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The High and Regressive Costs of Tax Preparation

1 min readBy: Alan Cole

The costs of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. preparation help can vary, but unlike the taxes themselves, preparation costs don’t get any smaller for low-income people. At times, they can even get larger. The New York Times ran an article this week on unscrupulous tax preparers who exploit information asymmetries to grab large portions of people’s refunds. Some of them even deliberately file the refundable credits fraudulently so that they have a larger refund to draw from:

There are plenty of stories here in Alabama of tax fraud in which the taxpayer is complicit. There are also many in which taxpayers find out only after being auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. ed that their refunds had been fraudulently inflated by preparers, who since then has[sic] disappeared.

The incidents described are not isolated. Improper payments on the EITC alone exceed $11 billion per year and many of those are the work of unscrupulous tax preparers.

The federal tax system is vulnerable to this abuse because of its opacity; it takes the income of low-wage earners through the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. , deposits it in the Social Security Trust Fund, which lends back to the rest of the government through bonds, which then uses the money to distribute back to people in the form of refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). s, which are difficult to compute and sometimes stolen by charlatans.

The reason people part with their money so easily is that – through all the employer-side payroll deductions and accounting gimmicks and withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. they never truly realize it was theirs to begin with.

The federal tax code is wretchedly and unnecessarily complex, and it reserves its most wretched and unnecessary complexities for the very poor, driving them into the hands of mountebanks – as if poverty alone weren’t indignity enough.