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Substance Over Shrunken Tax Form

It is safe to say there is less to the newly redesigned income tax return than meets the eye. And I don’t only mean the fact that it is almost pocket-sized.

Politicians, particularly Republicans, have been talking for years about simplifying the tax code to the point that a tax return can fit on a postcard. The new Form 1040 could, indeed, fit on rectangular card stock under six inches long and four-and-a-half inches high, which is the Postal Service’s upper limit for postcard postage. You would have to use both sides, but you could do it. (You should really spring for an envelope, though, unless you’re fond of having your Social Security number stolen.)

The form is definitely smaller, as promised. But I’m not convinced it is simpler.

While some changes in the tax law will certainly make filing tax returns easier for many Americans, the changes to Form 1040 don’t exactly reflect a great simplification of the tax code. Rather, steps like doubling the standard deduction simply relieve a greater number of taxpayers from having to navigate some of the complexities that remain. And those complexities are unlikely to go anywhere, because the reality is that life is complicated. Even a simplified tax code will need to account for that in a reasonable way.

For decades, taxpayers with uncomplicated tax situations have had the option to fill out simplified tax return forms: Form 1040A or 1040EZ. The Internal Revenue Service says that the new 1040 will replace all three previous versions of the form. The draft of the new Form 1040, as shared by news outlets, shows that to reduce the form’s length, the administration rearranged and removed what appear to be some of the lesser-used line items. Tax Analysts reported that the draft of the new 1040 includes 23 line items; the existing form includes 79. In essence, this new form is really just a version of the old simplified ones, except it is available to anyone, instead of only people in particular situations.

For people taking the standard deduction, this change will work just fine. However, those who itemize or claim adjustments and deductions directly from gross income (called “above-the-line” deductions by tax mavens) will need to attach one or more additional worksheets (called “schedules”). Postcards don’t work so well with staples.

Of course, the IRS doesn’t want your postcards, or your envelopes, at all. The Service wants everyone to e-file their returns, because that makes them simpler to process. Most of us already e-file; the IRS reported that more than 90 percent of taxpayers filed electronically as of 2017. For the majority of taxpayers who use tax software or pay a professional (who also uses software), even a Form 1040 with substantially more schedules should not require much more effort to produce.

For the taxpayers who prepare their returns without help, it is worth noting that some of the tax breaks that have disappeared from Form 1040 still exist. If you are unsure whether itemizing deductions will benefit you more than choosing the standard deduction, you will still need to understand which deductions are available and take the time to tally them up to compare. But most people use software or human professionals, who will ask them questions about their situation based on the prior year’s return. I doubt the new form will create much in the way of real confusion.

In the end, the whole idea of a postcard-sized 1040 may be for political effect, a means to provide something tangible to represent the new law and resulting tax cuts. But in reality, a shorter basic form does not necessarily represent a simplified tax code. I doubt most people will notice much of a difference. To the extent the process is simpler, most taxpayers will have the increased standard deduction to thank, not changes to the form itself. And I would be surprised if the postcard lures anyone back to filing on paper who has already made the switch to e-filing.

When taxpayers or professionals overreach in manipulating the Internal Revenue Code’s language, the IRS sometimes invokes the doctrine of “substance over form,” always in the Service’s favor. The idea is that anything that walks like a duck or sounds like a duck is taxed like a duck. In this case, the new Form 1040 is essentially the same duck, just a little smaller.

Tax preparers and tax software companies will need to implement and adapt to the new forms. Professionals like my colleagues and me will work to fully understand the changes well in advance of filing deadlines. But I suspect that a portion of this additional work will be offset by the increased number of taxpayers who no longer need to itemize their deductions at all. By the time tax season rolls around, my guess is that most taxpayers won’t even remember lawmakers’ half-fulfilled tax form promise.

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