The 2022 tax nightmare
What the 2022 tax season was like for taxpayers and tax preparers
This past tax season was incredibly awful for many Americans. Hopelessness, frustration, and ignorance plagued just about everyone - taxpayers, tax preparers, and tax officials. Taxpayers hopelessly file taxes using software that gives them zero confidence in an accurate report; tax preparers frustratingly grind through tax season dealing with clients and organizations that fail to provide adequate documentation on time; tax officials ignorantly avoid firm guidance across a range of questions on topics like crypto, child tax credit, and PPP loans. The US tax system exists as an overcomplicated web of rules and regulations designed to appease our Congressional leaders and lobbyists instead of those participating in it. If we don’t address these issues in 2022, we’ll witness an even worse tax season in 2023, leading to an increase in tax evasion and tax preparer turnover.
Inside the nightmare:
Ridiculously, taxpayers are expected to navigate a tax code that gets more complicated every year with limited help or dependable software solutions. This tax season was especially frightening for crypto investors who racked up hundreds of taxable transactions without even knowing and had to reconcile them using spreadsheets or software that provided different answers. In fact, 85% of crypto investors (approximately 28 million Americans) had little to no knowledge of reporting capital gains on their tax returns.
If the IRS continues to make filing taxes this difficult or expensive for the average taxpayer, they’ll exclude certain income and take their chances with an audit.
Sadly, tax preparers are consistently overworked, underpaid, and under-appreciated. They’re American heroes who have to deal with their client’s tax compliance year-round - April 18 was just another day as far as they were concerned.
In addition, the software supposed to make tax prep simpler and automated for preparers is often unreliable and hard to use. Unfortunately, tax professionals are still stuck using software that looks like it was built in 2002.
Particularly bothersome for tax professionals is the IRS' lack of timely support and guidance. Crypto remains a gray area for taxation even though tens of millions of Americans actively invest in it every year. With a working environment like this, it’s no surprise that tax professionals consider scaling back their practices or quitting altogether. As mentioned above, if the supply of qualified tax experts dwindles substantially, taxpayers will face an even more difficult time dealing with it themselves.
Taxpayer Advocate @YourVoiceAtIRSLive now: National Taxpayer Advocate is live before @oversightdems Subcommittee on Government Oversight, speaking on “IRS’s current state of operations.” Read her written testimony: https://t.co/PqrxOaLwJQ https://t.co/XnDpGozBkX
The IRS, an agency understaffed and overworked, was a complete nightmare internally as well. One of their more egregious errors was sending incorrect Child Tax Credit Payments and offering a vague FAQ as a remedy. Secondly, its return processing and call support times were egregiously long - keeping tax-payers and preparers in an unnecessary limbo.
Thirdly, crypto guidance, especially for NFT transactions, is still mostly missing. All of these problems beg the question: how do we fix the IRS and the tax filing system?
Kelly Phillips Erb @taxgirlThe IRS hasn't provided clarity on the #tax treatment of some #crypto & #blockchain transactions, including #staking. In today's @tax Insights, @Paul_Hastings' Stephen Turanchik says it’s time to treat proof of stake fairly. https://t.co/q75zSkdWQE
How do we solve this moving forward:
Simplifying the tax code and filing process is at the top of everyone’s wishlist. Based on the current process, which looks more like a map of the NYC subway system, it’s clear that there are too many steps for every stakeholder to participate in. There are also too many documents to prepare, file, and review.
What’s particularly frustrating for many taxpayers is that the IRS, in certain cases, knows how much tax they owe yet wants them to do all the work of documenting how that number added up. Wouldn’t it be awesome if the IRS could tell taxpayers how much they owe and then leave it up to them to dispute with documentation if the bill was too high?
Next on the wishlist should be more taxpayer and preparer support in the form of on-demand call center staff and detailed guidance. We live in a technology-enabled world that’s changed our perception of customer service. We want our questions answered immediately without having to jump through hoops. Instead, we’ve had to deal with long wait times and no clarification on critical questions like how crypto staking rewards are taxed. The best solution would be additional funding for quality customer service staff and a commitment to finally publish crypto tax rules in stone.
Finally, laws related to taxation should be free from lobbying and special business interests. Intuit notably lobbies against a simple tax code so that it can continue creating a need for its Turbotax product. Hedge funds and private equity groups lobby against closing the carried interest loophole. All the while, 99% of taxpayers are stuck participating in a tax system that’s not designed to make their lives easier or save them their hard-earned money.
The IRS is one of the most hated public institutions in America and one that costs stakeholders billions of dollars and hours each year. The US tax system is ten times more expensive than the tax systems in 36 other countries with similar economies, and costs us 2.6 billion hours in tax preparation each year. It’s clear to almost everyone, except corporate lobbyists, that improvements are needed to reframe the tax system as one needed to service the public rather than frustrate it.
If Congress and the IRS refuse to make major changes, the US will enter a nightmarish scenario of more taxpayers electing to evade tax payments and tax professionals leaving their practices in favor of a less stressful environment. This scenario will cascade into a dire situation of fewer tax revenues and a limited pool of professional preparers who will be affordable only to the wealthy.
As a country founded on rebelling against an unjust tax system, our leaders should be extra mindful of creating a more fair and enjoyable experience - one that affords everyone the opportunity to file properly and take advantage of the same optimization strategies that the most expensive tax professionals employ for their wealthy clients.
In summary, here’s how we can avoid a repeat of 2022:
Better accounting software for tax preparers
Clear taxation law for all types of crypto transactions
More accessible customer service for both tax prepares and payers
Limit lobbying from those trying to game the tax system