Happy Tax Filing Day....

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As today is April 15, 2016, it should be the usual filing deadline for your taxes or to request an extension; except this year the deadline was extended to April 18, 2016.  Why?  Emancipation Day (a day set aside for commemorating the signing of the Emancipation Act by Abraham Lincoln (normally celebrated on April 16, but this year since it is on a Saturday, it is recognized on April 15) is a legal holiday in Washington D.C.).  So, since the deadline falls on a legal holiday in Washington D.C., the tax deadline is extended to Monday.

The hot topic story today is Massachusetts Democratic Senator Elizabeth Warren’s introduction of a bill to make it unnecessary to file a tax return (for single people with simple returns, and in 2018 to extend to other filers).  According to the Huffpost both Democratic Presidential Candidates support Senator Warren’s bill, as do other Senators.

Two questions come to mind:

  1. Is this bill different than Republican candidate Ted Cruz’s plan to abolish the IRS or Democratic Candidate Bernie Sanders’ plan?; and
  2. How practical is Senator Warren’s proposal?

Question 1:  Is Senator Warren’s proposed plan different from Senator Cruz’s proposed plan or Senator Bernie Sanders’ proposed plan:

Simple answer is Yes.  A more detailed explanation is:

Senator Cruz is advocating a flat tax plan.  What this means, is that Senator Cruz is proposing to compress the current rates of personal income tax to one single rate of 10%, See paragraph 2 of his summary.  He states that the simple flat tax will eliminate the IRS as it exists.  He also proposes to levy a simple flat business tax at 16%.

Contrasting Senator Cruz’s plan is Senator Sanders’ plan (NOTE: Bernie’s plan is outlined in the FAQ’s for paying for medicare, about ¾ of the way down the page.  It seems that his plan is summarized at this unofficial site.)  He proposes to keep the graduated rates based on income.  His proposal seeks to raise the rates at the higher income levels.  For example, the current 33% bracket is for incomes between $230,451 through $411,500.  Bernie’s plan would make this band smaller, specifically for income between $230,451 through $250,000, and amounts over $250,000 would be in the next bracket.  The brackets are delineated for incomes up to $10,000,000 with the top rate at approximately 52%.

Senator Warren’s proposal merely seeks to eliminate the need for single filers, who meet the following criteria:

  1. do not have deductions adjusting their income,
  2. do not have to file a schedule C (income from a business operated or a sole proprietorship),
  3. income only from wages, interest or dividends,
  4. No dependents.

For the single filers that meet these 4 criteria, Senator Warren proposes that the IRS will develop a tax return preparation service that will file a return on single filers that opt in to the program.  Senator Warren’s proposal also seeks to expand the program for 2018 to: married individuals, heads of households, taxpayers claiming the earned income tax credit, taxpayer with dependents, taxpayers claiming the child tax credit, and taxpayers claiming deductions for non-employee compensation.  Senator Warren’s proposal also allocates money to pay for this “new” tax preparation service.

Senator Cruz’s plan and Senator Sanders’ plan are plans designed to re-think how we tax people and their income.  Senator Warren’s plan is a change to the implementation of the existing tax regime.

This leads to the second question, how practical is Senator Warren’s plan?

The IRS already has a form that simplifies the tax filing procedure.  The Instructions for 1040EZ provides a checklist for those eligible to use Form 1040EZ as follows (Note a taxpayer has to meet all of these before utilizing Form 1040EZ):

  1. Your filing status is single or married filing jointly.
  2. You do not claim any dependents.
  3. You do not claim any adjustments to income.
  4. If you claim a tax credit, you claim only the earned income credit.
  5. You (and your spouse if filing a joint return) were under age 65 and not blind at the end of 2015.
  6. Your taxable income (line 6 of Form 1040EZ) is less than $100,000.
  7. You had only wages, salaries, tips, taxable scholarship or fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500.  If you earned tips, they are included in boxes 5 and 7 of your Form W-2.
  8. You do not owe any household employment taxes on wages you paid to a household employee.
  9. You are not a debtor in a chapter 11 bankruptcy case filed after October 16, 2005.
  10. Advance payments of the premium tax credit were not made for you, your spouse, or any individual you enrolled in coverage for whom no one else is claiming the personal exemption.

Senator Warren’s proposal appears to check the same boxes as IRS 1040EZ (or at least her proposal for post 2018).  So why would we need another tax return preparation method that would mirror IRS 1040EZ.  Also why would need to spend more money and appropriations for developing a system to mirror the filing of an existing IRS Form, when only about 16% of the filing population could benefit from this “simplified plan”?

Year Total # of Returns Filed Total 1040EZ Filed Percentage
2014 148,686,586 23,259,850 16%
2013 147,735,801 23,463,055 16%
2012 144,948,385 23,115,401 16%
2011 145,579,530 22,643,149 16%
2010 142,856,282 18,007,553 13%

Shouldn’t we spend the money it would take the IRS to develop this new proposed system in closing the “Tax Gap” ?

Happy Tax Filing Day!

If you have specific and credible evidence of taxpayers failing to file their tax returns and/or paying their tax liabilities in excess of $2,000,000 of taxes, interest and penalties you should consider filing an IRS tax whistleblower claim.  Contact us to assist you in filing your tax whistleblower claim to receive an award of between 15-30% of the amounts collected by the IRS on tax liabilities in excess of $2,000,000.