Tax preparation software has encouraged the gamification of tax evasion, making it tantalizingly simple to bump up the value of a tax refund. This is alarming, but it's easy to see how we got here.
I love classic video games.
When I was a kid, Atari made the best games, but hard core fans may remember ColecoVision. Or maybe Odyssey 2? My brother Brendan and best friend Lee played K.C. Munchkin on an Odyssey 2 for hours on end. We had epic battles to determine who was best. The competitions got heated. We bickered. We developed (secret) strategies. We practiced after school and on weekends. All in a quest to get the highest score.
Little did we know that we were training ourselves to become tax cheats.
Huh?!!
Yep, there is an intriguing connection between Space Invaders and tax evaders.
Fast forward from 1982 to 2016. Video games have evolved from child’s play into a $93 billion a year industry.
The influence of these games is broader than the immediate market for them. Concepts from video games have found their way into many aspects of society. This phenomenon even has a name – gamification. Dictionary.com says that gamification is “the process of turning an activity or task into a game or something resembling a game.”
Ever put a purchase on a credit card, just to get enough points for a free flight? That’s gamification. Wear a pedometer, track the number of steps you take, and try to beat what you did last week? That’s gamification.
Here’s another example, just in time for Tax Week 2016. Ever use tax software to file your taxes? I have, and the elements of gamification are hard to miss. Here’s my experience.
I enter the information from my W2. The software shows me a really cool animated “refund calculator” at the top of the screen. It tells me I owe $3,054. Next, I enter my wife’s W2. The refund calculator fires up again… now I owe $4,490. “Damn! That can’t be right!”, I mumble to myself.
With furrowed brow, I turn to other documents in my pile. I grab my mortgage interest statement and enter the information. The refund calculator begins to flash and turn. But wait! This time the number is going DOWN! $4,000… $2,000… it begins to slow, as it settles on $1,334.
Next up? Property taxes. I live in New York, so this is a big number. I enter the figures, and as I press the enter button, my eyes move quickly to the refund calculator. It starts to move…. $1,000… $500… it turns GREEN!... $500… $1,000… settles on a refund of $1,083! I start to get excited.
Now to a pile of charitable donations. They are all small amounts. $50 for cancer research. $100 for Covenant House. $30 for St. Baldrick’s. Each time I enter a donation, my refund goes up by a few dollars. I like that I can make my refund amount go up, just by pressing a few buttons. It's fun... almost like a video game.
A thought crosses my mind. What happens if I add a donation for $5,000? What would THAT do for my refund? I change the cancer research donation from $50 to $5,000. The refund calculator goes wild. “Wow!”, I think to myself. “Wouldn’t it be nice to have a refund like that?!”
That's a reaction that should be concerning to tax administrators.
I could continue with my story, but by now, you see the point. Tax software firms have gamified the chore of filing taxes. That’s good, because it eases the burden of filing. But, gamification has big consequences. Everybody wants a big refund. Gamification makes it easy to engineer one for yourself.
Think gamification of tax evasion isn’t a big deal? Consider that 27 million filers use tax software to file their taxes. That makes it amazingly easy for a large segment of taxpayers to get a refund amount larger than they should.
To me, that makes tax preparation software the single biggest threat to the integrity of the US tax system. It's easy to (literally) 'game the system.' Tax administrators and policy makers should be greatly concerned about the effect of gamification on compliance.
As fraud fighter, and as a founding member of the video game generation, I sure am concerned. You should be, too.
NOTE: The author dutifully complies with all tax laws, and the tax line item figures presented in this blog are for illustrative purposes only.
8 Comments
Shaun - very interesting article.
Thank you for sharing. Most of my comment will respond to your saying "Gamification makes it easy to engineer big refunds for oneself".
What is the difference between tax planning and tax evasion? Thinking 'a $5,000 number there would decrease my tax liability by so much' is tax planning.
And if you think tax prep software is a threat to the US tax system - wait till I release my spreadsheet. I am re-creating the entire tax code in Excel. W-2 and 1040 are ready, working on including other schedules as well.
This Excel will be perfect for the 'What-if' analysis that you talk about. It will be quicker to use as compared to any software. Also it will be mostly free.
Moreover, in many cases, the tax code (Government) wants us to understand the implications: why do they give credits like first time home buyer's credit? Alternate energy credit? Because they want to influence the taxpayer's decisions.
I look at the tax prep software/ my Excel just as a way for the common man to gain insights into the tax code without paying heft CPA Fee.
You can subscribe to my blog using your email ID OneMoreDime.com so that you are the first to know when my Excel comes out.
Lastly, even when tax prep software was not common, people would go to a CPA and any shrewd CPA would tell their clients what all they can do in the coming year to avoid taxes (or what they could have done last year to avoid taxes).
Bobby,
Your points are well taken. As we both know, there is a fuzzy line between tax planning and tax evasion. Technically, your comment about tax planning and simulation is right. Tax preparation software can give people a great sense of what drives their tax obligations. The more insight, the better. And, to your point, government has included all types of incentives in the tax code that it wants citizens (and businesses) to respond to. My intention in the blog post was to point out the positive aspects of such software.
But, it is naïve to assume that everyone is fully compliant. It is awfully tempting to fudge numbers to get a bigger refund (or a smaller tax due). Taxpayers have been able to do that for years, no matter if they file themselves or use an accountant. What's different now is that it's really, really easy to fudge the numbers. In fact, because of the instant nature of the calculations built into tax prep software, it's now become a lot like a game. Cheating is easier than ever. No matter how many positives there are to tax prep software, there is a distinct downside.
At the end of the day, it all comes down to the integrity of the people who use the software. If you have a strong sense of right and wrong, you're likely to be compliant. But if you see the world with cynical eyes, then you may be more willing and able to mis-report your tax obligation.
Best of luck in finishing and releasing your spreadsheet! It sounds like it could be a powerful tool to understand the highly complex tax code with live with in the US.
Shaun - I remember that Odyssey 2 and rambling geek chat Lee, Brendan, and you would square up with. Quite comical to listen to while I stood in the back with my Commandore 64 in the background. All jokes aside, gamification is embedded in the human nature of finding ways to make things easier, aka life-hacks...but to a point that humans do it to GAME the system by cheating out of our responsibilities is where the human moral compass gets out of line. At the end of the day what matters is when we click on "submit tax filing" we do it with a clean conscious knowing we answered all questions honestly and ethically.
Good article and thank you for sharing the memories!
Shawn, interesting observation. However, I beg to disagree that exploring your options via tax software “makes tax preparation software the single biggest threat to the integrity of the US tax system". I think the blame is misplaced here. I believe that the US tax system is the single biggest threat to itself. It is overly complicated, non-transparent, non-linear, illogical, not easily verifiable, full of loopholes and time consuming. It creates the whole service industry of accountants, its lingo is bizarre (e.g. “passive activity”) and it drives people nuts. Who would need that tax software if tax code were simple!
Leonid, your observations about the current state of the US tax code are spot on. When the tax code was originally approved by Congress on October 3, 1913, it consisted of 26 pages of text. Today? It has grown to over 10,000 pages! You will find little disagreement from anyone about the complexity and inanity of the tax code.
In fairness, the vendors that have created tax prep software have done us a great service. They have helped to simplify the process of filing. Most software packages contain easy-to-use wizards. They use plain language. There are alerts to help you find things you miss. In short, these vendors have made filing easier and less burdensome.
But, make no mistake... as an unintended consequence, they have made cheating on tax laws just as easy as complying with them. Now, you could argue that taxpayers have ALWAYS had the ability to fudge numbers and misreport. That's an indisputable fact. The difference is the game-like nature of the software. Change a few numbers here. Round up there. With a few strokes of the keyboard, you can watch your refund go up, up, up!
Of course, it all comes down to the personal integrity of the person using the software. If you have a strong moral compass, you're likely to be compliant. If you don't, then all bets are off.
Thank you, Shawn, for your reply. I guess nobody is going to "play" with numbers on W-2 or 1099-DIV. Well, theoretically one can explore "what my tax (or net income) would be if I get a 10% raise", but that's not cheating. That is because that information gets delivered to the IRS, not just tax payers, and everybody knows it. Donations, business expenses, car mileage, - yes, there is room for gaming. But tax software is not a culprit here. The tax code is, because it allows such poorly verifiable items. I am sure people would not stop donating should donations stop being tax-deductible. Business expenses could be allowed at a fixed rate (say 30% of gross income) including car expenses. When there are no poorly defined or poorly verifiable rules there is no room for cheating. Your title is absolutely correct, but the conclusion that tax software is the one to blame - that what I have an issue with.
Interesting article, but the real gamification comes from the folks who create the complex tax code. One of the reasons the tax code is so complex is because special interests have gotten easter eggs embedded into the code. Beyond that, wasn't AMT specifically designed to reduce the level of gamification? One of the games that I would encourage everyone to play is the charity game. At the end of 2015, I realized that I might have have a pretty hefty tax bill when I filed. So I opted to bump my donations up to mitigate that extra bill. You might call that gamification, I would call it directed giving. Bottom line is that, used correctly, tax software can give a little more financial insight and control to the taxpayer.
Some years back a CPA made a comment to me to the effect "You must be doing well since you paid a large amount of taxes." I did not see it that way and would never recommend that CPA to anyone. Just my two cents.