Mitchell Fox is a Co-Founder of GoodApril.
Why is it that each spring, so many of us cringe, cross our fingers, and start filing our taxes without knowing what we’re in for?
What’s worse, we rarely feel confident that we’ve achieved the best possible outcome for ourselves when it comes to taxes – and with good reason. Back in 2002, the nonpartisan Government Accountability Office (GAO) estimated that people were overpaying their taxes by nearly $1B a year. (And they only looked at one of many ways to mess up – with the real number of overpaid taxes likely much higher).
Even more striking is that these problems affect most Americans regardless of whether they’re firing up tax filing software, working with an accountant, or filling out IRS forms by hand.
So, what will tax filing be like five years from now if technologies continue to advance and consumers demand better tax policies and better software solutions? Will this process be easier or the same? Lets take a look:
You will already know your outcome
While tax rules are complicated, they are well defined. A majority of the things that affect the average taxpayer’s return are already digital and available online: paychecks, investment gains and losses, mortgage payments, and the like.
Five years from now, this data will be collected, organized, and crunched on your behalf, in near real-time. You will know whether you’re going to owe the IRS or get a big refund at any point during the year. That job change, stock market windfall, or new home will have been considered as they happened, and your forecast adjusted.
Tax law changes, like this year’s Taxpayer Relief Act (the “Fiscal Cliff” deal) and Affordable Care Act (“Obamacare”), will have been analyzed in the context of your financial situation, and their impact explained and accounted for.
You won’t owe a dime
If you can already know your tax outcome, then why shouldn’t the tax withholdings on your paycheck (or estimated tax payments if you’re self-employed) have been adjusted automatically to ensure you have paid only what you owe?
Started a freelance gig on the side, or purchased a house? Your tax software should detect that and guide you to make the appropriate adjustments to keep your tax bill as close to $0 as possible. A small refund is probably always in store, but the days of big tax refunds and tax bills should be over.
Your data will be waiting for you
Why is it necessary for me to wait for tax documents to arrive in the mail in order to file my taxes? While tax prep software providers are making tremendous strides toward financial data aggregation, it’s still a gruesome process of individually looking up each account, digging up long-forgotten passwords, and cursing when the connection invariably fails.
As financial institutions get better at providing secure data connections, and software providers get better at extracting and interpreting it, your tax data should already be loaded when it comes time to file your taxes.
The experience of filing your return should be a lot more like checking out your Amazon shopping cart – clicking to confirm the numbers are accurate and as-expected – rather than an epic weekend of wrangling 1099s, W2s, and 1098s.
You will only pay your fair share
The tax code is full of incentives that taxpayers can use to their advantage to pay less in taxes and get access to services at lower cost. Getting a college education, home ownership, and paying for childcare are just some of the many activities that are tax advantaged. The IRS also gives you a break when your expenses pile up: supporting a dependent parent, for instance, or paying excessive medical bills.
You should know what tax benefits are available to you, and what actions you could be taking to pay less.
In order to only pay your fair share, tax software must be watching out for your best interests throughout the entire year, and be presenting this analysis and advice to you in a timely and easily understood way.
You will have access to your own history
You probably have filing folders of tax documents for the last few years somewhere in your house. If you’re more tech savvy, maybe those are PDFs. But that data is not stored in a way that you can use it for your own analysis, nor is there an easy way to share it, for instance with a loan underwriter trying to decide whether you can afford to repay that mortgage. Today you’re still stuck opening or sending the actual tax filing documents, and manually extracting the data.
Your historical tax data should be yours to consume not just as documents, but as bits. While your tax return provider ought to be giving you access to this data, it’s the IRS that should not only be collecting that data each year, but making it available to you and the financial institutions you authorize.
Your taxes will be simpler
Technology can’t solve every part of what makes taxes so painful. A big part of the blame lays with policy makers who, with the best intentions of rewarding “good” behaviors (like donating to charity or investing in retirement or getting health insurance), create a spaghetti code of tax law so confusing that less than 10% of taxpayers are brave enough to even try to do their taxes without the assistance of software or a professional. Even the IRS’ own National Taxpayer Advocate called the complexity of the tax code the “#1 most serious problem facing taxpayers.”
In 2005, the GAO estimated that the cost of complying with tax policies, in the form of time and money spent on this like tax planning, preparation, and filing, cost our nation at least $100B annually and projections by the Tax Foundation estimate that by 2015 the cost will reach nearly $500B.
Five years from now, let’s hope that we have done our part as the end-consumers of that tax code to have advocated for simpler, easier to use tax policies that the average American can understand, comply with, and get back to their lives.
Where innovation should come from
Even without tax reform, however, as I hope I have shown, smarter technology can make taxes easier for the average consumer.
The most obvious place where these innovations should arise is within one or both of the consumer tax software powerhouses: Intuit (TurboTax) or H&R Block.
Another possibility is through one of the personal financial management platforms that consumers use today to get a complete perspective on their finances: Mint (also owned by Intuit), PageOnce, Personal Capital, and most recently, Credit Karma.
Additionally, there is an emerging crop of financial planning startups that could develop to include tax capabilities: for instance FutureAdvisor (investments), LearnVest (wealth planning), Ready for Zero (debt), and PlanWise (goals). And yes, my own company, GoodApril, is working on these problems as well, and look forward to collaborating with other financial innovators to realize this vision for pain-free taxes.
Here’s to a future where our taxes are no longer a surprise, and we have confidence that we’re only paying our fair share to Uncle Sam.
Image via Warner Bros.; Illustration by Tom Cheredar
Mitchell Fox is a Co-Founder of GoodApril, an online tax planning startup for consumers. Follow him and GoodApril on Twitter @mitchellwfox and @goodapril.