For those who have ever spent a late night poring over figures; for you who triple-check your math; for anyone who ever broke a sweat during an audit; for each one of us who wonders if the price we pay our tax service is just wasted money; here’s the reality check you’ve been waiting for.

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           I honestly don’t think that we really object to paying our taxes.  I believe that most of us understand the reality of the need for our government to have operating revenue so that it can do its job.  I don’t even think that for many of us, the amount that we pay is the basic problem.  We often talk about the problems we have with where our money goes and how it is spent by our government, as well as the hassle of having to cope with the many different types of taxes which come at us from all directions.  But I think that there is something deeper that causes us the great stress we feel each year at tax time which we don’t seem to have a way to express.

           Various proposals are currently being bandied about that seek to invoke tax reform—primary among them are the national sales tax, the similar “value-added” tax, or a more fully developed “fair tax” idea.  Yet we fear that the adoption of such schemes would be an addition to, rather than a replacement for, the current income tax system.  Most of the states utilize a combination system of both an income tax and a sales tax, so it is often rightly inferred that the federal government could easily do the same, but in a much larger and more burdensome way.

           It is difficult to trust a government that doesn’t trust its citizens.  Yes—many people do cheat on their income taxes; that’s a given.  But when the general attitude that we feel emanating from our leaders is the overbearing presence of the possibility that we could be severely penalized for the slightest problem, it is then the time to reclaim the constitutional principle of a government for, by and of the people.

The underlying second burden

           The income tax is unique in that it is the only tax system in America in which the burden lies upon us not only to pay up, but to compute how much we owe.  All other fines, fees, surcharges, or percentage-based taxes are either flatly charged or somehow computed for us; we are told how much we owe.  But with income taxes, we tell the government all of the figures, variables, categories, and mathematical reckonings and then must arrive at an accurate assessment of our own bottom line.  This is the second burden that we bear.

           Further complicating this process is the highly problematic and overwhelmingly confusing mountain of laws, rules, and regulations which we must take into account in the process.  Ineluctably, most of the people who created these statutes do not prepare their own tax returns, but hire accountants or other professionals to do that for them—which would then leave us to wonder if they even understand their own laws.  There are also several legendary accounts which tell the tale of different IRS representatives who were asked the same question about a hypothetical tax situation and provided vastly different answers—which can also lead us to the same conclusion about officials not understanding the laws they were hired to enforce.

           So every year, when we feel April 15th fast approaching, many brave souls assume the responsibility of calculating their income taxes.  Even for those of us who consider the math to be the easy part, we still wrestle with the proper use of the forms, the correct interpretation of the language used in the preparation instructions, and the insane worry that we may have forgotten something important.  After all, it is all too easy to see our big, impersonal Uncle Sam imposing outrageous fines and penalties for the most menial misunderstanding or for an innocent yet careless omission.  So if we try to pay our taxes and make a mistake, there will be a situation in which we have to pay not only what we owe, but all the extra burdens as well; in other words, we pay, AND we might have to pay to pay.

           Folks with little income generally don’t have to worry about all this; they can use 1040-EZ or maybe 1040-A to take care of it.  But for those of us who collect interest or dividends of some kind, or who have invested and are collecting capital gains, or if we are doing anything at all that makes our money work for us and grow into some sort of nest egg, we soon discover that we may have opened for ourselves a Pandora’s box of laws and regulations.  Because we have done something smart with our savings, we just might find ourselves facing an overbearing load of official scrutiny.

           It is this very situation that has spawned a number of tax services, tax resolution lawyers, tax accountants, or other specialists who make a living out of making sense of this morass.  And because these services “guarantee” their work, they usually offer to go with you to an audit or to assist in resolving any problem that may arise, so that you (and they) will be secure from harm by the investigation (in other words, have your backsides and theirs covered).  But this also comes at a price, so we find that again, we have to pay to pay.

           For those of us who like doing things online, there are several brands of software available—for a price.  Of course, with the changes that happen to the tax code every year, upgrades also have to be purchased.  So even for this, we have to pay to pay.

           Of course, we could always learn the laws for ourselves.  And, because they change every year, we can take the supplemental courses and refresher courses so that we can keep up.  But those classes cost money, too; so we still have to pay to pay.

A common fallacy

           Some counter these arguments with a misunderstanding that goes something like: “if you pay someone else to do your taxes, you get that money back the following year.”  This is simply not true, and is surely the false idea of many who do not calculate their own taxes and therefore have little clue as to what really happens.

           What really happens is this:  you are permitted to deduct the expense of tax preparation as part of your itemized deductions.  So far, we see that it only applies to those who itemize rather than take a standard deduction, which in many cases, once they find that the standard deduction is of greater advantage, will opt for that rather than itemizing.  For those who remain with their schedule A, the figure goes in as part of the mix of deductions which eventually is subtracted from the adjusted gross income (or AGI) figure.  This reduces the amount of money that you are taxed on.  Then, once the taxable income is figured, it is a little bit lower than it would have been without reporting the tax preparer’s fee.  Then, your bracket becomes the deciding factor: if you are in the 15% bracket, you get back 15% of what you paid the preparer; if your bracket is 25%, you get back 25% of the preparer’s fee.  So we see that you do not get back the full amount, but only the percentage of that amount that is your bracket percentage.

           So let’s plug in some figures and see what that means in the real world.  If you pay a tax service $100.00 (admittedly this is merely a round number for the sake of example), you deduct that figure from your AGI, and end up with $100 less in taxable income.  So if you are in the 25% bracket, you will pay $25 less in taxes and LOSE the other $75; if you are in the 15% bracket, you pay $15 less and LOSE the other $85.  Obviously, we don’t get it all back.  We lose the amount of money which is the difference between the amount we paid the preparer and the percentage of that amount that is equal to our tax bracket.

           Objectively, it makes no sense at all to pay the $100 only to get back $15 or $25 or whatever your bracket and the resulting figure would be.  That’s just bad business.  But still, it is a service that is seen by many as indispensable and therefore, worthwhile.

           Now for a related sidetrack:  this same fallacy is brought up in many other areas, most notably mortgage interest.  I have been told many times that it’s not necessarily a bad thing to pay the interest on a mortgage, because “you’ll get it all back at tax time.”  Wrong again.  The same idea as above applies here with the tax bracket percentage.  Suppose we pay $8000 in mortgage interest (again, not an unreasonable figure, and a good one for our purposes).  If we end up having a taxable income in the 15% bracket, the amount that our tax burden is lowered is $1200.  Don’t be fooled; YOU STILL LOSE $6800.  This should make us think hard about our financial situation before we throw ourselves at the feet of the American dream.

Back to our subject

           As far as our income taxes go, none of the current options looks particularly good.  We can pay our professional preparers to tell us what to pay the government (meaning two payments), or we can do our own work and risk the consequences of an audit, penalties if we mess up, etc., or we can go the easy route, which is only possible if we have but a little to work with.  If we keep the present income tax system in place, we must find a better way to execute it.

           Normally I would be against governmental intrusion into the private sector, but since this is an area that directly affects an already existing intrusion, it becomes a matter of expedience.  The very least that the government can do is tell us straight up how much we owe.  They should do this for us without charge—at their own expense.  The results must be final, and not subject to audit at a later date.  If there is a mistake made by the preparing agent, the taxpayer must not be held responsible; the IRS may not add charges later unless they can prove that the taxpayer somehow withheld necessary information.  The deadline of April 15 will no longer apply—it will then be on whatever day and time your assessment appointment with your government-supplied preparer is arranged.  And the IRS must not hold the taxpayer responsible for proof in future years that the matter was settled.  Our government owes us at least this much.

           Federalizing tax preparation will draw protest from many groups.  Many of us taxpayers will feel that government agents cannot be trusted to provide fair service for them, citing ignored chances for deductions and a lack of attention by the agents to possible details in their favor.  It would naturally fall to the taxpayer to provide any necessary documentation for such deductions.  It would also be the responsibility of the preparer to see to it that all the bases are covered.  It may even be possible someday in our technological age that the need for this visit can be dropped and the answer can simply be provided to us.  After all, the IRS computers supposedly already have all the relevant figures in their possession somewhere; the right software can just simply take care of it automatically.

           Another group that will no doubt protest will be the tax preparation professionals who will find themselves out of a job—at least until the government realizes that they will need additional agents and starts hiring many of them as supplemental IRS preparers until they can effect the full computerization of the system.  It would then become a year-round job—no longer will it have to be a merely seasonal income for them.