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.
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.