Simplify and modernize by removing exclusive use for a home office deduction

Yet more from the testimony I submitted for the written record of a Senate Finance Committee and Small Business and Entrepreneurship Committee roundtable held June 7, 2023 (see my posts of 7/9/23 and 7/2/23 and 6/25/23). Another way to simplify tax rules for small businesses (such as ones operating out of the owner's home) and modernize tax rules is to remove the exclusive use requirement for the home office deduction.

Modern life makes it unlikely that anyone uses a home office only for business activities. Most people, for example, have a smartphone in their hands and might get a personal call or text message or use a weather app while in their home office.

An alternative would be to allow a home office deduction only if the space is used over 50% for business and to reduce the deduction based on the percentage of personal use of the space, such as based on time. Offering a standard home office deduction, such as allowed by Rev. Proc. 2013-13, would be helpful, with the amount adjusted annually for inflation (and no exclusive use requirement, but adjusting the standard deduction for the percent of personal versus business use of the space based on an average week of use). 

What do you think?

Sign of need for modernization - Getting tax refunds to taxpayers

Usually around this time of the year - a few days before the filing due date, the IRS issues a news release reminding people who did not file 3 years ago (so for today, their 2019 return) that they need to file by April 15 to get a refund (but due to Covid extensions, they have until July 17 to get their 2019 return filed).

Of course, when some of these people file and report their income, deductions and credits, they might not be eligible for a refund (they might owe tax). But, the news release (IR-2023-79 (4/12/23)) uses the term refund.  I conjecture that for many of these individuals and much of the "$1.5 billion in refunds" their only income is wages and too much tax was withheld based on their income. Some may even have been below the filing threshold but unaware that they could only get their overpaid tax (withholding) returned by filing a tax return.

The IRS reports the data on the "$1.5 billion in refunds" by state. I think they know which individuals did not file because the IRS has a document(s) with their SSN and noting how much tax was withhold (the possible refund). 

Questions:

1. Why doesn't the IRS just refund the amount to the taxpayer if based on the W-2 and any other information returns, too much tax was paid?  The law doesn't allow this; you have to file a return.

2. Why is this announcement always close to the end of the statute of limitations period rather than a year before? Yes, this year it is earlier than usual due to the extra filing time we had for 2019 returns.

3. Can the IRS file a substitute for return for these individuals or is that only when there is tax owed? If the later, can the law be changed?

4. Will modernization efforts reach the point where taxpayers can easily have all of their tax data assembled in what I call their "tax cloud" and then they identify a software tool to handle the filing and get the filing done easily. And this would not just be only for wage, interest and dividend income, but if a sole proprietor set up their recordkeeping up right, it would compute taxable income and go to their tax cloud. Then we would have far less late returns or perhaps ones that will never get filed causing the taxpayer to forfeit their refund.

I think we are too wed to the way we do things now and for the past many decades is the only way to do something. We need to get past that. I have blogged on this topic before and in April 2021 had an op ed in The Hill noting that use of technology and our individual "tax clouds" for our digital tax data, could even eliminate the need for April 15 because taxes could be computed daily, weekly, monthly, etc. and with a swipe of a secure app, if you were underpaid, transfer the funds from your bank account or if overpaid, get a refund. Let's get to a system where there are no refunds owed and outstanding for 3 years and possibly never given back to the taxpayer.

#letsfixthis

What do you think?

Law and Tech Modernization Needed to Get Tax Refunds To Taxpayers

 In recent years, a few weeks before April 15, the IRS issues a press release such as these two:

2021: IRS has refunds totaling $1.3 billion for people who have not filed a 2017 federal income tax return (IR-2021-75 (4/5/21))

2022: IRS has $1.5 billion in refunds for people who have not filed a 2018 federal income tax return; April deadline approaches (IR-2022-66 (3/25/22))

For 2021, the IRS estimated that 1,345,900 individuals were owed that refund (average of $966 per taxpayer).

For 2022, the IRS estimated that 1,514.627 individuals were owed that refund (average of $990 per taxpayer).

These news releases show the number of taxpayers and dollar amount per state. Presumably, these totals come from data, such as W-2 data, that the IRS has but without a filed return, cannot refund the tax withheld which the IRS is presuming would be refunded if the return was filed.

Why can't the IRS just issue the refund? The law doesn't allow it. I had an op ed in The Hill last year about the need - and capability, to modernize compliance and administration such that for many taxpayers, they would not even need to file a return. If payroll and similar data, most of which is already digitized, could be used to determine a taxpayer's tax liability at any point in time, the IRS / technology would just issue the refund.

And we know the IRS has the capability to issue payments as evidenced by three rounds of economic impact payments since March 2020, the advance child tax credit for 2021, and millions of other tax refund situations. 

The law should be changed to allow the automatic return of withholdings to individuals after the IRS runs its check based on information reports it has for the person. Or send each a reminder 13 months in advance of the expiration of the statute of limitations to have the individual confirm their income. But the tech solution would be best as it allows for more improvements beyond the return of taxpayer money to the taxpayers.

What do you think?

#letsfixthis