only three employees on staff who know how to manage the software and make changes with each tax year. Meanwhile, the staffing at the IRS has steadily declined along with a steadily cut budget. Regardless of whether you’re a tax-and-spend policy wonk or a taxation-is-theft libertarian, the inescapable observation is that while we have a robust and complex system of taxation in the United States, the government agency responsible for managing the tax system is funded about 12% as much as they need to be to run efficiently. This shows up in the backlog of returns which, as of February of 2022, still had over 20 million returns to process from 2020 (many of which have now been simply thrown away). It shows up in the delay of refund payments by months or well over a year for some taxpayers in the past year. It shows up in the statistic that there is one call center agent of the IRS available for every three-hundred calls received at any given time. It shows up in the relentless tempo of notifications that sometimes reflect reality and other times seem to have been made up wholesale, only to be amended and fixed months down the road. All of this to summarize: The IRS is not a fully functioning organization, and despite the serious financial and legal ramifications of getting your taxes wrong, the organization is simply too overwhelmed to reasonably manage its workload.

There Is No Such Thing as a Simple Return

Let’s just get this out of the way: There actually might be such a thing as a simple return. If you are a W2 employee earning less than $73,000 as a single person, who does not own their home, have any non-retirement investments (i.e. a brokerage account at Fidelity, mutual funds at Vanguard, a Robinhood account, etc.), and do not have a spouse, children, a business, own a vehicle, own real estate investments, have college debt, or have any inkling that any of those things might apply to them, then you might in fact have a simple tax return. For that one in a thousand people, the IRS has a free-file system, and all of the major tax firms (Intuit/Turbotax, H&R Block, Jackson Hewitt) have agreements with the IRS that they will file your federal (note, not your state) income tax return for free. For that one in a thousand people, you should avail yourself of those programs, because your return essentially boils down to entering information from your W2 and claiming the standard deduction: easy peasy, you don’t need help with that. However, if your situation trips on or bumps into any of the items I mentioned above (or anything I didn’t mention that sounds as complicated), then congratulations, you do not have a simple tax return. This is an important fact because you now need to make a decision: You can still self-prepare with many of the software-based and low-cost providers I just highlighted, but as Hearn’s Law states: “You will pay for what you get and if you’re lucky, you’ll get what you pay for.” Self-preparing your return is an entirely viable option for many taxpayers, but as your taxes get more complicated and the level of detail required increases (particularly for those with non-retirement investments, real estate investments, or a business), you need to seriously consider working with a professional, because these systems are getting nastier year after year, and the cost of getting it wrong is steadily growing.

Tax Professionals: Handle with Care

Having emphasized the necessity of working with a tax professional just now, we now have to emphasize the other half of this: Adjust your expectations. Ten years ago, tax preparation was largely the act of entering in data from various tax documents (your W2, 1099s, etc.) This was relatively easy to do, with most returns taking a competent tax professional only an hour or two and requiring very little additional thought or contemplation. During tax season, a period of roughly 54 business days from February through April, a competent preparer could complete approximately 200 returns, with the variance being largely in the level of complexity their clients worked with. Today, tax preparation often takes a minimum of four to six hours per client, driven not just by the increasing complexity of the tax documents clients provide (the same W2s and 1099s), but also by a number of ongoing programs that are facilitated through refunded tax credits and programs such as the stimulus program and child tax credits, which ultimately must be reconciled in the annual return. However, no one hung up a sign explaining this change in the landscape. This means that many tax preparation clients found out last year and this year that their expectations regarding delivery of the return and timely turn arounds would not only be met but that making much of a fuss about it would likely result in being fired or not taken on as a client the next year. The simple economics of supply and demand are kicking in, and in a way that most consumers aren’t going to be happy about. At present, there are only about 300,000 working tax professionals in the United States. That means for the 123.6 million households in the United States, a tax preparer would have to take on 412 clients a year, which is literally impossible given the amount of time in tax season. As a result, many preparers are pushing the number of clients they’ll accept for tax returns down closer to 100-150 rather than the average of 200, and their prices are doubling and in some cases, tripling. The bottom line for consumers is not only that tax preparation services are getting more expensive, but that the current structure of the tax filing system puts additional pressure on them to seriously manage their own tax liabilities or to be an ideal clients for their tax preparer, lest they be “fired as a client.”