The Computer Ate My Taxes

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APRIL is the cruelest month,

breeding Lilacs out of the dead land,

mixing Memory and desire,

stirring Dull roots with spring rain.

Winter kept us warm,

covering Earth in forgetful snow,

feeding A little life with dried tubers.

– T.S. Eliot, The Wasteland

T.S. Eliot was, no doubt, thinking of tax season when he wrote The Wasteland.

Just kidding. Though, for most of us, tax season does impart a special “wintry” mix of despair, frustration, and disillusionment:

  • We’re fearful of catching the cruel eye of the IRS because audits represent an unknown quantity of suffering.
  • We’re frustrated by our own incompetence at the task, which somehow, every citizen is expected to accomplish.
  • We’re disillusioned by the thought of leaving money on the table, when stories of the 1%’s successful tax fraud seem like a daily occurrence.

Today, we’ll address each of these issues head-on. We’ll work-through our fears and talk about how to outsource our incompetence. Then, we’ll speculate on whether computers can solve all our problems by imagining all the new ones they might create.

Buckle up. It’s gonna get weird. 

FEAR: There’s Nothing to Fear Besides Governmental Collapse

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becausetaxes1

What are the chances you’ll get audited this year? Here’s the good news: they are very, very low. Here’s the bad news: your chances are low because the IRS is a mess. As Yahoo Finance put it last week, “If you don’t already cheat on your taxes, it’s an opportune time to start.”

This year, the number of individual tax filers likely to be audited has fallen to an 11 year low – just 0.86%. The IRS has about 10% less funding and 2,200 fewer auditors than it did four years ago. Meanwhile, the total number of returns it must process has increased by 3.4%.

Think about this for a moment and you’ll realize that the truly scary thing isn’t getting audited. It’s what happens if the trend continues, and the government can’t collect the taxes it needs.

Suppose you do get audited, though. What happens then? There are plenty of resources on this, so we won’t spend much time here. Believe it or not, you don’t go to jail. You pay the difference.

Make a really big, honest mistake, and you’ll be asked to pay a penalty. Make a really big dishonest mistake, and you might trigger a criminal investigation. All that’s negotiable, of course, if you can afford to make life difficult for the overextended taxman. This is why Wall Street crooks never go to jail.

So, audits aren’t tantamount to the apocalypse, but a lack of them might be. Lovely. In the interim, audits are still a schlep you personally want to avoid because, well, life’s too short.

Let’s talk about how to navigate through the mess.

FRUSTRATION: You’re Just Like Donald Rumsfeld

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becausetaxes2

It’s late in tax season and you still haven’t filed. The going-rate for accountants is soaring. Turbotax has stripped critical features from its service, inviting you to upgrade from “deluxe” to “premier.” Meanwhile, the IRS projects that half the people who call the agency asking for assistance this season won't be able to get through to a human. Should you use software or seek professional help?

Basically, if you are among the lucky handful of law-abiding idealists with straight-forward tax returns, you’re better off using software. Otherwise, you’re like Donald Rumsfeld (that’s his open letter to the IRS above): you have absolutely no idea what’s at stake, but still want to fairly, or perhaps unfairly, minimize the amount you’re expected pay.

Here is where the services of an accountant are indispensable, as you don’t actually need help with compliance. You need help spinning the perception of compliance.

The sad truth is that nobody, including the IRS completely understands the tax code. Tax codes are laws and like all laws, there’s a lot of room for interpretation. Compliance is an ideal, not real goal.

A good accountant knows how and where to bend the rules and which loopholes might apply to you. You don’t and you can’t – and your tax software can’t either. Here’s why:

  • Knowing’s Not Understanding
  • Like the IRS, tax software uses algorithms, based on principles like “Benford’s Law,” to detect whether a return smells funny. What software can’t do is determine whether or not the rules apply to you. Software knows the rules, but it doesn’t understand the rules. If that were the case, we wouldn’t need lawyers either.
  • Your Sample Size is You
  • You only have experience doing your own taxes, or worse, you don’t. Accountants, on the other hand, have experience doing taxes for many individuals. This gives them professional intuition about what risks are worth taking, and which are worth avoiding.
  • You Can’t Do You
  • Even if you did have all the information, as an individual, you are handicapped by your own personal investment. You are likely to be risk averse when taking risks works in your favor and vice versa. This is the same reason why doctors are discouraged from self-treatment and lawyers are discouraged from self-representation.

As long as there’s room to play, professional accountants will continue to be indispensable for the reasons above. For better or worse, though, a couple software updates could change all this in the near future. Next, we find out why.

DISILLUSIONMENT: BECAUSE DATA

So far, we’ve tackled our fear (sort of), and found a quick-fix solution for our frustration. We’ve learned that when it comes to taxes, the scariest thing isn’t our own incompetence, but rather the incompetence of the taxman. Ironically, we’ve also concluded that most of us ought to seek professional help, so we don’t leave money on the table. This is because software can know the rules but can’t understand the rules.

What about that creeping feeling of disillusionment? Aren’t the rich and famous still gaming the system with reckless abandon, and doing it better than us? It seems we’re worse off than we started.

Well... surprise. There’s no easy answer to that one.

Right now, wealthy individuals and corporations pay the lowest tax rates. That’s because they have the most complicated financial situations, most expensive accountants, and most persuasive lobbyists. Lower-income workers, who earn most of their money through simple wages, are entitled to fewer loopholes and can’t afford the same level of assistance.

Yet this may change soon, because software in other fields is getting remarkably good at understanding rules. The creators of Siri are currently developing Viv, a personal assistant than can teach itself. Netflix is already using artificial intelligence to make smarter programming choices. And of course, algorithmic trading has already made a tremendous, and controversial impact on Wall Street.

Meanwhile, consumer-facing finance startups like Acorns and Robinhood are making it easy for everyone to make micro-investments that complicate their own finances, and by extension dramatically complicate their tax returns.

Put all this together, and it seems likely that a lot more of us could soon sidestep the IRS like the 1%. Though drastically underfunded, the IRS actually understands this. The agency is scrambling to catch up by investing billions to modernize its outdated computer system.

What comes next is a bunch of big, fat question marks. Will everyone be able to game the IRS or will nobody be able to game the taxman at all? Will the private sector’s IT departments outpace that of the government? Will the government keep pace, and if not, how will it recoup its losses? It’s a brave new world, dude.