Hello! This is an article I wrote last summer and shared in an earlier newsletter. I am sending it again (and may a few more times) because it’s TIMELY - the month-long Catch-22 started March 15th! It’s also filled with some great information about the snowballing complexity of the tax code, our struggling tax profession, and one of my favorites, the History of US Taxation & April 15th.
Quick Links
1 April 15th Stress Disorder & the Out-Dated Deadline
2 ASD Roots & Symptoms
3 ASD’s Impact on Tax Professionals
The Month Long Catch-22
Tax Professional Tipping Point
4 Why tax season became unbearable
Mind-Bending Complexity
Form 1040 Changing Function
Tax Professional Fraud Auditors
The Shrinking Tax Season
5 How You Can Help Fight April 15th Stress Disorder
Understand The History of April 14th
Recognize the Media’s Manipulation
Debunk the Extension-Audit Relationship
6 -WhyExtensions are Your Friends
Elimination of the Late Filing Penalty
More Time to Gather Materials
Avoiding IRS Notices
Avoid Amending Returns
7 -The Only Extension Downside
8 -Conclusion: Change the April 15th Due Date
April 15th Stress Disorder & the Out-Dated Deadline
Every year, from late March until mid-April, tax professionals are overwhelmed by clients experiencing April 15th Stress Disorder, also known as ASD. Most Americans have never heard of ASD, and even fewer know they have it. In this article, I will discuss the symptoms and prevalence of April 15th Stress Disorder and how it endangers the tax profession - just when expertise is most needed. I’ll also share a brief history of the April 15th due date and make a (hopefully successful) argument as to why it’s time for a change.
ASD is the irrational fear of filing one’s tax return after its original due date, generally April 15th. Its most common symptom is anxiety (and related ailments). Apprehension grows as the day approaches.Symptoms commonly manifest asfilers realize it’s a few weeks away. Some haphazardly gather their materials and rush to tax professionals’ offices. Others contact their proto check their return’s status, pressing (in various ways) for completion before the dreaded date. Those experiencing more acute ASD lash out if timely completion seems unlikely.
ASD’s Impact on Tax Professionals
Tax professionals suffer from April 15th Stress Disorder, although they are generally not directly afflicted. Instead, their maladies stem from clients experiencing ASD. High blood pressure, insomnia, and depression are widespread. Sadly, hearing of a colleague’s stress-induced hospitalization (or even demise) in the closing days of tax season is not uncommon. A few years ago, your author was affected by ASD and rushed to the emergency room due to uncontrolled high blood pressure – the lack of sleep, stress, and coffee had taken its toll.
The Month-Long Catch-22: It is difficult for many clients to understand the havoc April 15th has had on the tax community. Imagine the weeks before the deadline - dozens of clients simultaneously experiencing ASD and complaining, “but you’ve had my materials for weeks.” The worst part – you are helpless to meet their demand. Why? Because the entirety of each day gets consumed by one of four tasks: 1) Meeting with clients, 2) Responding to their emails, texts, and phone calls, 3) Organizing documents delivered by clients who suddenly realize the April 15th is approaching, and 4) Filing extensions to ensure no client gets hit with the Late Filing Penalty. Preparing returns is not a primary activity.
The exact timing varies from firm to firm. For many, functional workflow disintegrates in the third week of March. By April 10th, most of us ride a wave of loosely reigned chaos. Every free moment gets used for one thing - filing extensions and ensuring no one gets missed.
Tax Professional Tipping Point:Unfortunately, the stress related to April 15th has increased steadily over the past ten-to-fifteen years, causing many accountants to leave the tax world. Others have reduced their client load. Those who can afford retirement are doing just that. When young accountants experience tax season, few decide to make it a career path. Who can blame them? Accounting is a broad field experiencing a shortage of talent. According to Bloomberg, the US has experienced a17% declinein the number of accountants. Demand for the profession, however, has not decreased, giving accountants significant leverage over employers and their careers. Why would a highly skilled individual endure the stress of tax season with so many other options?
Why Tax Season Became Unbearable
There are four primary reasons:
1. Mind-Bending Complexity:The Tax Code’s ever-growing complexity has made return preparation much more time-consuming (and annual training more necessary and expensive). And Congress has not helped – they are not only responsible for making taxes more complex. Sweeping, often retroactive, changes to taxation laws have become common. The moment you have a good grip on the rules, they change them!
Taxation is unlike any other area of law. Most legislation has sensical grounding - rooted in fairness, equity, and logic. Criminal attorneys don’t have to worry about repeated seismic changes to their profession. Lawyers specializing in real estate don’t face an entirely new set of rules every few years.
Taxation, however, has no logical foundation other than, perhaps, the concept of economic gain. Tax bills are (predominantly) drafted by lobbyists and special interest groups. Then, elected non-accountants grind them into formal legislation. Once signed into law, few tax rules are permanent. Those impacting most filers are routinely scrapped and rewritten by the political whims of Congress.
Sweeping tax changes used to occur once every decade or so. Today, they happen every two to three years and are often retroactive – meaning changes impact prior years (even as returns are completed and filed for that year)!
Worse yet, treasury regulations, which tell professionals how the IRS interprets the laws, arrive long after a bill becomes law. So, tax pros are left to guess, speculate (and argue) about the rules while preparing returns impacted by those rules!
2. Form 1040 Changing Function:The primary purpose of your individual income tax return, Form 1040, has changed. It used to be a tool focused on calculating and collecting income tax. Today, its primary purpose is social welfare distribution – taxation is secondary. The reason for the shift is pretty simple. Form 1040 is the single signed (under penalty of perjury) document individuals and families must file annually with the federal government, making it the perfect vehicle for income-based welfare administration. Below are a few examples of programs facilitated via Form 1040.
Form 1040 distributes money to Americans considered “low income” via theEarned Income Credit. Daycare subsidies get paid to income-qualified parents via the Dependent Care Credit. The Child Tax Credit offsets the cost of raising children. Education (American Opportunity and Lifetime Learning) credits reimburse qualifying filers for college & vocational school expenses. The Retirement Credit helps low-income individuals save for retirement. In 2014, the Affordable Care Act even placed the IRS and Tax Professionals in charge of financing health insurance for millions of Americans!
Each credit represents a separate income-based social welfare program. If not for Form 1040, imagine the resources each program would require to screen applicants and distribute benefits. Instead of further bloating bureaucracy, Congress has made tax professionals unsung social workers responsible for administering these programs. They are required to understand each benefit - who qualifies and how to apply. They must also keep up with each program’s ever-changing rules and ensure filers are not gaming the system, which segues to our next point.
3. Tax Professionals are NowFraud Auditors:Utilizing Form 1040 to administer federal welfare programs may appear efficient on the surface, but it has a cost. As programs have grown in scope, so has cheating. Tax credit fraud runs rampant. Although all credits invite cheating, the Earned Income Tax Credit (EITC) is the largest culprit.
The EITC has been around for decades. Initially enacted in 1975, its intended purpose was to reduce welfare rolls by rewarding work. Unfortunately, as happens with so many government solutions, the opposite happened. Instead of reducing the number of welfare recipients, decades of tinkering and expansion made the EITC a mammoth welfare program (and most who receive the credit still qualify for other welfare benefits). Today, the credit distributes over $65 Billion ($65,000,000,000) taxpayer dollars annually to over 26 million recipients. That’s a lot of free money for simply filling out a form, which is why the program is rife with fraud. The IRS estimates that between 20% to 26% ($14 to $17 billion every year) of EITC payments are fraudulent.
So, whose responsibility has it become to protect government funds? Yep, Tax Professionals. Each year, the IRS requires pros to collect additional documentation to ensure clients are not cheating (or face disciplinary action). Pros must gather this information for the Earned Income Credit AND each abovementioned subsidy. What does being a welfare administrator take? Time. A lot more time.
4. Shrinking Tax Season:Another reason April 15th has become unrealistic (and filing extensions critical) is that, as tax complexity increases, the amount of preparation time – the length of the traditional tax season has collapsed.
Traditional tax season used to last about three months, from mid-January to mid-April. Today, it lasts a few short weeks. Fifteen years ago, many filers received everything needed to complete their taxes by mid-January. What did they have? Their employment W2 and interest earned by a savings account. Nearly everyone else received their materials by January 31st. Today, most are not ready to file until at least early March, four-to-five weeks later.
So what changed? Several things, but one of the most is the growing prevalence of personal investment accounts. In the early 2000s, investors generally used a broker or financial planner to buy and sell securities. Few filers had investments other than their homes, retirement, and, occasionally, rental property. Those utilizing brokerage services generally only had one broker – one account. Their information returns were delivered timely, were generally correct, and reasonably simple.
Those days are gone. Today, individuals of all ages and income levels can quickly and inexpensively invest in stocks, bonds, calls, puts, and municipal securities via dozens of internet-based brokerages. Small investors can participate in dollar-bundling businesses that loan money to others for a profit. Those who want to invest in commodities can buy shares in an oil well, wheat futures, corn, or other staples. Want to jump in the latest IRS-infuriating craze? Trade Bitcoin or another virtual currency. Why not all of them!?
Each investment and trade generates a taxable event (hopefully income). And as the prevalence of investment firms has grown, so has the information they must collect and report to the IRS. The volume of data processed at the close of each tax year is staggering. Brokers must track the tax basis (investment) and the gain and loss generated by near-every traded security. About a decade ago, the IRS also added six separate forms (ironically all on a single document called Form 8949) to report capital gains and losses. Brokers must calculate the profit or loss from every sale and tell clients where each trade gets reported on their tax returns.
Brokerages must send investors this information by February 15th - a deadline few can meet. Most investors receive their tax documents in late February or early March. [Worse yet, initial reporting often contains errors. When brokers discover mistakes, they send corrected information returns, often in May or June.]
Most clients now have at least one online brokerage account. Three is surprisingly common, as are twenty-plus pages of trades to report on various Forms 8949. As our new financial reality has collapsed tax season, the burden of additional 1040 reporting requirements has increased the time needed to prepare returns.
Growing complexity, the changing purpose of Form 1040, fraud detection/minimization, and America’s evolving financial landscape work together to make the April 15th tax deadline obsolete. Filing an extension has become increasingly necessary, if not wise, for an unprecedented number of filers. Although the IRS has been late to realize it, helping filers overcome April 15th Stress Disorder has become vital for effective tax administration.
How You Can Help Fight April 15th Stress Disorder
Don’t Be A Victim:Knowledge is power. Hopefully, this article has helped you recognize the signs of ASD and the increasing strain the disorder puts on tax professionals. Understanding the origins of the April 15th deadline and the media’s role in stigmatizing the date helps many filers overcome ASD. I’ll share this information below and clarify some lingering misbeliefs regarding extensions and the benefits of filing one.
Understand the History of April 15th:The April 15th deadline (for non-extension filers) has existed for over sixty years. It is an arbitrary date invented by Congress in 1955 when they changed it from March 15th (the original date was March 1st). In 1955, the entire tax return,Form 1040 (click to see the return), including itemized deductions and credits, was a whopping total of four pages. Instructions totaled 16 pages. Now, add two more pages if you own a business or four if you own a farm (including self-employment tax).
That’s it – that’s the whole 1955 1040 Tax Library. A total of four forms and schedules:
- Form 1040,
- Schedule C for the self-employed,
- Schedule F for farmers, and
- Schedule SE for calculating Social Security and Medicare for business owners and farmers.
Here’s a brief history of Form 1040’s due date. In 1913, ratifying the 16th Amendment (the irony surrounding its passage is quite interesting) established the income tax. State approval occurred surprisingly fast and hung on some familiar rhetoric – it would only apply to the rich who would “finally pay their fair share” back to society. At first, only married couples earning over $4,000 per year and single individuals earning over $3,000 had to file and pay income tax. Such income levels in the early 1900s’ placed filers among society’s elite. For perspective, consider the following: A highly paid union workerin 1923 (ten years after enactment - the earliest year I could find records) earned about $50 per week, or $2,600 per year. Additionally, two-earner households were rare. The result: Only 1% of Americans filed a tax return in the early years of Form 1040’s existence.
The original due date was March 1st, then quickly became March 15th. The reasoning for a March due date was two-fold. First, it gave the filers ample time to collect their materials and complete the simple form. Second, and most interestingly, Congress wanted their returns (and money) before they fled to their summer homes or left the country for vacation.
Now, let’s fast forward to 1955, when the due date changed to April 15th. Because of World War I, the Great Depression, and World War II, the size of government ballooned into a miniature horror of what it is today. Spending and debt soared. Someone needed to pay for it. Who would it be? If you guess the middle class, congratulations.
By 1955, actual (inflation-adjusted) incomes had increased substantially along with the standard of living. As income increased, the Form 1040 filing threshold decreased. The percentage of households required to file returns became close to what it is today. [I have not done the research but am willing to bet that, due to social welfare payments running through today’s 1040, a higher percentage of Americans paid income tax in 1955.]
By 1955, Form 1040 had also become a much-simplified version of today’s tax return. It was only four pages but included sections for types of income, itemized deductions, and personal exemptions. It referenced tables used to calculate tax. Only two credits appeared: One for dividends and another for retirement income. Completing Form 1040 now required math skills and interpreting cross-eyed instructions, making it complex enough to hire professional assistance.
So, why did Congress claim they gave filers an additional month to meet their civil obligation? FORM 1040 HAD BECOME TO DANG COMPLICATED. A secondary (and likely more accurate) reason for changing the due date to April 15th is that the IRS was overwhelmed by the growing number and complexity of returns filed. Employees needed additional processing time before the law required them to pay interest on refunds.
If Congress changed the due date from March to April 15th due to increased complexity, why has the date remained the same for 60+ years?Considering: 1) the exponentially higher difficulty of today’s tax return vs. 1955’s and 2) The current state of the Internal Revenue Service (if you have not noticed, it’s a mess), why hasn’t the April 15th due date changed to June or July? Why hasn’t the IRS worked to dispel these extension myths and promote its role in reducing fraud, errors, and the need for amending returns?
Recognize Media Manipulation:The media has played an instrumental role in planting April 15th Stress Disorder into the American psyche. Publicizing the date remains an annual ritual, attracting eyes, ears, and advertiser dollars. Headlines count down the days to the Taxman’s arrival like some dystopian Santa. Although the headlines and stories remain, coverage was far more sensational before electronic filing. Reporters hung around post offices as midnight approached. They staked out the lobbies and interviewed scores of last-minute filers clutching clumsily stuffed envelopes, rushing to obtain an April 15th postmark.
Media-induced panic gathers attention and makes money. It fuels barbershop, barroom, and kitchen table discussions of taxation and government theft. It also contributed to ASD by triggering nightmarish speculation regarding the fate of poor souls who miss the deadline.
Debunk the Extension-Audit Relationship: Tax returns have never, nor are they now, flagged solely because of the date filed. It’s complete nonsense. But, like most fireside tales, the myth may be rooted in two grains of coincidental truth predating electronic filing.
First, before E-filing, the IRS primarily processed returns by hand. It was a daunting and stressful task – wading through growing mountains of envelopes mailed before or on April 15th. IRS employees had one mission – shrink the pile! There was little time to double-check math and spot strange deductions. But, about a month after April 15th, the mountain shrank to a small hill. Workflow became manageable. IRS employees had more time to perform their duties with critical eyes. So, there was a higher chance they would notice errors and anomalies.
Here’s the second grain of coincidental fact. In the early decades of hand-completed tax returns, whose taxes were most likely to go on extension? Business owners and investors. High-earners with inch-thick, super-complex, manually calculated returns. Such returns are more likely to contain unreported income, misapplied deductions, and mathematical errors. It only makes sense that they would also garner more attention.
In either case, filing an extension is not the direct cause of increased scrutiny. Additionally, any correlation went out the window decades ago - when electronic filing and computer algorithms replaced human hands and eyeballs.
Among many tax professionals, a prevailing counter-myth has replaced those of the pre-eflile era. Their speculation holds that filing an extension may reduce audit risk. Why? Because, at some point during the year, IRS attention shifts from current year processing to preparing for next year’s filing season. Programmers are busy writing new code and creating new algorithms; their focus has moved away from the previous tax year. Do these professionals have solid evidence to back up this assertion? Nope.
Why Extensions are Your Friend
I’ve shared the media’s interest in spreading April 15th Stress Disorder and debunked common extension-filing myths. Now, it’s time to familiarize ourselves with the object of our fear and realize that extensions are nothing to shun. They are, on the contrary, a powerful tool providing several benefits. Here are a few attributes that endear the extension to filers and professionals alike:
Elimination of the Late Filing Penalty: The extension functions to change the due date of the filer’s return. That’s it. Instead of having until April 15th, filers gain an additional six months – until October 15th without worrying about facing a significant penalty – the Late Filing Penalty. The title, Late Filing Penalty, is a misnomer. Filing Form 1040 late does not automatically generate a fine. If the return shows a refund, there is generally Form 1040 no penalty. It only applies when late-filed returns have a tax due. But, the fine is substantial –5% each month (or part of a month) the return is late. The cost adds up quickly and maxes out at 25% of the tax due. For 2020, 2021, and 2022 congress has enacted a minimum penalty for returns filed over 60 days late. This minimum: The lesser of $435 or 100% of the tax due!
Additionally, the tax and penalty are both subject to daily-compounding interest. The general market determines the rate, which changes quarterly, but 3-6% is a fair estimate.
Avoiding this penalty is one of the reasons tax offices are overwhelmed from late March to April 15th. Pros are fielding client inquiries and questions, receiving client materials, and dealing with April 15th Stress Disorder. But, most importantly, they are making sure everyone files an extension to avoid this penalty.
More Time to Gather Materials:Filing an extension reduces the stress of those who understand their benefit. They have more time to ensure they’ve received and compiled income and deductions. Business owners, families, everyday investors, and retirees with multiple retirement streams benefit most. I cannot tell you how often small business clients rush to meet the April 15th deadline, then realize their records were erroneous. Retirees regularly forget about an investment or retirement account that didn’t get into their tax folder. Busy spouses miscommunicate, forgetting about charitable donations, medical expenses, and childcare costs. Another common oversight occurs when partnerships (often publicly traded investments) or other businesses have filed extensions. Investors forget about needing the information and omit it from their taxes.
An extension is also essential for anyone who has moved over the previous year. Forwarding mail takes time (and does not always work). Sold a home? How does the previous mortgage holder know where to send your interest statement? It’s as easy to forget the part-time job held last spring as earnings accumulating in a seldom-used savings account. Filing an extension helps ensure correct completion. There are no surprises, no notices from the IRS, and less need to amend a previously filed return.
Avoiding IRS Notices:The most common audit experienced by modern taxpayers results from computer matching programs, not an IRS employee demanding receipts to justify a deduction. Providers of income must report this income to the IRS via information returns. As a required courtesy, you receive a copy of these forms; 1099-MISC, 1099-INT, 1099-DIV, 1099-B, 1099-NEC, and W2s in January or February. But, their real job is telling the IRS that you received this income. The IRS loads this information into computers to ensure you have been an honest citizen by matching it to what you reported on your tax return. Computers expect each income item to appear on a specific line on your tax return. When an amount is missing or falls short (ironically, overreporting does not matter), they kindly adjust it and send a notice called a CP-2000 (generally 3-6 months after you file). They also send a bill for any additional tax, which you can pay or dispute. Unfortunately, most of these notices are correct –the recipient made an error. Sometimes the information reported to the IRS is incorrect, or we can offset the income with deductions. Either way, fixing the mistake requires arguing with a computer or filing an amended return.
What’s the easiest way to avoid these notices? Filing an extension ensures you’ve received all information needed to file your return.
Avoid Amending Returns:As discussed extensively in other articles, taxation has become exponentially more complex since adopting the April 15th deadline in 1955. Complexity increases the likelihood of errors, especially when rushing to meet deadlines. These errors happen for various reasons, and we’ve discussed many. They all increase the probability of needing to file an amended return (a tedious process that tax professionals generally bill for).
Increased complexity is not isolated to Form 1040. Errors on information returns are now commonplace. The volume of data employers and institutions must provide staggers the mind. Every year there are new forms, codes, and instructions for employers, banks, colleges, mortgage companies, brokerages, corporations, mutual funds, health insurance companies, third-party payees (eBay, PayPal, and credit cards), and health savings programs (to mention a few). Most of these entities must send the required information to recipients by January 31st. Brokerages (Form 1099-B) get an additional two weeks.
What do complexity and rushing foster? Errors. Once discovered, the reporting entity will send corrected information, typically in May and June. What happens if the updated data is material to the recipient’s taxes? Filers should amend their return. What’s the easiest way to avoid amending such a return? File an extension.
The One (small) Extension Downside
Filing an extension does have one downside, albeit a small one. As you have probably heard, filing an extension provides more time to file your return but not additional time to pay your tax. Although this is not entirely true, there is a penalty for some filers who pay their taxes after April 15th, even if they have filed an extension - the Late Payment Penalty. The Late Payment Penalty (also called theFailure to Pay Penalty) equals ½ of 1%. It is 1/10th of the Late Filing Penalty. It applies each month (or part of a month) tax gets paid after its due date and tops out at 25% of the tax due. Like the Late Filing Penalty, it is also subject to interest.
As mentioned earlier, the Late Payment Penalty is tinywhen compared to others. It’s one of the smallest in the IRS catalog. It equals $5 per thousand dollars owed monthly. Compare this to the Late Filing Penalty (eliminated by filing an extension), which is $50 per thousand.
It is important to note that owing tax with an extended return does not mean you owe the Late Payment Penalty. When tax due is less than 10% of the total tax due on the return, it generally does not apply (assuming you pay the balance by October 15th).
Also, the Late Payment Penalty can be difficult to distinguish from a similar penalty called the Estimated Tax Penalty. It’s a little complicated, but if you owed tax the previous year and owe tax on the return again, you may incur the Estimated Tax Penalty regardless of when you file.
Conclusion: Change the April 15th Due Date
Let’s wrap up with a few observations.
First:April 15th Stress Disorder is an actual condition. It is a phobia rooted in a misunderstanding media and popular culture have fanned into irrational fear.
Second:The income tax return function has changed drastically since the 1970s’. Its primary function has become one of social subsidization and financial regulation. Calculating and collecting income tax has become secondary.
Third:Due to the return’s changing function, Form 1040 has grown ridiculously complex, as has the information reporting required by third-party payers.
Fourth:This complexity has increased the time it takes to prepare tax returns while simultaneously shrinking the window to complete them.
And Finally:These factors have placed an undue burden on both Form 1040 filers and tax professionals. The stress of meeting the deadline has placed an excessive strain on the professional tax community, which is the IRS’s most valuable tax compliance asset.
The solution is obvious. It’s time to change the un-extended due date of Form 1040.
Change the Date! In 1955, Form 1040’s due date was changed from March 15th to April 15th because of the burden complexity placed on filers and IRS employees. Let’s put this burden into perspective. In 1939, the entire US tax code was 504 pages long. By 1955, it had grown to roughly 14,000 pages. Form 1040, including all schedules, was four pages long, plus an additional form for business owners and farmers. By 2014 (nearly a decade ago), the US tax Code had grown by over 500% and reached 75,000 pages. It now contains over 1 million words and is longer than the King James Bible, Tolstoy’s War and Peace, and the Harry Potter series.
Common sense, fairness, and effective tax administration all point to one conclusion: The April 15th deadline no longer makes sense and needs to change. I’ll let Congress haggle about the exact date, but June 15th has a nice ring. Until then, I hope this article has helped the reader to understand that filing an extension is the easiest way to cope with this antiquated and arbitrary date. It is nothing to fear and provides a mountain of benefits with a molehill of downsides.