When Will Tax Complexity Cause a Collapse?

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?

Right?

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.

I’m not asking the question rhetorically; I really am wondering about this, and I’m curious what tax pros and average taxpayers think about my latest long missive.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”

8 Responses to “When Will Tax Complexity Cause a Collapse?”

  1. Robert D Flach February 20, 2013 at 5:52 am #

    Rather than raising fees on new complexities I have often chosen not to deal with them.

    I remember sitting in tax classes during the last ten years listening to detailed information on new complicated tax changes and saying to myself, “It is just too much – I simply won’t accept a client who has this issue”.

    I have decided not to do any returns with EIC due to the ridiculous new due diligence requirements you have mentioned – but I actually did do one for a client with no children (less nonsense involved).

    Now that I no longer accept new clients it is easier. And if an existing client has such an issue I can always choose to “sub-contract” that particular issue or form to a colleague with more experience and knowledge in the issue.

    As I have often written before, most recently in http://www.accountingtoday.com/news/We-Need-True-Tax-Reform-65721-1.html?taxpro, I would certainly welcome a much simpler system –

    “I believe that a much simpler tax system would not hurt my business, or that of most tax preparers, at all. I sincerely believe that if I did nothing but 1040As all day during the tax season, I would make more money, experience less agita, and substantially reduce the number of extensions.”

    The IRS does not need to regulate tax return preparers – it needs to regulate the idiots in Congress!

    TWTP

    • Jason Dinesen February 20, 2013 at 6:10 am #

      I like the line about the IRS needing to regulate Congress! I also agree about not fearing tax simplification. In fact, that topic is on my list of things to blog about this off-season. No matter how “simplified” things become, there’s always going to be some sort of tax system, which means there’s always going to be an IRS (regardless of the rhetoric about “eliminating the IRS”).

      The existence of the IRS = disputes between taxpayers and the IRS.

      Disputes between taxpayers and the IRS = work for an Enrolled Agent!

  2. Russ Fox February 20, 2013 at 8:27 am #

    I’d love a simple, straightforward tax system; a flat tax would be ideal imho. Sure, I’d be doing less tax preparation work but there will always be those disputes, ‘taxpayers’ who don’t pay, and corporate work.

    In any case, I see no chance of significant tax reform passing in the current Administration so this is all a pipe dream.

    • Anthony February 20, 2013 at 10:52 am #

      How much per hour are these message board participants going to charge for doing calculations? How much is a client going to be willing to pay?

      Adding more mindless busywork to my job doesn’t increase my hourly rate, it lowers it. And once you’ve got a few years under your belt, hourly rate is the only thing that really matters, as there are plenty of clients to fill your working hours during the tax season.

      That said, I don’t think this new method of business use of home expenses falls under that category. It’s optional. Clients can choose to do things the new way, and not have to burden the clients with figuring out utilities and repairs and maintenance and insurance, and not have to consult with them about unrecaptured section 1250 gain and the effect of home office expenses on the exclusion from gain on the sale of a primary residence. This greatly decreases complexity. Or they can choose to also do things the old way, which might get them a bigger refund now, but also might give them less social security benefits in the future, and/or more taxes when they sell the property.

      If they choose the old way, there’s really not any additional complexity. The only significant additional complexity will come from consulting with regard to tax planning issues. But that’s optional.

  3. Anthony February 20, 2013 at 11:23 am #

    With this talk of having to figure out everything two ways with regard to home office expenses, I wonder, what does everyone else do with regard to standard vs. actual auto expenses? What about safe harbor vs. actual sales tax expenses vs. the deduction for income taxes?

    Personally I generally start with the simpler calculation, and then mention that there is another option which they can choose to use instead, and ask if they want to do so. I’m assuming that the home office deduction is going to be pretty much the same thing. Show them the safe harbor method, which is really easy to calculate, and ask if they’d prefer to calculate things using actual expenses.

    I really don’t see how this is going to be added work, especially once I get a feel for which is likely to be better, so I can discourage people from unnecessarily calculating actual expenses by telling them I doubt it’ll help and that I’ll charge for the work even if we wind up not using it. Overall, on average, things are going to be simpler, which means I’ll be able to do more returns in a season, which means I’ll make up for lower average fees with higher volume.

    • Jason Dinesen February 20, 2013 at 4:12 pm #

      I usually do the same – start with the simpler calculation. And I can usually eyeball it. The vast majority of people I’ve dealt with obviously benefit from taking the standard mileage rate rather than actual expenses.

      As for the “new” home office calculation, I’ll probably just eyeball it, or do a quick back-of-the-napkin calculation to compare actual vs. standard. It will also depend on the client — some provide meticulous spreadsheets of everything that goes into the calculation. With a client like that, it adds almost no time to do a quick comparison of actual vs. standard deduction. For a disorganized client, or one who’s never going to be able to pull together things like their utility bills, I’ll just take the standard deduction.

      At any rate, I don’t plan to raise my rates for Form 8829.

  4. Dave Fazio February 21, 2013 at 10:17 am #

    I too have had to raise rates on Schedule EIC clients and now that I have already set them for 2012 returns I’ve already determined that it wasn’t enough and I’m planning on raising them another $25 for next year.

    I will be mailing a notice to EITC clients in January next year notifying them of the rate increase and the fact that the IRS now expects me to be not only their tax guy but their social worker when it comes to verifying residency. I’ll also include a list of the types of documents I’ll need to review and scan to the client file.

    I don’t see the fee as being an issue. The clients have either been to HRB themselves in prior years or know from friends and family that HRB in MA charges at least $250 to do a 1040A/EIC/8812 return plus a MA state return. If they balk, they can either TurboTax it themselves or look elsewhere. A EIC return now takes longer to do than a long form with a simple Schedule A and the fee needs to reflect that.

    I’m fed up with social worker aspect of tax preparation. These refundable credits should be off the return and handed out as monthly welfare payments anyway. It makes ZERO sense to reward low-income, hard-working taxpayers with a $6,000+ bonus in February when they are struggling the other 11 months out of the year. Distribute it as rent vouchers, daycare vouchers, food stamps, EBT cards or some other governmental assistance program but for God’s sake, keep it off the 1040!

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