If you're at all familiar with Elizabeth Warren, you know she's a senator with a keen interest in protecting consumers financially. She was the driving force behind the Consumer Financial Protection Bureau, a relatively new government agency that "works to make sure that consumers have the information they need to make the best financial decisions for themselves and their families." One of Warren's latest targets is our tax system, and if she has her way, many of us may be able to prepare and file our taxes ourselves, in just five minutes per year.
Before I explain any further, let's set the stage a bit. In case you haven't noticed (and I'm sure that's not the case), our current tax system is very complex -- and, many think, unnecessarily so. The National Taxpayer Advocate, in her 2012 annual report to Congress, noted that the tax code is close to four million words long and that individuals and businesses spend more than 6 billion hours each year on tax preparation. About 59% of taxpayers end up paying professionals to prepare their tax returns for them, with another 30% using tax-prep software that is also typically not free. As of 2007, the median-income taxpayer spent $258 on tax preparation, a not-insignificant sum.
There's a better way
You might think the situation is mostly just inevitable, and perhaps you can't imagine anything better. Well, in many other countries, tax preparation is far simpler. The Atlantic magazine reviewed this issue in March, noting:
Eight OECD countries, including Finland and Norway, fully prepare returns for the majority of its taxpayers. In Estonia, it famously takes the average person five minutes to file taxes. In Sweden, the vast majority of taxpayers don't do battle with tax documents and fine-print questions about itemized deductions. They just get a document from the government with all the relevant information already filled out. Some even get a text message with their prepared tax information, and if they respond "yes," their taxes are done.
Simplification for the U.S.
Senator Warren has introduced the Tax Simplification Act of 2016 bill, which would have the IRS automatically fill out tax forms for millions of taxpayers using the income reports they routinely receive from employers and financial institutions. Those who approve the pre-filled-out returns as correct could just indicate that and be done with it, paying what they owe or soon receiving their refund. The bill would also create a free online tax preparation and filing service for taxpayers (not unlike TurboTax, TaxAct, etc.) and would offer taxpayers access to information about their tax returns.
In arguing for this simplification of the tax-prep process, Warren noted, "This year, taxpayers will spend an average of 13 hours preparing and filing their returns, and will pay $200 for tax preparation services -- a cost equal to almost 10% of the average federal tax refund," Warren said in a statement. That's certainly eye-opening, that many of us are forking over 10% or more of our refunds just for tax preparation services.
Limits and opposition
The proposal is exciting to many and would save millions of taxpayers a lot of time and money. It won't quite as useful to some, though. If you have capital gains to report, such as from stocks you sold, the proposed pre-filled tax return won't work. It's also not likely to work for the many people who itemize their taxes, claiming deductions for charitable contributions, medical expenses, and more. Still, many Americans have rather simple tax situations, collecting income just from a salary and not having deductions greater than the standard deduction. Warren has estimated that between 8 million and 60 million households may benefit greatly from this proposal, not having to prepare and file returns.
The proposal might seem like a terrific, slam-dunk idea to you, but some entities see it differently. Companies that specialize in tax-preparation, for example, such as H&R Block and Intuit (which sells its TurboTax software), are passionately opposed to any tax simplification. After all, the more complex our tax code gets, the better it is for their business. A report prepared by Warren's staff notes that, "as of 2016, just three large tax preparation companies, Intuit, H&R Block, and Jackson Hewitt, have spent nearly $41 million since 1998 on federal lobbying [against tax simplification and return-free filing]."
While some on the right who don't love Elizabeth Warren might also be skeptical about the proposal, they should know it's not exactly a new idea; even President Reagan supported the idea, supporting return-free filing in a 1985 speech on taxes.
If you like the Tax Simplification Act of 2016 bill, consider contacting your representatives in Congress and letting them know. You might want to follow the bill's progress, too -- especially if you're an investor in any tax-preparation companies.