About 90% of Americans used either tax preparers or tax-preparation software in 2009. That's insane, particularly when you realize that a substantial minority of Americans either don't pay income taxes or have a very simple filing. But when people talk about the need for tax simplification, they overestimate the complexity of many people's taxes and they underestimate the role that fear and anxiety play in the process. People are terrified that they'll get something wrong, or trigger an audit, or miss a rebate. They're intimidated by the tax system itself. You may think you can do your taxes, but why take the risk?
The 15th draws near. Ezra Klein comments.
Er, wow.
I'm not quite sure why tax preparation software is lumped together with using a tax preparer, to tell the truth (on following Klein's link one finds 29% are using tax preparation software, and 2/3 of low-income families are using a tax preparer). I just bash out my accounts in Excel and then do the return by hand - it's not a pretty business, and I can well imagine that some sort of software would simplify the process. Especially if it takes care of depreciation, which is a headache. Had no idea, anyway, that this was so rare.
A popular response seems to be that tax laws should be simplified, but I wonder how much that would help. The problem seems to be in part learned helplnessness (the conviction that mistakes will be made), in part an exaggerated fear of failure (you will be punished horribly for getting it wrong). It would be better, I suspect, to tackle the latter. Look, you work through the form, giving it your best shot. If you make a mistake, the IRS notify you of the fact. If you've made an error in their favour, they give you a refund; if you've made an error in your own favour, they tell you how much you owe and charge a fine - the interest on the amount you underpaid.
I would rather hand it all over to someone else, on the assumption that writing would be a more profitable use of the time, but having an accountant never seemed to reduce the work I had to do and produced a false sense of security. I would ask the accountant a question with serious tax implications and assume I could rely on the answer - and then find, too late, that the accountant was wrong. Wrong in the sense of landing me with registering for VAT and filing VAT returns when I wasn't liable for VAT. Wrong in the sense of changing my residence for tax purposes, so that it was suddenly necessary to file two sets of tax returns and draw up accounts for two different tax years (the tax year in the US coincides with the calendar year, that in Britain from April 6 to April 5 of the following year). Wrong in the sense of making a completely unnecessary estimated tax payment for the following year of $17,000. The great thing about dealing directly with the IRS, in case of doubt, is that you have obviously done everything you reasonably can to get it right: if the official you deal with gives you the wrong answer, you can say you were just following instructions.
NB, though. If the US Government is worried about the complexity of its tax returns, the IRS should get a set of the UK instructions and forms and learn from their example. The UK tax returns are extremely well designed, exceptionally easy to follow. (As Edward Tufte says, confusion and clutter are not features of information but of design: the US might get more mileage out redesigning the forms than changing the law.)
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