The IRS has a big opportunity to fix the way Americans file taxes

“Right now, if you’re an American who wants to file your taxes without paying any additional fees to a private company or preparer, you have three options (besides limited “simple return” promotions by the big companies).

You can role-play as someone living in the 1970s and print out the 1040 tax form, along with any associated schedules or forms for tax credits and deductions for which you may be eligible, and compute it all by hand, meticulously collating physical copies of your W-2 and 1099 income statements and any other documentation you need.

Your second option is only slightly less tedious: You can use Free File Fillable Forms, a free service implemented by Intuit that simply copies the physical IRS tax forms and makes them “fillable” so you can type in the numbers. It’ll even do some basic math for you. But you still have to manually enter everything, you can’t import PDFs of your W-2 or other statements, and it’s easy to get confused about exactly which forms you’re expected or required to fill out. I’m an IRS-certified tax preparer, and I gave up using the website this year out of frustration.

Your final option is only available if you make $72,000 a year or less. In that case, you’re eligible for a free return on private tax software through the IRS Free File program. But careful: You might get a ton of spam from whatever company you choose trying to upsell you and get you to pay for fancier options. One investigation found that 14 million Americans were charged by companies for Free File returns that should have cost nothing.

The IRS also funds community tax organizations that can file returns for low-income people, but I can say from experience as a volunteer tax preparer that these groups are underfunded and overworked.

This is an unacceptable state of affairs. Americans should not have to choose between these obviously inadequate and half-baked free options for tax filing and paying a private company. Paying taxes is a legal requirement, and it should be possible to easily do it for free. And it just isn’t possible right now; it’s no wonder that over 91 percent of individual returns filed in 2019 were filed through a paid preparer or a private online service. The current system almost forces you to pay for the privilege of paying your taxes.”

“For years, the government leaned on those two companies to provide free tax services to Americans in need. But the basic problem with relying on private sector companies that provide paid tax services to provide free ones is that they will always have an incentive to make the free service worse and to make the paid one more attractive. That’s been the story the past couple of decades.”

” The IRS desperately needs to put together an easier-to-use, simpler way for people to file their taxes and access benefits free of charge. Accomplishing that, of course, is easier said than done. The IRS has been underfunded for decades and does not have sufficient in-house technical expertise to build a free file system on its own.”

The IRS has a big opportunity to fix the way Americans file taxes

“The IRS desperately needs to put together an easier-to-use, simpler way for people to file their taxes and access benefits free of charge. Accomplishing that, of course, is easier said than done. The IRS has been underfunded for decades and does not have sufficient in-house technical expertise to build a free file system on its own.”

“The actual work of doing your taxes mostly involves rifling through various IRS forms you get in the mail. There are W-2s listing your wages, 1099s showing miscellaneous income like from one-off gigs, etc. The main advantage of TurboTax is that it can import these forms automatically and spare you this step.
But here’s the thing about the forms: The IRS gets them, too. When Vox Media sent me a W-2 telling me how much it paid me in 2020, it sent an identical one to the IRS. When my bank sent me a 1099 telling my wife and me how much interest we earned on our savings account in 2020, it also sent one to the IRS. If I’m not itemizing deductions (like 70 percent of taxpayers), the IRS has all the information it needs to calculate my taxes, send me a filled-out return, and let me either send it right back to the IRS if I’m comfortable with their version or else do my taxes by hand if I prefer.

This isn’t a purely hypothetical proposal. Countries like Denmark, Sweden, Estonia, Chile, and Spain already offer ”pre-populated returns” to their citizens. California experimented with a version called ReadyReturn before it was shut down under pressure from H&R Block and Intuit.”

“Congress needs to authorize more funding for the IRS.”

How to make the child tax credit more accessible

“The first of the 2021 child tax credits hit parents’ bank accounts in July — but not for everyone. For many of the parents who need it most, accessing the money may be more of a struggle.
That’s because the IRS — an agency that knows little about the lowest-income Americans, who often don’t file taxes — has been tasked with distributing the money, up to $300 per month per child.

On July 15, the day payments first went out, the IRS said it sent $15 billion to 35 million families, 86 percent of which was sent via direct deposit. That suggests that the vast majority of initial recipients were from families who earned income and filed taxes, many of them middle- or lower-middle-income parents whose names, addresses, and bank accounts are on file from tax returns.

More than 10 million children live in poverty, according to 2019 data from the US Census. Of those, the People’s Policy Project estimates that about 7 million live in non-filing households. (Because these families are, by definition, somewhat difficult to track, estimates vary: The Census Bureau says that 36 percent of children in poverty are from families that did not file taxes in 2019, including 55 percent of children in families in deep poverty.)

Most of these families haven’t signed up to get government stimulus checks, either, effectively leaving thousands of dollars from the government on the table over the past year. The IRS gathered information on an additional 720,000 children in non-filing households where the parents registered to receive stimulus payments.

But that still leaves millions of children whose parents are eligible for the child tax credit (CTC) but who are not on track to receive it.”

““The North Star should be making this as automatic as possible so families don’t have to take affirmative steps to get the support they need.””

The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax

“how do megabillionaires pay their megabills while opting for $1 salaries and hanging onto their stock? According to public documents and experts, the answer for some is borrowing money — lots of it.

For regular people, borrowing money is often something done out of necessity, say for a car or a home. But for the ultrawealthy, it can be a way to access billions without producing income, and thus, income tax.

The tax math provides a clear incentive for this. If you own a company and take a huge salary, you’ll pay 37% in income tax on the bulk of it. Sell stock and you’ll pay 20% in capital gains tax — and lose some control over your company. But take out a loan, and these days you’ll pay a single-digit interest rate and no tax; since loans must be paid back, the IRS doesn’t consider them income. Banks typically require collateral, but the wealthy have plenty of that.

The vast majority of the ultrawealthy’s loans do not appear in the tax records obtained by ProPublica since they are generally not disclosed to the IRS. But occasionally, the loans are disclosed in securities filings. In 2014, for example, Oracle revealed that its CEO, Ellison, had a credit line secured by about $10 billion of his shares.

Last year Tesla reported that Musk had pledged some 92 million shares, which were worth about $57.7 billion as of May 29, 2021, as collateral for personal loans.”

“after decades of wealth accumulation, the estate tax is supposed to serve as a backstop, allowing authorities an opportunity to finally take a piece of giant fortunes before they pass to a new generation. But in reality, preparing for death is more like the last stage of tax avoidance for the ultrawealthy.”

“Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code.

Then comes the estate tax, which, at 40%, is among the highest in the federal code. This tax is supposed to give the government one last chance to get a piece of all those unrealized gains and other assets the wealthiest Americans accumulate over their lifetimes.

It’s clear, though, from aggregate IRS data, tax research and what little trickles into the public arena about estate planning of the wealthy that they can readily escape turning over almost half of the value of their estates. Many of the richest create foundations for philanthropic giving, which provide large charitable tax deductions during their lifetimes and bypass the estate tax when they die.

Wealth managers offer clients a range of opaque and complicated trusts that allow the wealthiest Americans to give large sums to their heirs without paying estate taxes. The IRS data obtained by ProPublica gives some insight into the ultrawealthy’s estate planning, showing hundreds of these trusts.

The result is that large fortunes can pass largely intact from one generation to the next. Of the 25 richest people in America today, about a quarter are heirs”

The White House can raise taxes on the wealthy without touching the tax code at all

“President Joe Biden wants to raise taxes on the wealthy to pay for some of his policy proposals. Part of the way he can go about that doesn’t entail touching the tax system at all — instead, he’d just have to put the IRS to work chasing down rich people to make sure they’re paying taxes they already owe.”

“The most recent official tax gap estimate from the IRS, from 2011 to 2013, was that it amounted to $441 billion each year. That’s a big sum already, about 16 percent of total tax liability those years. But there’s reason to believe the gap is much higher — and that wealthy people are often to blame.”

“The IRS’s total budget is down by some 50 percent since 1993 as a share of gross tax collections, and appropriations for the IRS — adjusted for inflation — have fallen by 20 percent since 2010, and after Republicans in Congress sought to curtail its budget. It’s lost thousands of enforcement staff. And its enforcement abilities directly affect revenue, not only by collecting unpaid taxes but also by influencing behavior. If people know that the IRS is going to come after them for skirting taxes, they’re less likely to try it. Rettig told the House Ways and Means Committee at a recent hearing that the number of examining revenue agents, who are tasked with handling complex cases, fell by 35 percent since 2010, and field collection revenue officers, who manage the harder collection cases, fell by 48 percent. The audit rate for millionaires fell from 8.4 percent in 2010 to 2.4 percent in 2019.”

“Biden’s proposal to inject funding into the IRS could go a long way in reviving the agency. Because the IRS’s budget is generally determined year by year, it makes it hard to staff up or invest in technology for the long term. Agents with the experience and know-how to deal with complex audits can take years to train and replace.
“One of the key things in this proposal is not just the money, it’s that it’s a multi-year stream of funding that would allow them to plan it and spend it out over a multi-year period,” Hanlon said.”