Death and Taxes

February 14, 2013

Death and Taxes

By: John Kafader 

            Only two things in life are certain as someone once said: Death and Taxes.  In addition to being certain, they are also one of the most confusing things the average American tackles on a yearly basis.  While doing my taxes recently, my mind began to wander.  Who can honestly say that they fully comprehend the highly legal and mind-numbingly wordy manner in which these tax documents are worded? 

            I don’t proclaim to be the smartest man on earth, I don’t even aspire to be in the running, but I have a college education.  I am a writer.  I also read voraciously.  Yet, when I go to do my taxes, I can’t help but get the feeling I am in danger of accidentally committing tax fraud. 

            About one third of the language would not make any sense to your average American (the people who actually do their own taxes), and after an hour or three you find yourself caring less and less, merely trying to get to the end and get the thing filed.

            Asking a bunch of co-workers a bunch of questions about what certain tax lingo meant, no one was really in any hurry to answer my questions.  For instance, a gold star goes to whoever can tell me accurately and confidently the answer to any of the following:

-  What is an ordinary dividend?

 -  Is an ITIN (Individual Taxpayer Identification Number) just an over-the-top word way of                        saying SSN (Social Security Number)?

-  Would you bet your life (or even just half of your little toe) that your tax return was 100% accurate?

           

            The tax code is out of hand.  Apparently even the professionals can’t get it right.  In 2006, the Government Accountability Office secretly submitted 19 tax returns to commercial tax preparers. All the completed returns had errors, the GAO found, and several overlooked common deductions.  With this kind of track record, anyone doing their taxes is most likely making errors; errors that either cost them money, or errors that can count as tax fraud.

           Utilizing such overly wordy language and such technical speech the average American needs to acquire help from either a tax professional or tax software to confidently complete their tax preparation.  "The tax laws have changed so quickly and become so confusing that it's very difficult for the average person to do their own taxes," says Cynthia Jeanguenat, an enrolled agent in Virginia Beach.

            To have an accountant do your taxes or not?  Millions of Americans either pay their accountant, a lawyer, or visit a storefront tax preparation business such as: H&R Block or Jackson Hewitt.  This is the most thorough way of ensuring that you get the beefiest return or have to pay the least amount of taxes.  These people need to stay current and read up on the overly complicated tax code, although this does not guarantee tax perfection.  Not to mention, tax professionals can come with a hefty price tag.

            Tax preparation done by a professional can cost an average of $130 for a federal and state return with no itemized deductions.  A federal and state return with itemized deductions costs an average of $229, according to the National Society of Accountants.  It can become a gamble whether you think you will find everything the accountant would have.  I always tell myself the accountant may have found me another $300 or so, but I just saved that doing my own tax prep. 

            Software tax prep usually costs significantly less.  Tax software costs run somewhere between free and $30, a fraction of the cost of professional tax preparation.  Although, with the software the only one to decipher the complexity of the tax code language is yourself, and you will second guess yourself.

            Tax preparation is soul-crushingly tedious process, especially when done in your free time.  The IRS estimated that the average taxpayer needed 22 hours to do his or her 2011 tax return.   It takes longer if you have a more complicated return, around 32 hours.  It is even complicated to tell if you have a more complicated return.  Unless you spend even more time looking into it, how would you know whether it would be beneficial for you to itemize your deductions?  I’m sure I am not the only one doing their taxes for the first time that spent hours sifting through page after page trying to find something to itemize. 

            How many people are actually doing their own taxes?  Well, quite a few from what I understand.  While 64% of Americans who filed their taxes electronically had them done by a tax professional, many Americans do their own taxes through a computer program or website.  This is the way I do my tax return.  Taxact.com, HRblock.com, Turbotax and TaxCut are all services and computer programs specializing in tax preparation. 

            DIY tax programs for the computer are really becoming more of the norm recently.  According to a USA Today article, H&R Block and Jackson Hewitt, the nation’s largest tax preparation firms, reported sharp drops in business last year, while Turbotax, the largest provider of tax software saw a 10% rise in sales during the same time period.  They are widely used, although without an actual accountant, there will be numerous situations in which the majority of Americans will either have to search for further meaning or interpretation of what they see on the page.  It can quickly become overwhelming. 

            Why is tax language so confusing?  I have a theory.  Tax language is written by people who went to school to understand what this language meant.  I feel that a certain amount of this language is based on job security.  If this language were to be stated in a clear and concise manner without confusing terminology, these guys would be out of a job. 

            Also, confusing tax language leaves room for loopholes.  Nobody wants to get in trouble for tax fraud; it carries hefty penalties.   Confusing language is meant to scare people out of attempting to claim money they are owed.  I am sure you have all done it. You are on section 22 of your 1040 and you don’t know whether your perfunctory liturgical stipend (okay so that might not actually exist, it’s a scenario for Christ sake) is or isn’t tax deductible.  Scenarios of audit letters burn through your subsconscious.  After twenty moments of reading the help section on Tax Act, you have just been frightened out of it; you don’t claim it. 

            In the United Kingdom taxes are done quite differently.  I read in a USA Today article that:

“Taxpayers receive an annual tax statement, based on information the government has about their wages and other sources of income. Those who agree with the information simply sign the form and send it back. President Obama raised the idea of giving taxpayers a "pre-filled return" during the 2008 campaign.

            So, I think it is fair to say that taxes are one of several aspects of our system that are working on a lean mixture of common sense.  While other models may exist, I am sure they have the shortcomings as well.  However, in my research I found a couple of safeguards I would like to share with you:

1.  Jeff Schnepper, author of How to Pay Zero Taxes suggests in his MSN Money article: “If you choose to do your own taxes, consult with a good tax professional at least once every three to five years - - just to find out if your missing anything.”  Many tax professionals take a look at your previous two years of tax filing, for things you have missed.  H&R Block actually states this in their commercials.

2.  Software can come in handy, it is cheap (relatively) and guides you through the process by asking questions and gives descriptions of where numbers can be found on your W2.  You will still have questions though, unless you are smarter than I am, or perhaps you just have an easier tax return.

3.  Suck it up and pay someone.  If you own a business or rental property, usually it might be a good idea to have someone do your tax preparation.  There are many facets to the taxes associated with business and property and they are ever- changing.  At least talk to someone.