Let’s Talk About Taxation and How to Modernize the IRS…It Can’t be Thaaaaaat Hard Right?

First off, thank you, everyone, for your outpouring of support and for sharing your own stories with me after my newsletter last week. I’m hoping that by sharing my own journey and what is happening in my life y’all could feel more empowered and comforted by knowing we’re not alone in this life. If you’re going through something similar and need a sympathetic ear feel free to reach out!

Annnnnd now that our bank accounts’ national day of mourning, April 18th, has come and gone and everyone on #taxtwitter finally has had a chance to breathe let’s talk about…TAXES! (I realize this is not y’alls fave topic but let’s dive in!)

As many of you know I am the crazy person who actually LOVES doing taxes. Taxation is my first love. I found a great deal of satisfaction in being a tax lawyer and still do tax work for Vol. 1 Ventures’ portfolio founders. I had planned on doing a deep retrospective into this past “tax season” and some trends I saw. But unfortunately, I’ve noticed some serious issues that are only becoming more widespread over the last few years. The longer we ignore these issues the worse it’ll get for everyone.

For starters, “tax season” has become a year-long season. The past few years April hasn’t been a complete shit show for tax preparers because of the joy of…EXTENSIONS! Now more than ever taxpayers are utilizing extensions. This year 100% of individuals that I do tax work for chose to utilize extensions in their filing. There are a lot of reasons why people are choosing extensions but a few reasons stick out.

Currently, folks have a lot of confusion these days about their tax responsibilities, what they owe, and what changes have been made to the tax code that might impact them. Paying taxes has also turned into an unacceptably complex and laughable ordeal for folks who just want to give the government more of their money and move along with their life.

Now to get where we need to go with this topic we need to back up a smidge…

The Internal Revenue Service was established in 1862(!) with the Revenue Act of 1862.

Since 1862 the IRS has thankfully gone through several changes over the years. In the early 20th century, the agency focused on enforcing tax laws and preventing tax evasion during Prohibition. (Total aside but I believe that arresting Al Capone for tax evasion was the piece de resistance and pinnacle of great public relations for the IRS. Taxpayers took the IRS and the sword of justice they held seriously after Capone’s arrest. This allowed the IRS to become a venerated institution that put fear into the souls of folks. If they could send Al Capone to jail…just imagine what they could do to Joe Schmoe.)

In the 1940s, the IRS began to use computers for tax processing, and by the 1960s, it had become one of the largest computer users in the world. This is kinda amazing to think about. The government was a leader in technology. (Yes, you read that correctly.)

Unfortunately, after this initial burst of innovation and leadership in technologies things went awry. Taxpayers are now loudly calling for simplified regulations and clearer communication from the agency, as well as increased modernization to keep up with changing times and technology. Taxpayers are now more conscious of the IRS and its anachronisms. Folks everywhere are used to easy-to-use and fast technologies in their everyday life. The aged technology and lack of transparency used by the IRS in its policies and procedures are on a collision course with reality and where the world has moved.

We clearly need the IRS. They are responsible for collecting approximately $3.5 trillion in taxes each year, which is roughly 95 percent of federal revenue. (On the flip side, in just this decade the IRS has lost $7 TRILLION in uncollected taxes.) The agency is also responsible for administering important social benefits programs such as the Earned Income Tax Credit, and relief programs like Economic Stimulus Payments in 2008 and Economic Impact Payments in 2020. With important administrative responsibilities such as that you would think that the IRS uses appropriate technologies. However, the IRS’s IT functions depend on systems that are at least 25 years old and use pretty obsolete programming languages. If you ever need a hearty laugh remember that the IRS depends on developers being experts in the veeeeery obsolete language of COBOL. Literally, there will soon be zero developers to help support the IRS in its job of collecting taxes. Sometimes I just cannot with this hilarity.

And it’s not like the IRS doesn’t know this is a problem. The Treasury Inspector General For Tax Administration regularly chastises the IRS for its lack of movement on integrating modern technologies. All. The. Time.

The taxation situation during COVID did little to bolster the reputation of the IRS with taxpayers. When returns took years to process and many taxpayers were unsure of the actual filing date, the basic tenets of taxation in the United States began to unravel. Taxpayers increasingly started feeling as though the IRS might not in fact be the best way to administer taxation or be stewards of the nation’s purse. We also started to see taxpayers not taking the IRS seriously as even a government agency. And it’s really hard to blame folks when you look at everything that was going on.

All of this being said, I actually believe that the IRS has some great folks working there. Every single time I have worked with an auditor they have been realistic and empathetic to the taxpayer. They know we are working with a system of chaos and as long as you’re not doing crime they will work with you. The IRS also has folks trying their darnedest to keep the ball rolling when it can seem like an absolutely Sisyphean task. The IRS also now has to work with taxpayers getting absolutely insane and terribly incorrect advice from social media. (I’m sorry but if you got tax advice from TikTok there is a 100% chance it was wrong unless it’s from a CPA or tax lawyer - sorry to be the bearer of bad news y’all.)

So now even the best folks at the IRS are butting up against a system of taxation that was developed for a world that we have long ago moved on from.

Now, I would be remiss if I didn’t talk about the external lobbying to keep our system of taxation within the hell that is our current status quo. There was a great NY Times article last month on this, but essentially the TL;DR is that every time the powers that be start to overhaul our systems to make it easier for individual taxpayers we see the tax preparation lobby push back. Intuit spent $3.5 million on lobbying in 2022. (I think we can all agree that this lobbying did not lead to a better user experience for taxpayers so I’m kinda sad that Intuit spent so much money…feels like they could have spent that money on other things but to each their own.) ProPublica has also investigated the tactics of industry leaders like Intuit and their direct impact on the taxpayer experience. As y’all know I love a good collab between tech and the government…but it needs to make folks’ lives easier - not harder. This is not it.

The next, direct issue preventing change is that there is now increased political pressure on the IRS (whether we want to acknowledge this or not…it’s true) and in a political climate full of voters who have very little understanding of how our political system works we can continue to expect more ridiculous bills like the ill-conceived one set forth to “abolish the IRS.” Taxpayers are demanding change but the politicization of paying tax paying has created misinformation and a lack of understanding around even the basic purpose of the IRS by voters and politicians. Starving the IRS of necessary resources for a short-term gain in political popularity does nobody any favors and again only hurts taxpayers. Imagine what our country would be like if we had just a portion of the $7 trillion in lost tax dollars in our coffers…

Obviously, there are some fundamental issues that urgently need to be addressed by the IRS. These issues are universal and should be kept separate and apart from whatever political views one holds. The IRS can finally address taxpayer concerns about outdated technologies by modernizing its systems and processes. This should include immediately updating its computer systems, improving its online platforms, and streamlining its regulations and procedures to make them more user-friendly. Taxpayers are demanding an easier-to-use and less confusing experience to pay the government money.

Literally, they just want to figure out how to pay the government what they owe in an easy and timely way. I have never met a person who wanted to illegally evade paying taxes. Almost everyone I worked with who ended up on the wrong side of the IRS has done so because of utter confusion or lack of resources. At the same time, we are seeing more innovative technologies being developed that will help make taxpayers feel less stressed and make the taxpaying experience more friendly. With a better user experience and these new technologies, we will see the IRS collect more accurate information and more monies from taxpayers. Hopefully, by working with these new technologies rather than fighting against the sea changes occurring in our world we can enter a new normal with the IRS again leading the charge on integrations of new technologies. But also, yay for getting that $7 trillion back!

Additionally, the IRS can finally work to improve its communication with taxpayers, providing clearer information and more accessible resources to help them navigate the tax process. I’m seeing a lot of builders in the tax industry looking at making tax laws more open and easily interpreted for taxpayers. A world where everyone knows what the rules of taxation are would be amazing for everyone. The number one reason founders I work with avoid dealing with taxes is because they feel like they have no idea what is actually going on with the IRS. These are smart people running amazing companies. Our government has always held transparency to be a fundamental part of our nation. Clear and concise information that doesn’t feel like it’s being put out by the Wizard of Oz will go far in creating a more friendly environment for on-time and accurate tax collection.

By taking steps to modernize and improve its operations, the IRS can better serve taxpayers and build trust in its ability to administer the tax system fairly and efficiently. We no longer have years to work on this. The speed of change and innovation is hitting our nation’s economic center hard so the keeper of our purse needs to adapt as well for forward progress to occur in every part of society.

Let me know your thoughts on how the IRS should move forward or if you’ve seen any cool innovations or startups in the space!

xoxo

Stevie