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Tax Prep Software Must Die

This morning's rant should look familiar to regular readers -- I wrote about the same thing last year, and the year before.

And yet every March and April finds me hunched over the keyboard, a folder of documents to my left and a tax-prep application on the screen, and wondering why we put up with all this garbage. It's not the amount of money I fork over that bothers me; it's the fact that I have no idea how this number gets calculated, that I have to trust a program to do the math for me, and that I can't even get the two dominant programs in the market to come up with the same number.

turbotax.jpg

I don't blame the developers of applications like Intuit's TurboTax and H&R Block's TaxCut for this situation. While I have critiques with the finer points of these programs (especially the Web-based version of TaxCut, as noted in today's column), I feel a great deal of sympathy for the programmers who have to enmesh themselves in the horrifying awfulness of the tax code.

I'd like to be constructive, so here are a few suggestions to improve tax-prep apps within the constraints of the current tax code:

* Be smarter about auto-completing things. I have almost never seen a W-2 that didn't list the same number on the federal and state "wages, tips, other compensation line," and which also didn't repeat the same figure in boxes 2 and 3. So once I type a number into one of those spots, fill it into next one (while highlighting the auto-filled figure as something I should double-check against the W-2).

* In a similar way, why can't typing my employer's federal Employer Identification Number allow the app to look up its name, address and state EIN for me? There must be a database that allows that, right?

taxcut.jpg

* Anytime a tax-prep app shows a number it's computed, I should be able to double-click that number to see what math produced that result. (TurboTax does with its overall number, but you can't then inspect the work behind such constituent factors as "adjustments to income").

As for the tax code itself... here's what I'd recommend if we want to stop wasting our collective ingenuity and initiative on the fundamentally unproductive task of tax compliance:

1. I don't have a problem with a progressive income tax. The marginal value of an extra dollar increases as you have fewer of them in your bank account; it's fair to raise rates for higher incomes. Besides, any chimp can figure out how to look up the balance due in a tax table (PDF).

2. But we should be really hesitant about treating different types of income differently. Every time we add a different rate for a type of investment or occupation -- the 1099-DIV on my desk lists three flavors of capital gains and two kinds of dividends -- we increase the record-keeping and accounting burden for everybody. And by privileging some economic activities over others, we only increase the motivation for unprivileged companies and people to hire their own lobbyists so they, too, can get their own special treatment in the tax code.

3. Likewise, we should reserve tax deductions and credits for the most important social goals. It's one thing to reward donations to charity with a deduction, but I suspect that most of these attempts at social engineering fail in practice, perhaps because people don't know these provisions exist and therefore do what they'll do anyway. There are simpler ways to reward virtue that don't require adding lines to the 1040. Example number one: If we want to motivate people to use less oil, heed my colleague Warren Brown's advice and raise the gas tax already.

If you've read up on behavioral economics, these ideas shouldn't sound strange. This branch of economic theory (one that my colleague Michael Rosenwald explores in his excellent Financial Lobe columns) discards the "rational actor" model taught in freshman-year econ classes to look at what makes distracted, busy, semi-informed and emotional customers act in real life. I find it enormously helpful in explaining why the economy is such a mess.

Apparently, President Obama's advisers buy into behavioral economics too. Many of those advisers themselves say they've been tripped up by the complexity of their own tax returns. And the president has said he wants to rewrite the tax code to make it simpler and fairer.

So I'll ask this directly: Mr. President, won't you please spare me from having to write this tax-code rant again?

By Rob Pegoraro  |  March 12, 2009; 11:32 AM ET
Categories:  Gripes , The business we have chosen  
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Comments

You've just summed up why I work with my accountant on my taxes. The cost is deductible going forward, and there's nothing like actual intelligence (instead of programmed artificial intelligence) to cut through the mess that is our tax system.

Posted by: Chasmosaur1 | March 12, 2009 12:15 PM | Report abuse

As someone who's done their taxes by hand for years, the free IRS online filing system was nice. I did my taxes as usual (and double checked my math), then entered everything online and was reassured that their math and my math matched up.

I also filed my VA taxes online, also free, also the math matched up. I think I'd do this again next year as well.

Posted by: Hemisphire | March 12, 2009 12:49 PM | Report abuse

I just did my fed and st taxes in both TurboTax and TaxAct over the past couple of weeks (first time on the latter). Both came up with the same St refund, but TaxAct produced a +$1400 difference due to the feds. I entered the same info in each (I double checked). Which one do you think I'm going to file?

Posted by: daveb3 | March 12, 2009 1:01 PM | Report abuse

I had the same experience as Hemisphere. I know what numbers to plug in where...easy, breezy. Math was checked. Direct deposit arrived in my account about 10 days after fling. I will do it again next year. This, if course, assumes the leap of faith that there will be income to report!

Posted by: tbva | March 12, 2009 2:16 PM | Report abuse

Whether you are using a Tax Accountant or Tax software, if it (they) doesn't (don't) ask the right question to elicit the proper answer, the whole thing is hosed.

Let's take the example of Mr Daschle (and I have no knowledge of the particulars of his deal): Does Tax Cut ask you "did somone provide you a car and driver that you used for personal reasons?" No, it doesn't. Would your tax accountant? I hope so, but no guarantees. There my be more general questions that might lead either to that answer eventually, but unless the company providing the services issues a tax document (1099?) saying they did, it seems easy to screw it up. So to that degree, I completely agree with Rob's point about this being far more difficult than it needs to be.

Posted by: JkR- | March 12, 2009 3:35 PM | Report abuse

I use Turbotax and yeah some of the calculation are nothing short of magic. But so long as I am not audited, I don't care.

I have to say that Turbotax has been doing what you wanted with the employer EIN for at least 2 years now. However, depending on the payroll service used by your employer, your employer's EIN might not be in the "database".

Posted by: tundey | March 12, 2009 5:48 PM | Report abuse

Why don't you try using a real tax prep program - I have been using HowardSoft tax prep software for ten years. It is an excellent program. Never had a problem. Expensive but a professional package.

Posted by: chazzram | March 13, 2009 9:30 AM | Report abuse

Just to let people know that there are a couple of us out there: I LIKE the tax code the way it is because I it yields a very low tax bill for me (one-income household, own a home, have kids). Talk to me in 20 years when I'm making more money and my kids are gone. (TurboTax online, two evenings of work to do my state and federal returns)

Posted by: joemcg | March 13, 2009 9:38 AM | Report abuse

For years, I have set up my own spread sheet to use the lines on the 1040 that I need to use and prepared my tax return.
Then I fill in the forms by PC.

Each year I have received a letter from the IRS urging me to file electronically via Turbotax or Tax Cut. And each year I write back to the Commissioner that there is no reason that the IRS cannot send out the tax forms on a CD which can be filled in and which does the math - especially calculating tax on the Capital Gains tax computation sheet.

I have never bought nor will I spend money on the tax programs. Most of the work is obviously the assembling of your data, not the filling out of the forms.

The only year that I used Turbotax, sent to me by my son after he was done with it, Turbotax made an error and the IRS sent me a $700 refund (unexplained of course).

Posted by: beagun27 | March 13, 2009 4:56 PM | Report abuse

"Likewise, we should reserve tax deductions and credits for the most important social goals. It's one thing to reward donations to charity with a deduction, but I suspect that most of these attempts at social engineering fail in practice."

With a few well-known exceptions such as Bill Gates, charitable donations by the wealthy and their attendant tax deductions frequently do not serve "important social goals." Instead they have buildings named after them, donate art objects to museums, support orchestras and dance companies, and create endowments at affluent universities.

While these types of endeavors may be worthy of financial support, they are not worthy of being subsidized by the Internal Revenue Code. If someone wants to donate ten million dollars for a new wing for the business school, fine. But don't expect the rest of us to make it up to pay for immunizations for poor children. The true measure of "charity" is when nothing is expected in return.

Posted by: 54Stratocaster | March 13, 2009 8:54 PM | Report abuse

The w-2 amts can be different. I comply with nanny tax rules, and pay the nanny's share of ss/medicare. this confused the nanny's tax preparer, whose software refused to allow different income numbers in those boxes. Also, it's hard to tell who is tripped up by the tax code, and who decides to cut corners. judging by the reward systems and tax regimes in place at wall street, the urge to cut corners is probably high. please clean up the code. who did it last, Reagan?

Posted by: MeatCake | March 16, 2009 2:56 PM | Report abuse

The real underlying problem here is the tax code itself. It ought to be seen as a way to fairly fund the Federal Government and not be be used to manipulate behaviour. But the politicians have to keep coming up with "breaks" so they can get re-elected. This needs to stop. A FLAT TAX, with only one or two brackets could be implemented. People could do their taxes in 5 minutes and be done with it. Think of how many man-hours are wasted with the current stupid system. Heck, even the IRS doesn't understand the tax code, so how are we or the programmers supposed to do so?

Posted by: moonwatcher2001 | March 17, 2009 10:13 AM | Report abuse

Because the tax code is so complex, at least in my case, I use a team of a tax accountant, a property manager (my income is passive rental money), and a top-drawer attorney -- for less than you might think. And I've *never* had a problem.

When I was much younger, yes, I did it by hand myself, as in those days things were simple. A few numbers, date and sign, stick it in the mail, and I was done.

But I read recently that the U.S. Tax Code has bloated out to over 80,000 pages. Yes, 8 followed by 4 zeros. That's absolutely ludicrous, particularly since even well-trained, experienced IRS agents regularly end up just as befuddled as the taxpayers.

I don't know what the fairest way would be, in terms of just the income tax, as every suggestions I've read seems to have pro's and con's. I guess if I got to vote on it I'd opt for a lowest band for the poor who had no tax liability but with a tops high enough they could actually survive, then maybe 3-5 higher bands with increasingly higher tax as you moved up a level.

As for capital gains, dividends, etc. etc. etc. -- I *really* don't know!

Posted by: MekhongKurt1 | March 18, 2009 6:13 AM | Report abuse

The comments to this entry are closed.

 
 
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