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Taxation

Five Ideas to Make the IRS More Warm and Fuzzy

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Like an increasing number of my fellow Americans living abroad, I received a CP11 notification in the mail from the Internal Revenue Service. The CP11 is one of the hundreds of form letters that, with bureaucratic delight, the IRS has prepared for communicating with tax filers: everything from missing information to reminders of balance due to requests for Combat Zone service dates. And they all exist in Spanish too.

Precisely because of the fact that I am living abroad, I expect these notifications to become a recurring event. The United States is one of the few countries on Earth to require its citizens to file their taxes no matter where they live or how long they have lived there. That is has not historically been too horrendous an imposition, but recent changes to the law have made it far more of a nightmare. The United States has a growing problem of income and wealth inequality, and wealthy people – like most everyone else – have an aversion to paying taxes. Unlike most everyone else, the wealthy also have the means to both legally and illegally shield their riches from the taxman, very often by moving it overseas to low tax countries or to private bank accounts where they hope it will remain undiscovered.

The Federal government has a serious problem with this. So should most Americans, for whom opening an account in the Channel Islands or Liechtenstein simply isn’t an option. It is perfectly legitimate for the government to go after tax evaders and also to put pressure on fiscal paradises to make tax avoidance[1] more difficult. Unfortunately for the average US citizen living abroad, the Federal Government has opted to deal with the problem using a sledgehammer rather than surgical tools. The sledgehammer is the Foreign Account Tax Compliance Act, also known as FATCA. This law requires US persons living abroad to report financial assets and interests held overseas that meet certain requirements and establishes extremely onerous penalties for non-compliance, even for unintended negligence.

It is not my intention to discuss the pros and cons – the many cons – of both the FATCA and FBAR[2] filing requirements. There are any number of very good and informative websites on that subject which even the most cursory Google query will turn up. It is my intention to make five simple recommendations to improve our interaction and experience with the IRS, making it the warm and fuzzy department we all know and love.

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Getting to Warm and Fuzzy

Let me begin by stating the positive: all of my interactions with the IRS have ended on a positive note. They have been professional and courteous, and once the problem was identified, it was resolved quickly and easily. That being said, there is low-hanging fruit aplenty for the IRS to work on:

  1. Expand your service channels. Each time I’ve had an issue with the IRS, I had the choice of writing them a letter or calling them. Writing might not be so bad …if I still lived in the US. But I don’t and it is inconvenient to have to send international mail with the associated cost and uncertainty[3].Calling is expensive too, but at least you get to resolve the issues more quickly. At least you would in theory, if the wait times to actually talk to an IRS agent weren’t between 45 and 90 minutes. That’s how long I had to wait this yearto be connected; and during one of the calls, the line went dead 5 minutes into the conversation.It’s not really the IRS’s fault: Congress passes ridiculously complex new tax legislation, which will lead to more complex filings and plenty of tax errors and queries, but then they make no provision to increase the number of IRS personnel dedicated to helping out filers sort these problems out. Typical bonehead move by Congress[4].That being said, there is no reason why the IRS can’t invest in a decent email query system, and online chat system, and other digital channels that would spread the work load and facilitate the resolution of issues. After all, the majority of errors could be dealt with very quickly and without much more than a couple of corrections and the mailing (better yet emailing) of a revised form.
  1. Digitalize everything. We invented the internet, but the IRS still uses paper-based communications and filings for almost everything. All that is lacking are the wax seals and carrier pigeons.For the love of God,digitalize everything. Iought to be able toinput every single form I need to file online throughinput masks which would make automatic calculations (reducing stupid math errors) apply theappropriate rates and taxes (eliminating stupid errors in using incorrect tables) and guide filers through theinput process far more intuitively (eliminating the need to refer back to the encyclopedic 1040 instruction manual through use of pop-up windows or message boxes when you hover over a blank field). I should also be able to scan and attach all requireddocumentations and schedules.Yes, I know there is the “FreeFile” tax preparation software available from the IRS. Unfortunately, this “software” has such severe limitations as to make it impractical for many filers to use. Starting with the fact that any individual or family earning more than $60,000 per year can’t use the actual software, they have to use electronic versions of the paper forms that don’t actually calculate anything for you. It’s better than paper, yes, but very much worse than what most OECD countries have as standard. There is also the option of filing electronically through commercially available software, but this is merely a gift to the tax preparation firms: why should I be forced to pay to have my taxes prepared and filed accurately? The IRS is perfectly capable of adapting FreeFile into a world-class (or at least world average) tax preparation software.

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  1. Have the IRS fill out the tax forms for the public. For more than half of American filers, their tax declaration is extremely simple. Even for most middle class Americans, many of the key deductions like home mortgage interest deduction or IRA contributions are all captured in standardized forms that banks submit to both the filer and the IRS. Thus, for most Americans, the IRS could prepare the tax form for them saving everyone – including Uncle Sam – time, money, hassle and errors. Most people would receive their prepopulated tax form 1040 or 1040EZ (electronically) on April 1st and would have two weeks to submit amendments, including supporting documentation (electronically).This wouldn’t make my life any easier, since as an expatriate, the IRS wouldn’t have easy access to my information. But for the vast majority of my countrymen, it would be an immense improvement over the current tedium and toil come filing season. And by preparing the tax forms for the public, the IRS could dedicate scarce resources to focus on the really complex filings which typically belong to the wealthy.

 

  1. Align the filing dates for FATCA and FBAR. Come on, Feds… really? Isn’t this just too retarded, even for the government??

 

  1. Stop calling me your customer. I am not your damn customer. I do not have a choice of governments and shop around for the one with the best service at the lowest price. You are not Walmart. I am a citizen, which means you work for me and I pay your salary.It may be a minor point, but it pisses me off. The public and private spheres are inherently and fundamentally different and the confusion of the public service with “USA.biz” is extremely annoying to me. Chalk it up as a pet peeve.

I have deliberately left out some substantial changes like simplifying the tax code, repealing FATCA and going to Residency-Based Taxation (RBT), but you can find those at my previous article: “The 5-Minute Tax Reform”.

 No one is going to make filing taxes something we look forward to, but there are some really easy steps that would lead to a reduction in the time and hassle for filers, a vast improvement in on-time filing and minimization of errors, much lower back-office work for the IRS itself, and generally a more streamlined experience for “customers” – sorry, citizens – than the medieval torture we go through every April.


Sources and Notes

[1] The difference between tax evasion and tax avoidance is that the former is illegal while the latter is legal. Both seek to reduce the individual’s overall tax liability.

[2] FATCA is administered through the IRS while FBAR is administered separately by the Department of the Treasury. The forms are different and the dates for filing are different, leading to massive potential for innocent confusion.

[3] That is not to say that the International mail is necessarily unreliable; but delivery times are uncertain and both certified and registered mail can get expensive.

[4] It wouldn’t surprise me if it were deliberate.

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