Why the IRS Can't Automatically Calculate Your Tax Owed

A frequent point of confusion in the tax system is why the IRS, which is supposed to know how much you owe in taxes, requires you to provide detailed information for your tax calculation. This article delves into the complexities of tax calculations and explains why the IRS needs your input to accurately determine your tax liability.

IRS and Deductions: A Key Complexity

Firstly, and most importantly, the IRS does not know all your deductions. Even if you have had significant medical expenses or undergone a fire, the IRS might not be aware of these events. It is possible to claim a wide range of deductions, such as mortgage interest, charitable donations, and various other personal and business expenses. Without your explicit declaration of these deductions, the IRS cannot possibly know the total amount of tax you are entitled to claim, and therefore, they cannot calculate your exact tax liability.

Let's consider a simple example. If you own rental properties, the IRS might only know about your income from those properties if you receive a 1099 form directly from tenants. However, if you manage these properties personally, the IRS may have no idea how much you pay for property maintenance, or how much you are paid for your managerial services. Similarly, they might not know how much you spend on property repairs, advertising, or painting, unless you provide this information. Even your own paycheck and employer-provided reimbursements may be only partially known, as the IRS would not have full insight into other reimbursable expenses, such as mileage and car maintenance.

Tax Complexity: A Major Hindrance

The tax code is intentionally complex to manage this vast amount of variability. It is designed to account for a wide range of possible scenarios and calculations, and it is impossible for any agency, no matter how powerful, to accurately predict individual tax obligations without detailed personal information.

Much of the information needed for tax calculations is not reported to the IRS. For instance, the IRS only knows about your gross income and certain types of reimbursements. It does not have transparency into how many miles you drive or the age of your car, which are critical factors in determining deductible expenses related to your vehicle.

The Role of Professional Lobbyists and Legislative Constraints

Linked to the complexity and the need for detailed individual information is the lobbying efforts by professional tax preparation companies. The tax return companies, such as HR Block, have successfully lobbied against the IRS's proposed automatic tax calculation system. Their argument is that such a system would take away their business by making it easier for individuals to manage their taxes without professional help.

Moreover, some conservative lawmakers champion the idea that "all taxation is theft" and work to make the tax system as burdensome as possible. One such example is the decision to implement a sales tax rather than a value-added tax (VAT), which would streamline the tax collection process. Their goal is to keep the tax system complex, making it more difficult for taxpayers to navigate and pushing them to seek professional assistance.

This lobbying effort has led to legislative constraints that prevent the IRS from automatically calculating tax liabilities. The IRS would be able to draft tax returns and send them for review, but this legislation has made it legally impossible.

Conclusion: The Importance of Providing Detailed Information

While it might seem unfair that the IRS requires you to calculate your own tax liability, the reality is that the tax code is designed to allow for complex and personalized deductions and credits. Without accurate and detailed information from taxpayers, the IRS cannot possibly account for all the deductions and expenses that may apply to an individual's situation.

Given the complexity of the tax system and the legislative constraints in place, it is crucial for taxpayers to provide all the necessary information when filing their taxes. This ensures that they are fully compliant and can take advantage of all allowable deductions and credits.

Ultimately, while the IRS can undoubtedly process large amounts of data and perform various calculations, the unique circumstances of each taxpayer's life mean that manual input remains essential for accurate tax assessments. This is why, despite the IRS knowing some aspects of your income and deductions, you still need to calculate your taxes yourself.