Friday, March 28, 2014

Did Americans Really Overpay by $1 Billion at Tax Time?

I heard a statistic on a running commercial series that is so shocking that I don't want to believe it's true: H&R Block claims Americans overpaid by $1 billion in taxes last year. Apparently this is enough for a stack of five hundred dollars to be placed on every seat of every NFL stadium (one on each of 2 million seats in the thirty two professional football stadiums).

I tried to find the methodology for this statistic, but H&R Block isn't making it very easy to find on their website or elsewhere on the internet. On the plus side, they do have a lot of interesting statistics about a billion dollars. Did you know that if you stack up a billion dollar bills, the pile is 109,250 meters high? Apparently, this billion comes, at least in part, from the 56 million Americans who will do their taxes on their own this year, and H&R Block estimates 11 million of those could contain errors that left money on the table. (Their site claims that H&R Block professionals found more money for one in five people, with $460 per person, on average.) So the question is: should people try to do my taxes on my own?

That said, the amount of money you would be leaving money on the table is, by definition, an "unknown unknown." If I were aware of the error, I'd correct it. But I'm not (so I can't, and I won't, but...) Using H&R Block's statistics, you have a 20% chance leaving money on the table, and that average error would cost you $460. But the math says you should not pay the extra $206 to hire a professional, for a one-in-five chance of netting $460. (I would need a one in five chance to net over $1,000 for the odds to point to hiring a professional.)  This also means that, even though Americans might have left one billion on the the table by not using H&R Block, they'd be paying H&R Block several times more than that had each one of those do-it-yourself tax payers simply paid them $246.- the average H&R Block fee.

But these are all just gross averages: who knows where your individual situation fits in? And then there's the fact that doing taxes is kind of a chore.It's boring, and there are better ways to spend a weekend. Regardless of the money spent, this might be a case for outsourcing.