How COVID-19 blew up the tax code
The U.S. tax code is like a one-stop for domestic social and economic policy. What does that mean? Great question! Well, that means that incentives like the Economic Impact Payment (EIP) 1, 2 and 3; (Advanced) Child Tax Credit; Earned Income Credit; Mortgage Interest Deduction; and Payroll Protection Program are all implemented through the Internal Revenue Code. It seems like, the more chaos, the more tax code “anti-chaos” provisions. And COVID-19 was definitely a chaos event.
When you consider the amount of tax legislation that has been enacted in just the past five years, it can make your head spin. Last year I concentrated on how the tax legislation focused on small business(es). This year I would like to expand that discussion to how recent tax legislation has affected individuals. From this perspective, my hope is that we can see some constructive reasons why the tax code is so confusing. Basically, if the U.S. tax code is being used to solve our domestic social and economic problems, the more problems, the more tax provisions to “fix” them. Several dozen countries utilize a return-free system for most taxpayers in straightforward situations. In Sweden, you can view on your cellphone your pre-filled tax forms and even approve them on your cellphone.
And don’t forget about the lobbyists we love so much in this country. It’s like once a lobby gets their claws into the tax code, they hold onto whatever provisions they got working in their favor – come what may. They will keep their respective incentives alive and well in the tax code, no matter how confusion it gets for the individual taxpayer to understand how to make the same provisions work for them, as well as how to report the activity on their return.
Recent Tax Legislation
In the past five years, there have been as many pretty huge legislative initiatives to deal with different tumultuous situations in the country. Each legislative enactment focusing on at least one overarching need of the individual taxpayer. The Tax Cuts and Jobs Act of 2017 increased the Child Tax Credit from $1,000 to $2,000 and created the Other Dependent Credit (which is still $500). The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 increased the Required Minimum Distribution (RMD) from 70 ½ years old to 72 years old. Then the world turned upside down.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 was the Trump administration’s attempt to stabilize the pandemic-stricken U.S. economy … from every foreseeable perspective. With respect to the individual taxpayer, the CARES Act provisioned the Economic Impact Payment (EIP 1), more commonly known as the “stimulus payment”. Another huge provision of the CARES Act was to remove the penalty normally levied for early distributions from a retirement account. If the distribution was coronavirus related and the distribution was $100,000.00 or less, the 10% penalty could be withdrawn.
The Consolidated Appropriations Act (CAA) of 2021 was President Trump’s last big legislative push. CAA followed in the footsteps of the CARES Act and provisioned the second stimulus payment (EIP2). Yet another stimulus payment to the taxpayer to stimulate the economy and help people who were in various perilous situations as a result of the pandemic. The American Rescue Plan Act (ARPA) of 2021 was President Biden’s first initiative aimed at ramping up assistance for the individual taxpayer. ARPA initiated a third stimulus payment, an unemployment exclusion, advanced child tax credit payments, earned income credit improvements, and a child and dependent care credit that increased from 3k to 8k for one child, and from 6k to 16k for two children.
Why So Complicated?! Because We Are Needy
Again, the U.S. tax code is like a one-stop for domestic social and economic policy. So, the tax code ends up just getting more and more complicated the more problems we face. COVID-19, however, was a more catastrophic event. As such, there were many policies that went into each of the aforementioned legislative actions since the CARES Act.
For example, let’s just drill down into ARPA a tad bit. If you look beyond the billions of dollars the IRS was responsible for issuing in checks, credits, and deductions, you get to the back end of the transaction – reporting said activity. Here in lies the problem. And this is what separates us from many other countries around the world that actually make reporting your taxes much more streamlined. The American taxpayer, basically, has to figure out how to accurately report all of this mess themselves, lest they receive a friendly reminder from the IRS that there is a discrepancy. Which really feels to most people like the feds are coming for you, the dog, the goldfish, and house (of course).
Let me put that into some perspective for you. This preseason (i.e., everything from the end of one tax season to the beginning of the next tax season is considered the preseason), just about 90% of the IRS letters that came into the office were in regards to the first and second stimulus payments. Basically, what the IRS thought you should have reported was not what you reported and a CP11 was automatically generated to point out the miscalculation the IRS believes exists. The point here is that this entire debacle largely stems from reporting discrepancies. And often enough, the discrepancy is the fault of the IRS. At the end of the day, the socio-economic policies that the tax code is tasked to handle create a reporting nightmare that is super stressful for many taxpayers, and even at times for the IRS itself. Confusion!
What Recourse Does the Average Taxpayer Have?
Well, you can spend hundreds of hours a year studying and keeping up-to-date on the tax code and all of its crazy combinations and permutations. Or if you have your own complex portfolio of financials, you can find a good Tax Advisor, and/or Accountant. Either way, the point of this article was more so to provide some perspective on why the U.S. tax code is so confusing, and to possibly get some readers thinking of why this confusion (in a very round-about way) is actually helpful to them. Food for thought.
Resources
Brookings Institution. “Why Are Taxes so Complicated and What Can We Do About It?” (December 1, 1999).
New York University Law. “Schenk Tells NPR that the U.S. Tax Code Is so Complex that Most Filers Make Mistakes.”
The Tax Policy Center. Briefing Book. “Why Are Taxes so Complicated?” (May 2020).
The Washington Post. “Why the U.S. Tax System Is so Complicated — but Americans Are Proud to Pay Taxes Anyway” (April 12, 2018).
Kajli Prince (“Prince”) has over 20 years of experience in small business tax preparation; he is a senior tax analyst and small business certified tax professional in the Centreville, Virginia, Block Advisors office. As a self-published author, Prince holds a special appreciation for NAIWE and its members. One of his passions is sharing relevant information with people and showing them how best to use it for their benefit. Prince is a small business owner of 25 years, and his specialties include emerging currencies (e.g., virtual/crypto currencies), information technology, intellectual property, and investment real estate.