PHILADELPHIA (KYW Newsradio) — The process of filing your taxes in the U.S. can feel complicated and impenetrable, especially if you have several forms to worry about.
Is there a better way to do it? With this year’s April 18 deadline almost here, we tried to find out.
Robert Sagedy, Jr., a CPA and lecturer at Rowan University, explains why taxes are so convoluted, how to make them better, and who deserves the most blame for our dense system.
This interview with KYW Newsradio’s Matt Leon has been edited for reading ease and length. Listen to the full episode of KYW Newsradio In Depth in the player below:
Q: It feels like all the pressure and responsibility is on the individual as opposed to the government. The government already knows what you made and what you owe. They get a copy of your W-2 as well. So, why is it all on me to get it right?
A: We’ve consistently had what’s called a voluntary tax system. As strange as that may sound, it’s really up to each individual to file their own information. So the question or comment that I get a lot when I’m preparing returns is, “I had this type of income, but I already had the tax withheld out of it.” And my response to that always is, “Well, you had taxes withheld out of it, you didn’t necessarily have all of the taxes that you need to pay withheld out of it.” Because each individual is going to determine, based on their own circumstances, how they’re going to file their return.
For example, what the government does not know is that I got married last year, or that I had a child last year or my spouse passed away last year. They don’t get that information. The only way that they can see that is by my filing a return.
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The other thing that the government doesn’t really know is, what sort of expenses or deductions do I have? For example, am I a teacher? Do I get a deduction for supplies that I may have purchased for my classroom? What did I contribute to charities last year? Did I make a contribution to an individual retirement account? All those types of things are items that may be deductible on a return that the government does not know about.
So I think by arbitrarily just saying to the government, look, you have all the information, just tell me how much I need to pay — we’re really kind of doing a disservice to ourselves, in many cases, in the amount of tax that we actually owe.
Q: Overall, is the process too difficult? I went to a professional to get my taxes done. I had a form related to paying for my daughter’s college, and he had never seen it before. I can understand it if we’re talking about cryptocurrency or something like that where things get weird … but is it just too wide ranging? Are there too many forms, and too many forms that are similar? Is there a better answer, or have we gone so far down this path that we’re really limited in what we can do?
A: From the standpoint of the number of forms, the way that things are presented, it can be done much more easily. But really, the issue becomes it’s not necessarily the forms themselves. It’s the tax code, because the tax code requires certain types of things and addresses how certain types of deductions are going to be calculated. It feels kind of strange to defend the Internal Revenue Service from my standpoint, but really, they are the part of the government that really makes sure that this information gets captured as the Internal Revenue Code requires. So they are essentially the enforcers of the Internal Revenue Code. If we wanted to simplify things, we really should look at simplifying the code overall. And then almost by default, the way that the returns are prepared would get simpler.
There’s been a lot of discussion about [how] you should have a postcard for a tax return and it should almost kind of be: Write down your income, multiply it by this number, and here’s how much tax that you have. And my argument to that has always been, well, how are we going to define income? Because income in the Internal Revenue Code really is defined as basically anything that’s not specifically excluded. So there’s a lot of debate over that.
So I think it could be changed. It could be simplified, to an extent, but I don’t know that we’re going to get past this idea of a number of different forms that we have to fill out. It’s more because of the code itself than it is because of the forms or the IRS.
Q: I’ve done a lot of freelance work in my career, and one of the things we learned very quickly is your full-time job, where you’re considered an employee, you get a W-2. But if you do freelance work, where it’s hit or miss, it’s a 1099, and when you get paid, you get paid whatever you’re agreed to with no taxes taken out. Going back to my earlier question about the onus always being on the individual, why aren’t taxes taken out of this just like they would be on a regular payroll? Why is it up to the individual to figure out how much you owe?
A: That really comes down to this whole idea of, I am not an employee of that particular organization. The employer has a responsibility to withhold these taxes from their employees. And again, that’s the way that it’s written in the Internal Revenue Code — these taxes only apply to employees. Well, if I don’t have an employee-employer relationship with a particular organization, by default, they’re not required to withhold those taxes from me.
The second part of the answer would be that as a subcontractor, which is essentially what I would be if I’m getting a 1099, I am going to have expenses, most likely that relate to my work that I did for the business organization. They weren’t reimbursed because I am not an employee. So I was basically operating on my own. I’m expected to have my own supplies, I’m expected to provide my own transportation back and forth to whoever this business might be. So there are a lot of expenses that are going to be incurred from a 1099, subcontractor standpoint, that the business that’s paying them is not going to know about. So a general withholding on that amount probably is not going to be representative of what the actual tax liability would be for that particular type of income.
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Q: I can’t tell you how many stories I’ve seen on the news: “It’s Tax Day, make sure you get them postmarked by this or that date.” Would we be better served by figuring something out where the entirety of the country isn’t shooting for one deadline, maybe space it out somehow? It seems like we kind of set ourselves up — and set people in your business up — for this incredible workload for six weeks where we could just figure out a way to stagger this.
A: This has actually been a big issue of mine for a number of years. Individuals, yes, their general deadline is April 15. But that, at least in my business, that’s just one part of the issue, because different types of business organizations are also due on the 15th of April. Some types of business organizations are due on the 15th of March.
Now if you choose, you can file for an extension, which is not an extension to pay the tax but it’s an extension to file the forms. So if you feel that you have a tax liability that’s going to be due with your return, you need to estimate that and send it in with the extension, or you might be subject to penalties.
Here’s where we kind of ran into a problem a number of years ago. So for example, many businesses today are what we call limited liability companies, or LLCs. Their deadline used to be April 15. But, Congress felt that that was causing too much of a problem for individuals to file their returns — basically, the same day that their businesses were filing their returns, the businesses that they were invested in were filing their returns. So they moved the deadline for limited liability companies from April 15 to March 15, thinking that’s going to provide a lot of additional time for individuals to get the information that they need in order to file their returns on time.
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And in many cases, it did exactly the opposite. Because now that the deadlines for limited liability companies had been moved up, that put a lot more pressure on the accounting industry to get those returns done even sooner than they had been getting them done before. So many of those returns now are being put on extension, which, by default, puts the individual returns many times on extension. So it almost did the opposite of what it was supposed to do. By basically getting more people to file by April 15, it actually got, in some cases, less people to file by April 15. My feeling has always been: Get rid of the extensions and push the due date further out. So basically, if you file an extension, that’s an extension of time for six months. So if I don’t file by April 15, and instead I filed for an extension as an individual, that gives me until Oct. 15 to file my tax return.
Many people, if they know that they have the extension, aren’t going to say, “Well, yeah, I’m going to get that done in the next week.” They’ll wait until Oct. 1 to try to get this stuff together. So my feeling would be to really kind of eliminate a lot of this pressure — both from an individual standpoint and maybe even from the accounting industry standpoint — push a deadline out to let’s say June 30. And say you got six months to file your tax return. No extensions, no changing of that deadline.
Would that solve the problem? I don’t know. I think there still would be a lot of people that would wait until June to file their returns. But I think the deadline is more from a governmental standpoint than it is from an individual standpoint, because they’re trying to get as much revenue in as they possibly can early in order to have the funds available to send out these refunds.
So I like the idea of looking at it maybe from, if your Social Security number ends in this number then you file by this date, or otherwise you file by that date. I don’t know that that’s going to necessarily solve the problem because I think the problem really relates to this whole idea of extensions — allowing people to really kind of draw this out as long as they possibly can is sometimes, I think, a little bit more the issue.
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