The most effective way to do that? Give different taxpayers different ways to file — big corporations like GE may file a 40,000-page tax return, while an individual might file a 1040-EZ. But are these “easy” tax returns easy enough?

Photo credit: striatic on Flickr.

The 1040-EZ, originally released in 1982, was designed to be the easiest of easy tax returns. And it is easier than the standard tax forms — it excludes anyone who is claiming dependents, earning $100,000 or over age 65. And it doesn’t allow any tax credits besides the Earned Income Tax Credit.

For many tax payers, that’s simple enough — but it’s not an easy tradeoff to make. After all, giving up education credits, the child tax credit, and the saver’s tax credit are all tax credits that lower-income taxpayers could take, but that wouldn’t be available to someone filling out a simple form.

Instead of having easy forms, the it’s a safer decision to make it easy to prepare them. Taxpayers shouldn’t spend hours figuring out their eligibility for a tax credit that’s not going to end up making them much money in the end. Instead, the simplest technique is to do as much as possible automatically. Automated, online filing can give taxpayers access to tax credits they could take advantage of, without forcing them to waste time on the ones that aren’t worth it.

It doesn’t make sense to just focus on the forms. Easy tax returns don’t come from shorter forms — they come from easy ones! That’s why RapidTax always makes it as easy as possible to file taxes online.

So what is the IRS trying to add here?

This is all part of their efforts to make there there are quality tax preparers available to all taxpayers. Instead of just declaring certain preparers qualified (or having them all take a standardized test), the IRS is asking regular taxpayers for their ideas.

This is going to give people a chance to articulate why they pick whoever they pick, which means that the IRS will be able to focus on qualitative issues: some people might excel at quickly preparing tax returns — but others might be great at making sure taxpayers don’t get overwhelmed my all the rules and regulations (not to mention fines and fees).

This IRS is looking for input from two groups:

Consumer groups (and regular consumers):

These groups include the AARP, Consumer Federation of America, Center on Budget and Policy Priorities, National Community Tax Coalition and Low Income Tax Clinics.

Industry groups (and tax preparers):

…including the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, the National Association of Tax Professionals and the National Society of Accountants.

So what if you’d like to attend? Just send them an email:

CL.NPL.Communications@irs.gov

This is actually a fairly bad precedent to establish. It’s clear that cell phones are a benefit, and that as such it wouldn’t make sense for them not to be taxed. If they were tax free, we’d end up with a situation similar to healthcare: it’s much more economical to buy healthcare through an employer than as a private party. This means that someone who loses their job also loses their access to healthcare. Treating cell phones this way could make things even worse: a newly laid-off employee could lose health insurance and the ability to call new potential employers.

The interesting question is: why wasn’t this law enforced in the first place? According to the Wall Street Journal:

The request is a turnabout from last week, when IRS proposed measures to improve enforcement of the law, which is now widely ignored by employers and employees. One option proposed by IRS would have counted 25% of employee cell phone use as personal, and thus subject to tax as income to the employee.

Their current line is that there won’t be any taxes on cell phones, for employees and employers. It’s certainly cheap to cut a tax that nobody pays, but it’s a bad idea to link phone access to employment. Especially in an uncertain economy, giving people a reason to bet more on a job they’re less likely to keep is a bad policy.

The good news is that they’re being cautious: rather than dive right in, the IRS is asking for lots of feedback beforehand:

The first part of this groundbreaking effort will involve fact finding and receiving input from a large and diverse constituent community that includes those that are licensed by state and federal authorities — such as enrolled agents, lawyers and accountants — as well as unlicensed tax preparers and software vendors. The effort will also seek input and dialog with consumer groups and taxpayers.

The bad news?

• This is criminalizing behavior that is already illegal: although many laws already have this effect (drunk driving laws prosecute people for engaging in behavior that could lead them to be prosecuted for manslaughter), but it’s still redundant.

• In an economy like this, why make some jobs harder? If there are bad tax preparers out there, it’s good to make them stop, but adding new rules punishes every tax preparer.

• This creates a false sense of security: right now, most people pick a tax preparer based on their reputation. If tax preparers have to follow more stringent rules, it increases the incentives to pass a test rather than earning trust.

I asked IRS press representative Kevin McKeon how this will affect taxpayers, and he explained that:

This process should benefit the average taxpayer. When people pay good money, they should not get bad advice. When people get bad service from tax preparers, it hurts them in many different ways. They can get penalties for incorrectly reporting and underpaying their taxes. They can pay more in interest and penalties if a preparer gets it wrong.

Conversely, when people get good tax advice, it helps them file an accurate tax return. They avoid paying interest and penalties. And it helps the nation’s tax system, and it avoids compliance problems for taxpayers down the road.

Ensuring we have a strong system in place for tax return preparers and the associated industry is very important and must be part of our overall plan. And we must ensure our system works for the nation’s taxpayers. This review — and the resulting recommendations — can help us on that path.

So it looks like the IRS is moving from fixing mistakes to preventing them. If they can do it successfully, this will be great news for the average taxpayer (and the average tax preparer, too!).

Other Tax Blogs Chime In

• RothCPA argues that it’s redundant. Tax preparers are already punished for making mistakes.

• PappasTax is in favor, citing fraudulent promises from tax preparers.

• Roni Deutch focuses on the IRS’s long-term plan for deciding which changes to make.

• Don’t Mess With Taxes points out that tax preparers are actually less regulated than hairdressers.