I am reading an abstract for an upcoming article in the Southern California Law Review.
When
an electricity provider wants customers to pay their bills monthly, it sends
them a bill each month. Yet this is not how the tax system works, at least for independent
contractors. Their taxes are due quarterly, but they receive a tax statement
(Form 1099) only one time a year. It is up to the individual, then, to know
when their taxes are due and how to pay them, and it is on that individual to
estimate how much they owe each quarter. As a result, compliance for
independent contractors – particularly for online platform workers–tends to be
lacking. Failure to pay their estimated taxes subjects these taxpayers to
potential penalties and causes the government to collect less tax revenue.
Yep, quarterly taxes for the self-employed. I know
a lot about the topic.
There is a simple, yet entirely overlooked,
reform that could vastly improve compliance when it comes to paying estimated
taxes: third-party information returns (Form 1099s) should be issued to
taxpayers on a quarterly basis. The idea is straightforward and intuitive. If
the government wants people to pay taxes four times per year, it needs to
effectively “bill” them four times per year. This idea is supported by social
science research showing that, the more taxpayers are reminded to pay their
taxes, the more likely they are to do so.
Sigh.
If only it were so simple.
Unspoken is an arrogance that accounting is just
pushing a button. Everything is automated, right, so what is the issue?
Much is automated. More so today than when I
started, and it will be more so again when I eventually retire. But much is not
all. Much is not necessarily even much.
The presumption that Fortune 500 accounting
departments are the norm for businesses will lead to erroneous conclusions, including
the one above. There are over 30 million companies in the United States. Less
than 1 percent of those are publicly traded, and the Fortune 1000 constitutes a
fraction of that fraction. There is an entire economic sector - the
self-employeds, the small- and mid-market companies - that are unlikely to have
an accountant - much less an accounting department - available to respond to the
whims of nonserious minds. Most CPAs - including me – advise that market. When
we meet with ownership, we meet with the owner or owners, not an assemblage at an
annual shareholder meeting. When
decisions are required, the number of decision makers is few; in many cases, it
is only one.
Somehow this overlooked sector represents roughly half
of all economic activity and approximately two-thirds of all jobs created in
the United States since the 1990s. This sector employs tens of millions,
allowing them home ownership, EV purchases, private schools, higher education, smart
phones, streaming services, and perhaps an occasional vacation to Disney World.
Can this sector push a button to generate quarterly
1099s because a professor thinks the idea has been “entirely overlooked?”
Maybe, but probably not. More likely, they will call their CPA – assuming they
have one.
That quarterly 1099 is somehow now in my court.
CPAs want to go home, too.
Then there is the issue of who will prepare these
1099s. I know that accounting literature is not a thing, but glance at the
following:
Statistics
from the AICPA suggest that 75 percent of current CPAs will retire in the next
15 years.
Does this seem like an appropriate time to further add
to the problems of accounting? Many already see a profession facing future
demands exceeding its ability to supply.
No, I don’t think that quarterly 1099s are a bright
idea.
In fact, maybe the Congressional effort in 1986 to
move almost all taxable year-ends to December 31, further compressing our work
schedule was – in retrospect – not such a bright idea.
Notices are the bane of tax practice. One may be a gifted
practitioner but send enough penalty notices and even a loyal client begins to
question. Maybe the decades of Congress “balancing” budget bills by
increasing tax penalties on virtually anything that moves was not such a bright
idea.
Maybe the relentless introduction of arbitrary,
inconsistent if not preposterous – other than as blatant money grabs - tax laws
was not such a bright idea.
Maybe passing tax laws late in the year when there
is no time for advisors to react – or even better, passing those laws the
following year but with retroactive effect – was not such a bright idea.
Maybe
the hubris that just one more surtax, deduction or tax credit will somehow solve
the enduring difficulties of the species and pave the highway to heaven was not
such a bright idea.
We are showered by sententious minds bringing bright
ideas.
They should be entirely overlooked.
