ALBERT EINSTEIN reportedly once said, “The hardest thing in the world to understand is income taxes.” Which makes me wonder: How did I end up wandering into this mind-boggling field?
I like knowing how my money gets taxed because it helps me better control our finances. By managing taxes, we can significantly boost how much money we have for retirement.
Why is the tax system so complicated? The system is trying to do more than just collect taxes. Congress uses the tax code to try to achieve economic and social goals, and then relies on an overburdened IRS to deliver on those plans. It would be far better for the IRS to concentrate its efforts on collecting revenue—its primary purpose—and let other federal agencies monitor social policies.
The U.S. tax code is a master class in complexity. If you prepare your own return, you need a lot of patience and usually find yourself reading the instructions more than once. Today’s tax laws unnecessarily burden America’s taxpayers and make voluntary tax compliance far too difficult.
The two top dogs in tax-preparation software are TurboTax and H&R Block. I’ve also had good results with FreeTaxUSA. It supports most tax situations and forms, without incessant handholding. It charges if you want live help, and also for state tax returns.
Now, the IRS wants to get in on the action. Its new Direct File pilot program, a free tax-filing program, is currently available in 12 states. The program doesn’t prepare state returns, nor can you use it if you itemize deductions, have more than $1,500 in interest income or claim certain tax credits. In other words, as currently designed, it’s only meant for people with simple tax situations.
The thinking is that, if the pilot plan is successful, it’ll be expanded to handle more complicated returns. Some folks like the idea of IRS Direct File. Others feel it’s like putting the fox in charge of the henhouse, and that private industry is doing a fine job of providing free and low-cost tax filing.
What’s your opinion?
I like this idea, though in a qualified way. Free tax prep software is a good idea but I’d prefer to do it the way most other countries do – IRS sends you a pre-filled form which you can sign and send back, or correct if needed.
See,
https://www.propublica.org/article/filing-taxes-could-be-free-simple-hr-block-intuit-lobbying-against-it
The for-profit tax software is uniformly awful. Note I have a graduate degree in computer science and nearly fifty years work experience in IT. Software is one of the few things in life I feel I do have some understanding of.
I used to do my taxes down at the public library, which had all the tax forms and regulations handily available. Then life and taxes got more complicated..
First program I used was TaxAct, which in its early iterations had good help pages which explained what the software was up to. It got steadily worse until it was just a series of forms to be filled out, with links to the IRS documents, and no explanations. Tried TurboTax but their politics are detestable (see link above), also it made several mistakes that I caught and one that I didn’t. Tried HR Block these last three years, it has also made mistakes each year. At least the mistakes were different 😉 so our tax software is learning I guess.
My protocol is to do the taxes with the horrible software, then print out all the forms and check them against the regulations: scribble on the forms and go back to the software to correct its mistakes. Soon I’ll have to break down and get an accountant to do my taxes, as I’ve started to make mistakes too.
“Congress uses the tax code to try to achieve economic and social goals”
That is NOT the major reason taxes are so complicated. Wealthy special interests use
bribes — excuse me for not being Neanderthal Correct — campaign contributions to make the tax code complicated to hide all their sleazy loopholes.
Tax-prep firms make bribes too so taxes are so complicated most people are forced to use them.
Corporate power is THE fox in charge of the henhouse.
“Congress uses the tax code to try to achieve economic and social goals.” If you believe this, I don’t think you really understand how Congress or the tax code really works.
You misread my meaning entirely. I didn’t say that system is ideal. I said That’s the way it operates now and contributes to the complexity.
Read first sentence of paragraph.
Marjorie, thanks for great article, and to all the commenters. I just got home from a day of tax prep with AARP TaxxAide. Just a few classifications about the VITA program.
1) The IRS sponsors the Voluntary Income Tax Assistance (VITA program). The program is operated by many partners all over the country. There were over 3200 sites in 2022. See this link to find a site
https://irs.treasury.gov/freetaxprep/
2) AARP is one of the largest partners with the IRS VITA program. You do NOT have to be a senior, poor, or an AARP member to use these services. Here is a link to AARP’s site.
https://www.aarp.org/money/taxes/aarp_taxaide/locations/
3) Many other organizations like Unite Way, Churches, colleges, …. also offer the service.
The program is free, all the tax counselors have been trained and certified. and all returns get a full review before being filed. Most of the tax counselors I have worked with over the past 6 years are retirees. There needs to be a regular intake of new counselors. I would encourage any HD reader who is interested to give it a try.
Rick, Thanks for taking time out from your busy schedule to offer your comments. Through your articles, I have often admired your dedication to your volunteer tax preparation, and your interest in your clients welfare by offering them some great tips to improve their tax situation.
As you said, the interest has to be there. Tax preparers need a lot of patience, good communication skills, along with math skills and the ability to figure it all out. It goes without saying that you are in no short supply of those qualities.
i hope your comments and your enthusiasm inspire others to become tax preparers. It’s also a great learning experience.
And the Sites I have worked do state returns, and often unique property tax refund program applications.
There was an interesting article in the Wall Street Journal recently about why the tax code is so complex— and isn’t likely to be simplified any time soon.
I do tax prep through the IRS Vita program at Goodwill. Most of the clients have basic returns, but I don’t think most will be able to benefit from the IRS free file option.
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They don’t do state taxes with Direct File either but refer you to your state’s tax filing site. I think the better choice for people with simple returns is Vita or TCE.
Thanks for the service you provide.
I am a volunteer for AARP Tax Aide here in suburban Detroit. My normal client is a retired receiving Social Security and pension or IRA distribution. These tax payers would be uncomfortable with the current IRS program. They are not computer savvy and would struggle. Their returns are very simple with our software. A better plan is for the IRS to calculate their tax and send them the bill. Many do not owe anything. We would have to get the states to buy in to this solution.
Harold – While a prefilled tax return may sound like it would make filing season les stressful, the current U. S. tax code is too complicated for it to work. As Dick Quinn commented – Lawmakers should focus first on simplifying the tax code and strengthening existing taxpayer service before implementing the expansion of a direct file program.
A new study indicates that the system would cost anywhere from $64 million to $249 million annually, depending upon usage and scope.
Even an IRS designed software platform cannot properly assess the deductions and credits a taxpayer might qualify for because it depends on specific situations for which third party data does not exist.
It also requires surrendering a great deal of privacy. Meanwhile, Today there are more than 30 free tax filing choices available from non-profit organizations and tax preparation companies. Many are under-utilized.
Thank you for your volunteer efforts, Harold. I’m sure they are rewarding. I was glad I could share what knowledge I had when I volunteered as well. And found most people very appreciative.
Why do they feel that way? What is their argument? It’s impossible to comment without knowing this.
Booch, Please see my comments above to Harold which I hope will answer some of your questions. If I were to articulate all the intricacies and consequences of Direct File, it would require another article. Thank you for reading and commenting.
I build a spreadsheet for myself every single year, so I can understand how the buttons and levers of tax policy are going to operate that year, and so I can plan my activities to minimize my tax, even a little. (Even now, I laugh at how the government initially botched part of the transition to those new schedules (1, 2, 3) three or four years ago, by misnumbering some lines and leaving a few dead ends. One needed to build the spreadsheet or at least do the line-by-line work oneself to see that spectacle.)
I still do that spreadsheet, and then file a paper return. [I also attach that part of my spreadsheet that shows my Qualified Dividend and Capital Gain Tax Worksheet because that calculation is so important to one’s tax bill (and yet somehow, the government still leaves it buried in the instructions for the 1040.)]
My couple of experiences with the IRS about my returns have actually been pretty good, and I have no anger or resentment toward it. They’ve even send me money after finding an error I made where I penalized myself.
But having the government prepare tax returns is dangerous for a couple of reasons. First, the government also makes mistakes, and they will likely be mistakes or omissions that the taxpayer won’t catch (or won’t bother to check). Second, it will lead more taxpayers to become even more ignorant about the tax code and how those buttons and levers in the tax code work. Third, the burden of proof will shift – right now, the taxpayer is presumptively right when he or she signs that return and sends it in. The government finds arithmetic mistakes and checks things that its system flags. And a lot probably falls through the cracks, though most of this is probably small change.
I guess having the government prepare a return may be OK for the very simplest of returns – where the risk of making mistakes or omissions is lowest and there are few items of income involved – probably only wages, interest and Social Security – and few or no deductions. But as many commenters note here, whenever there is a twist – even a little twist – a return can rapidly turn into a unique one-off tax situation. And Direct File won’t help with that.
You might be interested in http://excel1040.com/ I’ve used it for a number of years.
Taxpayers also make mistakes when using TurboTax, H&R Block and other software. Even if you have H&R Block prepare your return in-office they still make mistakes. We had them prepare an amended return and it was missing Schedule A. That delayed the refund for nearly a year. When the IRS finally processed it they sent us our refund plus interest because of the delay.
There is nothing that will prevent you from creating your spread sheets and taking a deep dive into the tax code. Most taxpayers don’t want to do this.
Even if this were true, it doesn’t matter. If the taxpayer makes a mistake the IRS will fix it. As you pointed out they will, “even send me money after finding an error I made where I penalized myself.”
There is nothing “dangerous” about Direct File, but I can see why Intuit, H&R Block, and others see it as a threat to their bottom line.
Martin, you are so right, in my opinion. I once had a letter from the IRS indicating I owed extra money. They had not taken into consideration the lower rate for qualified dividends and capital gains, so although they say to keep the worksheet for your records—it’s not a bad idea to send it with the return
one other point—under the law the IRS is supposed to give you the reason they are requesting additional funds. I have found them wanting in that respect.
Marjorie, thanks for this and I love the Albert Einstein quote.
I also continue to file on paper, mainly because I always seem to have some notes or additional information to include which the tax programs I tried couldn’t accomodate.
I once mentioned my dinosaur habit to a CPA and I said, “I guess I’m the only person left in America doing it this way.” To which he replied, “No, I think there are two others.” So, Jo Bo, we gotta find the third person and start a club!
Andrew, here I am, your 3rd person. I have yet to e-file yet. There are sometimes unusual circumstances requiring statements one may wish to attach to a form or schedule and e-filing doesn’t support the explanation.
Thanks for your comments.
The government has never done a good job with technology, so I think it will be a while before the everyone can do their taxes through the IRS. One option for tax preparation is the AARP Foundation in conjunction with the IRS sponsors free tax preparation done by accredited volunteers. I have been a volunteer for two years and find it very rewarding to help those who can’t afford a CPA. The link to find out more is: https://www.aarp.org/money/taxes/aarp_taxaide/
Tony, I agree. I volunteered myself for 8
years with Vita and TCE at both my county and township libraries. It’s does feel good to help others and you also learn a lot in the process. So many were widows who appreciated the service.
In reply to your query, I favor expanding IRS direct file.
I am among the few still filing on paper, my rationale being that bypassing third-party e-filing lessens opportunities for identity theft. I suspect that a third party may store my data, too. Will the IRS continue to support paper filing much longer? I doubt it. At that point, I would hope to file directly with the IRS. And I completely agree with Nick’s comment.
JoBo, Thank you for reading and for your comments.
Fees for tax prep have become expensive. Every time taxes are “simplified” they seem to become more complex; the Tax Cuts and Jobs Act added up to 6 new schedules to tax returns. That was good news for tax preparers who joke about “charging by the pound” for paper laden tax returns. So yes, I think low cost options are important.
Now that I’m retired I also use FreeTax USA. It’s a wonderful program with one exception; it doesn’t have an easy way to determine the best filing status for married joint versus married separate. My commercial software (Drake) could do that with a single keystroke. Without that keystroke you need to physically prepare a MFJ return and 2 MFS returns, both federal and state to determine what’s best, and you also have to be careful to avoid IRMMA Medicare income limits, which are much lower for a married filing separate return.
Dan, thank you for sharing your knowledge.As a professional tax preparer, preparing numerous returns, I’m sure your concerns were more inclusive than the individual’s.
Good tip on IRMMA.
I use Free Fillable Forms, which means I have to understand the parts of the tax code that apply to me.
The IRS instructions for each form are pretty comprehensive. I always read them carefully and model each worksheet on my tax spreadsheet. Then I can just follow what I had the prior year, and check for changes.
Ormode..I have used free fillable form as well but I think it is more geared to those who have some knowledge of taxes,like you, and you seem to take great care in preparing your taxes.
Have found FreeTax USA an easier format.
thanks for your input
In more well functioning developed countries, they already provide a pre-completed tax return. All you do is review and sign it. The tax industry in the US lobbies Congress to maintain the complexity of the tax preparation process. But the fact is the IRS already gets a copy of every tax form you receive, and they know every tax law, so writing a software program to handle the taxes of everyone in the US would be trivial. What’s more, that software would completely eliminate the need to audit anyone accepting the pre-completed return, which would save the government a lot of money, and ultimately reduce the cost to the taxpayer of funding the IRS. The cost of writing software is far less than the salary of the approximately 10,000 IRS Revenue Agents, Tax Compliance Officers, and Tax Examiners currently paid a salary to audit returns under the existing tax preparation system. So unless you’re intention is to cheat on your taxes, everyone should be in favor of simplifying the process in this way.
Nick, The IRS has already been provided with $80 billion over 10 years to improve enforcement and customer service. I can’t find any specific amount allocated to Direct File, except for the statement that it, too, is supported by funds from the Inflation Reduction Act. I will play Devil’s Advocate and say that the cost of Direct File will no doubt expand as the program expands and many people object to adding taxpayer monies to pay for what they consider more government overreach.
Thank you for reading and for your valued opinion.
Spending taxpayers money on a program that would reduce the amount of money that taxpayers already spend on the existing audit workforce is money well spent. This should be obvious, since every business spends money on process improvements that will, in turn, reduce ongoing costs. Classifying this as government overreach is absurd, since to be consistent, one would also have to consider the salary and benefits paid to all current tax auditors to also be government overreach.
Like Ormode, I wonder about something, in my case (and that of many other retirees) QCDs. Currently the IRS has no way of knowing that these withdrawals from traditional IRAs are nontaxable unless we filers point it out.
Sure, but having a pre-filled form where you just need to add one item is certainly preferable to doing the entire thing from scratch, right? And it reduces the audit process to checking just that one item, not the entire return, so the IRS should need far fewer auditors on the payroll.
Good point. Not worth it to me, though, if after that change the “prefilled” form didn’t automatically recalculate the subsequent related numbers.
(There’s also the issue of whether the prefilled form would include the medical deduction allowed from the CCRC monthly fee. That amount appears in a letter from the CCRC, not on an IRS form.)
Unless, of course, you have a business. The IRS does not know your cost of goods, or how much mileage you drove.
Correct Ormode, filers with schedules C for business, E for rental income, and F for farms need to supply a lot of information. Those are also the easiest returns to cheat on.
I have used Turbo Tax for years with no problems. In fact, when I ran into a few questions and an incorrect form, their online chat and live calls easily solved the issues. These days you can avoid a lot of data entry because they will download 1099s W-2s directly from many banks and financial institutions.
I don’t think the IRS should be using its resources for tax preparation. AARP provides free services for older Americans in many areas.
The focus should be on simplifying the IRC and the filing process especially for those with basic returns.
I use TurboTax too. I usually get the ‘premier’ version.
After I load it on my PC I give the cd to one of my children. The same license key can work on up to five installs.
Then I let the kids argue amongst themselves who gets to use the 1 free State return e-file.
Winston, I do something similar. I file my taxes, help my daughter with hers and file, then two of my sons file with my software as well. I get the free state return, they pay for theirs. Yes, TurboTax can bring a family together. 🙂
I believe with the Deluxe+State version you can calculate one state return free, but e-filing it costs $20-25.
Thanks for your comments, Dick. I think many people would agree with your thinking.
Have used tax software since the late 1990’s – first TurboTax and then H&R Block because it cost less – with no regrets. Not to proud to admit manual preparation became beyond me. As a side note, I’ve subscribed to the Humble Dollar newsletter for at least a few years and this is the first column I recall authored by a female. Bravo!
The one time I paid H&R Block they paid a mistake on the schedule E, which I reported to their customer support. Their response was “we are not liable for any returns that are filed with the override button checked” and she refused to tell anyone about the error, assuming that I was incorrect. I was gratified when a news article came out months later saying that H&R Block had to re-file a lot of returns and provide refunds to their customers due to an error on the Schedule E. They didn’t specify what the error was, but I assume it was the one I reported to them… The error had to do with active vs passive ownership, so nothing that had changed due to a tax law change that year.
I don’t understand all the downvotes. The contributors are overwhelmingly male, although there are female writers. Thank you for advocating for more female points of view.
Ha, ha. All the down votes are from those who don’t like the truth.
klaatu…I always had a interest in investing and, as they say, everything has a tax angle. Most investment income is taxable and tax considerations are an integral part of every decision, year round—I was determined to learn as much as I could. I’m no expert but by some miracle I understand the subject and it interests me —although my husband thinks I’m unusual too.
thanks for reading and commenting.
There are a number of talented female writers on the site who regularly contribute. Take a look at https://humbledollar.com/writers/
Yes a total of 7 women and 39 men.
Not a criticism of Jonathan at all. Just a reflection of the lack of inclusivity in the industry.
I’m happy to consider any article submitted. But the reality is, most come from men.
You have missed a lot of columns then. Click on “about” above and then “writers” and you will see a number of women who write regularly.
Dick…in Klaatu’s defense he may have been referring to the subject of the article. Since he reads regularly I’m sure he’s aware of the exceptional women who are HD contributors.
Klaatu could be a she!
Good point, Stacey. You could be right.