The April 15th tax deadline has been around since 1955, when Congress moved it from March 15th. It was changed, in part, because Form 1040 taxation had become so complicated that the average citizen needed more time to complete it. In 1955, the 1040 library consisted of four pages, plus a Schedule C for sole proprietors and a Schedule F for farmers. Today, it’s not uncommon for a simple income tax return to exceed thirty pages in length. Still, the due date remains – menacing filers who fear filing an extension and causing preparers to question their careers.
Experienced pros who can afford retirement are doing just that, while those still in business are reducing their client load. When young accountants experience tax season, few decide to make taxation a career path. Who can blame them? Accounting is a broad field experiencing a shortage of talent. According to Bloomberg, the US has experienced a 17% decline in the number of accountants in recent years. Demand for the profession, however, has not decreased, giving new accountants significant leverage over their careers. Why would a highly skilled individual endure an ever-changing tax code and the nightmare caused by cramming a year’s worth of work into a few short tax weeks if they don’t have to?
The stress of meeting the arbitrary tax deadline has increased steadily over the past two decades. The weeks between March 1st and April 15th have become toxic. But, still, it’s just one reason accountants are leaving the tax world. Why has income tax preparation become a dying profession? There are four primary reasons:
- Mind-Bending Complexity: The Tax Code’s ever-growing complexity has made return preparation much more time-consuming (and annual training more necessary and expensive). And Congress has not helped – they are not only responsible for making taxes more complex. Sweeping, often retroactive, changes to taxation laws have become common. The moment you have a good grip on the rules, they change them!
Taxation is unlike any other area of law. Most legislation has sensible grounding - rooted in fairness, equity, and logic. Criminal attorneys don’t have to worry about repeated seismic changes to their profession. Lawyers specializing in real estate don’t face an entirely new set of rules every few years.
Taxation, however, has no logical foundation other than, perhaps, the concept of economic gain. Tax bills are (predominantly) drafted by lobbyists and special interest groups. Then, elected non-accountants grind them into formal legislation. Once signed into law, few tax rules are permanent. Those impacting most filers are routinely scrapped and rewritten by the political whims of Congress.
Sweeping tax changes used to occur once every decade or so. Today, they happen every two to three years and are often retroactive – meaning changes impact prior years (even as returns are completed and filed for that year)!
Worse yet, treasury regulations, which tell professionals how the IRS interprets the laws, arrive long after a bill becomes law. So, tax pros are left to guess, speculate (and argue) about the rules while preparing returns impacted by those rules!
- Form 1040 Changing Function: The primary purpose of your individual income tax return, Form 1040, has changed. It used to be a tool focused on calculating and collecting income tax. Today, its primary purpose is social welfare distribution – taxation is secondary. The reason for the shift is pretty simple. Form 1040 is the single signed (under penalty of perjury) document individuals and families must file annually with the federal government, making it the perfect vehicle for income-based welfare administration. Below are a few examples of programs facilitated via Form 1040.
Form 1040 distributes money to Americans considered “low income” via the Earned Income Credit. Daycare subsidies get paid to income-qualified parents via the Dependent Care Credit. The Child Tax Credit offsets the cost of raising children. Education (American Opportunity and Lifetime Learning) credits reimburse qualifying filers for college & vocational school expenses. The Retirement Credit helps low-income individuals save for retirement. In 2014, the Affordable Care Act placed the IRS and Tax Professionals in charge of financing health insurance for millions of Americans.
Each credit represents a separate income-based social welfare program. If not for Form 1040, imagine the resources each program would require to screen applicants and distribute benefits? Instead of further bloating bureaucracy, Congress has made tax professionals unsung social workers responsible for administering these programs. They are required to understand each benefit - who qualifies and how to apply. They must also keep up with each program’s ever-changing rules and ensure filers are not gaming the system, which segues to our next point.
- Tax Professional Fraud Auditors: Utilizing Form 1040 to administer federal welfare programs may appear efficient on the surface, but it has a cost. As programs have grown in scope, so has cheating. Tax credit fraud runs rampant. Although all credits invite cheating, the Earned Income Tax Credit (EITC) is the largest culprit.
The EITC has been around for decades. Initially enacted in 1975, its intended purpose was to reduce welfare rolls by rewarding work. Unfortunately, as happens with so many government solutions, the opposite happened. Instead of reducing the number of welfare recipients, decades of tinkering and expansion made the EITC a mammoth welfare program (and most who receive the credit still qualify for other welfare benefits). Today, the credit distributes over $65 Billion ($65,000,000,000) taxpayer dollars annually to over 26 million recipients. That’s a lot of free money for simply filling out a form, which is why the program is rife with fraud. The IRS estimates that between 20% to 26% ($14 to $17 billion every year) of EITC payments are fraudulent.
So, whose responsibility has it become to protect government funds? Yep, Tax Professionals. Each year, the IRS requires pros to collect additional documentation to ensure clients are not cheating (or face disciplinary action). Pros must gather this information for the Earned Income Credit AND each subsidy mentioned above. What does being a welfare administrator take? Time. A lot more time.
- Shrinking Tax Season: Another reason April 15th has become unrealistic (and filing extensions critical) is that, as tax complexity increases, the amount of preparation time – the length of the traditional tax season has collapsed.
Traditional tax season used to last about three months, from mid-January to mid-April. Today, it lasts a few short weeks. Fifteen years ago, many filers received everything needed to complete their taxes by mid-January. What did they have? Their employment W2 and interest earned by a savings account. Nearly everyone else received their materials by January 31st. Today, most are not ready to file until at least early March, four-to-five weeks later.
So what changed? Several things, but one of the most impactful, have been the growing prevalence of personal investment accounts. In the early 2000s, few filers had investments other than their homes, retirement, and, occasionally, rental property. Those who traded stocks and bonds utilized the services of a broker or financial planner. And those who did only had one account. Their information returns were delivered timely, were generally correct, and reasonably simple.
Those days are gone. Today, individuals of all ages and income levels can quickly and inexpensively invest in stocks, bonds, calls, puts, and municipal securities via dozens of internet-based brokerages. Small investors can participate in dollar-bundling businesses that loan money to others for a profit. Those who want to invest in commodities can buy shares in an oil well, wheat futures, corn, or other staples. Want to jump in the latest IRS-infuriating craze? Trade Bitcoin or another virtual currency. Why not all of them!?
Few investors realize that each trade generates a reportable taxable event. As the prevalence of investment firms has grown, so has the information they must collect and report to the IRS. The volume of financial data processed is staggering. Brokers must track the tax basis (investment) and the gain and loss generated by every security trade. Additionally, the IRS added six new forms (ironically all on a single document called Form 8949) to its tax library a decade ago. These forms report various types of gains and losses. Brokers don’t just calculate the profit or loss from every sale; they must also tell customers which form to use to report each trade.
Investors must receive brokerage statements for tax prep by February 15th. It’s a deadline few brokerages meet. Most receive them in late February or early March. [Worse yet, initial reporting often contains errors. When brokers discover mistakes, they send corrected information returns, often in May or June.]
Most clients have at least one online brokerage account. Three is surprisingly common, as are twenty-plus pages of trades to report on various Forms 8949. As this financial reality has collapsed the length of tax season, the burden of additional 1040 reporting requirements has increased the time needed to prepare returns.
Take Away: Growing complexity, the changing purpose of Form 1040, the tax practitioner’s role in fraud avoidance, and America’s evolving financial landscape have made the April 15th tax deadline obsolete. Worse than that – it threatens to destroy the US Treasury’s greatest administrative asset –knowledgeable tax professionals who understand the tax code and ensure the accurate preparation of tax returns.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.