Tax filing: Is there a better way to do it here in the United States?

untitledTax filing day has come and gone, and for millions of Americans, it’s another reminder of how complicated and convoluted our current tax collection system is.

For some of us, it means setting aside a couple evenings or an entire weekend to collect receipts and other relevant documentation, work through the filing documents and prepare tax information — most of which the federal government already possesses.

For many others, trepidation — or just the sheer irritation of preparing their tax returns — means paying another person or a tax preparation service to do it for them.

The amount of hours and dollars spent on tax preparation is rather astounding; according to a White House estimate published as far back as 2010, collectively it amounts to over 7.5 billion hours and ~$140 billion each year.

Thus, the current lay of the land should make considering new alternatives just the thing to do.

Along those lines, in a recent article in The Atlantic, senior economics editor Derek Thompson posited a “third way”:  Why not receive a document from the government with the relevant information already filled in, and all the taxpayer needs to do is confirm the documentation?

It seems like a cross between Pollyanna and a pipe dream … until one begins to realize how neatly this approach aligns with the financial lives many people lead.

According to the Atlantic article, about half of American taxpayers earn all of their earned income from a single employer’s wages along with interest income from just one financial institution.  This is information the government already collects, which would make it possible for the IRS to send nearly completed tax forms to these individuals.

Some Scandinavian and Baltic countries have been doing this for years.

In fact, a full decade ago economist Austan Goolsbee proposed this very thing for the USA.  In a paper published by the Brookings Institution, Goolsbee advocated adoption of a “simple return” that would involve sending out pre-filled documents to those taxpayers who have the most straightforward taxes.

Those who qualify would include approximately 9 million single, lower income taxpayers who work for a living and don’t itemize their deductions.

An additional 17 million taxpayers have returns that are nearly as simple — including married couples who don’t itemize deductions.

Alas, as with any problem, there is a solution that’s “simple, elegant … and wrong.” Barriers preventing the adoption of a new, streamlined tax filing process include three big ones:

  • The current federal income tax system is not just complex, but also riddled with special interest protections. While in theory, a powerful argument for simplification falls on receptive ears, ultimately it fails when people begin to realize how the reform will reduce their own personal tax benefits. Too often, it’s “Tax simplification for three but not for me.”

 

  • The cost to overhaul the tax collection system isn’t chicken feed — and as we all know the IRS isn’t exactly swimming in excess funds after having raised the ire of Congress through its targeting of not-for-profit entities (not to mention the not-so-trivial cost of implementing Obamacare compliance enforcement).

 

  • Resistance is also coming from two other quarters. Tax preparation services are fundamentally opposed to simplification of the process because their very raison d’être depends on the continuation of a complex system that most people cannot or will not deal with on their own.

[On this last point, unlikely allies of the tax preparation services are political conservatives who may hate the current tax code, but who are suspicious of any remedies that might make tax collection become any “easier” for the government.]

Still … it would seem that any serious effort at rethinking the current tax filing system should be given all due consideration, as I have yet to meet anyone who is satisfied with the way things are today.

Where do you come down on the issue? Please share your observations with other readers here.

Have we become too complacent about cyber-security threats?

cyber warfareThe scandal involving the security risk to U.S. State Department e-mails is just the latest in a long list of news items that are bringing the potential dangers of cyber-hacking into focus.

But of course, we’ve seen it before — and it involves far more than just “potential” risk.  From Target, Best Buy and other retailers to Ashley Madison customer profiles, IRS taxpayer information and the U.S. government’s personnel records, the drumbeat of cyber-security threats that’s turned out to be all-too-real is persistent and ongoing.

In the realm of marketing and public relations, recent breaches of PR Newswire and Business Wire data gave hackers access to pre-release earnings and financial reports that have been used to enrich nefarious insider traders around the world to the tune of $100 million or more in ill-gotten gains.

These and other events are occurring so regularly, it seems that people have become numb to them.  Every time one of these news items breaks, Instead of sparking outrage, it’s a yawner.

But Jane LeClair, COO of the National Cybersecurity Institute at Excelsior College, is pleading for an organized effort to thwart the continuing efforts — one of which could end up being the dreaded “Cyber Pearl Harbor” that she and other experts have warned us about for years.

“We certainly can’t go on this way — waiting for the next biggest shoe to drop when hundreds of millions — perhaps billions — will be looted from institutions … It’s time we stopped making individual efforts to build cyber defenses and started making a collective effort to defeat … the bad actors that have kept us at their mercy,” LeClair contends.

I think that’s easier said than done.

Just considering what happened with the newswire services is enough to raise a whole bevy of questions:

  • Financial reports awaiting public release were stored on the newswires’ servers … but what precautions were taken to protect the data?
  • How well was the data encrypted?
  • What was the firewall protection? Software protection?
  • What sort of intruder detection software was installed?
  • Who at the newswire services had access to the data?
  • Were the principles of “least privilege access” utilized?
  • How robust were the password provisions?

In the case of the newswire services, the bottom-line explanation appears to be that human error caused the breaches to happen.  The attackers used social engineering techniques to “bluff” their way into the systems.

Mining innocuous data from social media sites enabled the attackers to leverage their way into the system … and then use brute force software to figure out passwords.

Once armed with the passwords, it was then easy to navigate the servers, investigating e-mails and collecting the relevant data. The resulting insider trading transactions, made before the financial news hit the streets, vacuumed up millions of dollars for the perpetrators.

Now the newswire services are stuck with the unenviable task of attempting to “reverse engineer” what was done — to figure out exactly how the systems were infiltrated, what data was taken, and whether malicious computer code was embedded to facilitate future breaches.

Of course, those actions seem a bit like closing the barn door after the cows have left.

I, for one, don’t have solutions to the hacking problem. We can only have faith in the experts inside and outside the government for determining those answers and acting on them.

But considering what’s transpired in the past few months and years, that isn’t a particularly reassuring thought.

Would anyone else care to weigh in on this topic and on effective approaches to face it head-on?

Now that April 15th is behind us …

While we’re all catching our collective breath after filing our 2008 federal and state tax returns … it’s a good time to consider the most recent findings on Americans’ tax preparation behaviors.

You might expect that a significant portion of tax filers are now using “cheap ‘n easy” computer software programs like TurboTax to complete and file their tax forms.

Well … not so fast. A just-released survey conducted by Mediamark Research & Intelligence finds that only about 20% of U.S. tax filers used software programs. Another ~13% prepared their own returns the traditional way — by hand.

But fully half of respondents relied on outside professional help from a CPA, tax preparer or national chain resource like H&R Block — despite the fact that such services cost much, much more.

Why would half of all adults who file personal federal taxes feel the need to pay a lot more for professional assistance rather than take advantage of affordable software programs? There are a number of reasons: the complexity of the federal tax code … intimidating tax forms and instructions … concern about the safety and security of computerized software programs and electronic filing … and, not least, fear of retribution from the IRS for making an error.

The fact that many of the tax returns completed by professional preparers still contain errors doesn’t seem to make much difference. Many taxpayers would rather shift the responsibility of “filling out and filing” to somebody — anybody — else.