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  • Writer's pictureMercedes Petrellis

Why the Need for Tax Returns

February 2024



Q. Why do we have to do tax returns? Doesn’t the IRS already have all the info? I don’t have a business, so why doesn’t it just send me a bill?

 

A. President Reagan promised a system that would cut in half the number of Americans who have to file a tax return. The Obama administration wanted to send already completed returns for our review. Neither plan came to be, nor did we get the postcard Donald Trump thought should be sufficient.   

 

The IRS receives the great majority of reportable income from employers, businesses, banks, insurance companies, custodians, lawyers, realtors, title companies, federal and local governments, casinos, lotteries and just about any institution that pays what could be considered income. Even interest on a family loan is reportable. Since 2012 brokers and investment companies have been reporting not only the proceeds from security sales but the cost basis as well.  

 

At least when it comes to income, the preparation of a tax return seems to be an aptitude test to see if all the appropriate amounts were reported correctly, entered on the right line and on the right form. Finally, was the math accurate and was the right tax rate applied.   

 

The IRS computer will be in touch if you miss reporting any income. It can work both ways. The IRS will let you know if you didn’t take credit for taxes paid or withheld and if you may be eligible for certain credits, for example, the earned income credit.       

 

At least so far the IRS does not get direct information on deductions like medical expenses, donations, energy credits, or what kind of car you drive. It does get information from lenders about mortgage interest and from schools about tuition. Anybody who can access Zillow can look up your property taxes. In 2018, the standard deduction was raised, and now 87% of taxpayers don’t itemize. 

 

With some exceptions, most of the genius in taxation is in planning and strategizing, not the preparation of the return. You can add to an IRA up until April 15, but generally, December 31 is your deadline for taking action to reduce taxes. 

 



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