Even if the IRS had perfect info about all your income and investments, there are decisions you can make which effectively make taxes non-deterministic. Suppose on two different dates, you bought shares of a company. Then on a later date, you sold one share. You get to choose which purchase date to count the sale as being against. This is important because you pay on the profit made based on that assumption. It also effects whether you pay short-term or long-term capital gains taxes for the sale.
Say for example you bought 1 share for $100 two years ago, and another share for $500 one month ago. One week ago, you sold one share for $1000. If you count it as selling the $100 share, then you must pay taxes on $900 in profit, BUT you enjoy the lower long-term capital gain tax rate. If you count it as selling the $500 share, you must pay taxes on only $500 in profits, BUT you suffer the short-term capital gain tax rate. Which of the two should you do (if you're a hypothetical perfectly rational actor who always makes absolutely optimal decisions)? Depends on what you plan to do with the other share, what you think is going to happen to the stock price, and so many other factors you could write a 10,000-page book about them...
Lot identification actually isn't a tax-time decision; it's a transaction-time decision. If you don't identify the specific lot you're selling (or more specifically if your broker isn't given or doesn't follow instructions which lot to sell), then in general sales are treated as FIFO, which might not be surprising because that characterization leads to maximum gain in a rising market. See Internal Revenue Service Publication 550 for more. This means that the tax treatment of a stock sale is in fact fixed at the time of transaction; moreover, it's entirely automatable by standing instructions to the brokerage, which most brokerages routinely offer as a feature ("tax optimizer" or "tax-lot optimizer" or similar language).
(This of course is all US tax code, not applicable to US states or other countries.)
Not a tax lawyer, but reporting of lot identification is a tax-time decision, at least for the things being discussed in this thread.
If it's transaction-time then that's totally unenforceable since this discussion applies to things as diverse as trading physical goods for other physical goods in an ad hoc unrecorded environment. It would make no sense for it to automatically be FIFO anyway, for example a person with amnesia might temporarily forget their ownership of longer-term holdings.
And for just one example where FIFO would be suboptimal despite a rising market, merely suppose that you know you're about to die and your children are about to inherit everything with a higher cost basis, but you need a bit of cash right now. (I highly doubt tax optimizer software has achieved the strong AI that would be necessary to know if you're about to die.)
You've clearly never bought and sold stock in two different lots in the US before. Brokerages report cost-basis to the IRS, this basis will be calculated based on your selection when you initiate the trade.
You can't start talking about other capital gains in the same sentence as regulated securities as the reporting requirements are going to be different.
Interesting. I thought your original comment was explaining why the IRS doesn't have all the information it needs to determine tax due by itself, and your example was stock trading. In that case not only is there a documentary requirement at time of transaction, but there's a catch-all rule for cases where you turn out not to have such documentation. Amnesia or "ad hoc unrecorded environments" absolutely aren't exceptions to any of those rules.
Perhaps you're trying to make a different point now, or I misunderstood your original one.
> Why cant the IRS just tell us every year if we owe or not and how much?
You can already contest how much the IRS claims you owe. Why would this hypothetical be any different?
Yes, it's probably impossible for the IRS to perfectly account for every American-person's income. They already make mistakes and it's not terribly difficult to show them how they got it wrong. Whether they are incentivized to adjust to your lower claimed liability is another question... but that's why we have independent courts.
Simplify the question: why can’t the vast majority who don’t trade in any instruments at all have pre-filled tax forms they can sign online, like in many other countries?
That stocks and some types of deduction means it needs amending to be “optimal” is pretty clear.
Even if the IRS had perfect info about all your income and investments, there are decisions you can make which effectively make taxes non-deterministic. Suppose on two different dates, you bought shares of a company. Then on a later date, you sold one share. You get to choose which purchase date to count the sale as being against. This is important because you pay on the profit made based on that assumption. It also effects whether you pay short-term or long-term capital gains taxes for the sale.
Say for example you bought 1 share for $100 two years ago, and another share for $500 one month ago. One week ago, you sold one share for $1000. If you count it as selling the $100 share, then you must pay taxes on $900 in profit, BUT you enjoy the lower long-term capital gain tax rate. If you count it as selling the $500 share, you must pay taxes on only $500 in profits, BUT you suffer the short-term capital gain tax rate. Which of the two should you do (if you're a hypothetical perfectly rational actor who always makes absolutely optimal decisions)? Depends on what you plan to do with the other share, what you think is going to happen to the stock price, and so many other factors you could write a 10,000-page book about them...