The tax code, as most everyone knows and acknowledges, is ridiculously complex and getting more complex all the time.
When will the complexity cause the system to collapse? And what, exactly, will collapse?
I can see things going bad in three different areas:
1. The tax and accounting industry
A few weeks ago, the IRS announced a “simplified” method of calculating the deduction for business use of the home. On a message board for tax pros, I saw some pros saying this was good because now we’ll have to calculate the deduction two different ways to see whether it’s better to take actual expenses or the standard deduction — which means a higher fee for returns claiming the deduction for business use of the home.
Also, many of us have significantly increased our fee for tax returns claiming the earned income credit due to ridiculous new documentation requirements being placed on practitioners for EIC claims.
The normal course of a complex system is that it will get more complex. But how much longer can our industry respond to every increase in complexity with “ooh, we can raise fees”?
The average fee, nationwide, for preparation of a 1040 with itemized deductions is now $246. That seems awfully high of a fee to charge someone with a W-2 who happens to itemize because they own a house.
Maybe I feel that way because fees in Iowa are low — some outfits in Iowa (even some CPA firms!) charge less than $100 for that type of return.
How much higher can fees go before clients revolt? Good lord, I’ve had people complaining this year about my fee going from $125 to $130 for a return with itemized deductions.
As fees go up, more and more people will turn to TurboTax. At some point, won’t profit margins stagnate because fees simply can’t go higher, and clients are leaving?
This may not cause a “collapse” of the accounting industry, but stagnation wouldn’t be good.
Oh, and speaking of TurboTax ….
2. TurboTax and other DIY software
As professional fees go up, more people turn to TurboTax and other DIY software. After all, as I’ve heard asked before — why waste your money on a professional when you can do it yourself in TurboTax much more cheaply?
But the big selling point of TurboTax is not just its price but the fact that it supposedly makes taxes “easy.” Growing complexity means ever-growing screens with ever-more questions.
It’s not that TurboTax’s software won’t be able to handle the calculations correctly. That’s just a matter of getting the software’s coding right.
But how on earth will TurboTax and other DIY providers be able to keep their software user-friendly as the tax code gets more and more complicated?
At what point does the DIY software collapse under the weight of a system that’s too complex to make palatable, thus rendering the DIY software unusable?
3. The tax code itself
What would a collapse of the tax code look like? I don’t know. In my mind, the term “collapse” when applied to the government conjures up images of pitchforks and torches, nuclear holocaust, Mad Max/Hunger Games type of chaos.
But I doubt that’s what will happen when and if the tax code collapses. More likely, it will simply become so cumbersome that enforcement of all the arcane rules is rendered impossible and citizens just start throwing numbers on forms without really knowing what they’re doing.