The Biggest Tax Problem Facing Households and the IRS is…The Tax Code

By :: January 6th, 2011

Each year for the past decade, Nina Olson, the National Taxpayer Advocate at the Internal Revenue Service, has issued a report to Congress on the most serious problems facing taxpayers. She usually focuses on individual provisions of the code, such as the Alternative Minimum Tax, or vexing tax administration problems. This year, Nina reached a quite different conclusion: The most serious problem encountered by taxpayers is…the Tax Code. The whole damn thing.

As the report says, “The most serious problem facing taxpayers—and the IRS—is the complexity of the Internal Revenue Code.”

Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That equal to a year’s labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.

Not only is the Tax Code massive—3.8 million words by Olsen’s count—but it is a constantly moving target. Her report estimates there have been more than 4,000 changes in the law over the past decade, and 579 last year alone. It is no wonder nobody understands it.

More troublingly, all this complexity is driving people to cheat. More than 60 percent of self-employed workers (whose income tax is not withheld) either under-report income or over-report deductions. Olsen attributes at least some of this behavior to taxpayers’ belief that they are paying more than their fair share while others are avoiding tax. Nobody, she says, wants to be a “tax chump.”

Of course, complexity isn’t the only reason to rewrite the tax code. It is also hideously inefficient and grossly unfair. It picks economic winners and losers, subsidizing those activities that politicians think are “good” and penalizing those that are deemed “bad.” Often, the more money you make, the more you are rewarded. And far too often, two households making exactly the same amount of money and living in roughly similar circumstances find themselves paying wildly different amounts of tax.

Nina is wrong about one thing. She says the time to reform the tax code is now. Actually, it was long before now. But that’s no reason why President Obama and Congress shouldn’t get started.

24Comments

  1. Everette Carnes  ::  11:34 am on January 7th, 2011:

    Start with the ultimate simplification. Everybody, that’s EVERYBODY! pays income tax on ALL income. That’s a start. Reasonable and necessary business expenses and cost of production deducted from gross income to determine income. Rate to be determined by Congress but I suggest 50%. Applies to EVERYBODY! FAIR IS FAIR!
    Then EVERYBODY will be entitled to EVERY deduction allowed by Congress. Possible deductions or exemptions are those EVERYBODY is now entitled to – personal exemptions, some state and local taxes, contributions, etc. No automatic deductions, itemize everything. No special treatment for or against anybody. No sneaky favors for our friends. Simple and straightforward. FAIR IS FAIR!

  2. worromot  ::  12:06 pm on January 7th, 2011:

    “89 percent either pay a preparer or buy commercial software to help with the paperwork. […] The average out-of-pocket cost per taxpayer: $258. ”

    There is something wrong with these numbers. The most popular tax preparation software packages cost $30 to $50.

    Maybe the trick is in the word “average”? When Bill Gates walks into a bar, “on average” everyone there becomes a billionaire. The mean would be a better summary stat here — the number such that half the people pay less and half pay more. It would surprise me very much if half of American taxpayers (30+ million people) were spending more than $258 on tax preparation ($516 per married couple). Do you have many friends who spend that much?

  3. tanstaafl  ::  12:38 pm on January 7th, 2011:

    @worromot: I think that ‘median’ was the measure that you are suggesting; Ms. Olsen is probably using the mean. Indeed, my wife and I are on the high end of middle class and we spent $40 (net) and about 2-3 hours doing our taxes last year. Of course, we keep good records and are educated in accounting and math, as all Americans should be (but aren’t); you can blame some of the high compliance costs on our shoddy education system.

    Ms. Olsen should also mention that a lot of poor and lower middle class Americans are ripped off by HR Block and Jackson Hewitt. These folks charge ridiculous sums to prepare very simple tax forms. I know this, having been a VITA volunteer for many years. (VITA is free tax preparation help from IRS-approved entities–often run by accounting professors at colleges).

    Finally, I am in favor of tax simplification, but if you are not rich then watch your wallet. Tax reform often takes the guise of tax cuts for the rich; witness the tax reforms suggested by the Simpson-Bowles draft report, which would result in huge tax cuts for the wealthiest Americans.

  4. Jpublic  ::  1:47 pm on January 7th, 2011:

    It amazes me that people who have expenses in order to earn a living would have to itemize and give up the greater standard deduction. Same with job search expenses, one would have to be a very big spender in order to even break even. Yet those who have no expenses get the same breaks.

  5. Sid F  ::  2:28 pm on January 7th, 2011:

    Comments about the complexity of the tax system are written by commentators who have relatively high income, a lot of complexity in their financial affairs and the need to have professional tax preparation. By contrast, the average citizen has wage, interest and maybe some dividend/cap gains income, but not much else and tax prep can be done in a few hours at little cost. In fact, if it were not for lobbying by tax preparation firms, the IRS could compute the tax liabilty and refund/amount due for a majority of taxpayers, send them the money/bill and form to sign and probably be correct over 90% of the time.

    The problem is that the writers on this subject impute their own situation to the majority. Just not so.

  6. BobN  ::  2:33 pm on January 7th, 2011:

    The complexity of the tax code is all about AVOIDING taxes, not paying them. If you don’t want to investigate every possible way in which you MIGHT be able to deduct something differently, it’s hardly a difficult task. Thousands and thousands of pages are devoted to meaningless tax loopholes — meaningless unless you happen to qualify, that is.

    No one ever talks about the fact that those loopholes got there due to the diligent efforts of the very same people who decry how complicated the tax code has become.

    Now, off to check if that investment in domestic oil production happened to fall within any Congress-designated enterprise zone… (yes, I know the correct terms are different, but I’d rather not wade through the ridiculous tax code to find the right ones.)

  7. BobN  ::  2:44 pm on January 7th, 2011:

    Not only could they compute the tax, but it’s hard to believe that even government employees (knee-jerk inference of incompetence) could come up with software as awful as most tax-prep products. In fact, I suspect the tax-prep programs are as tedious and complicated as they are in order to perpetuate the myth that tax filing must be difficult, leading users to think, “Imagine how much harder this would be if we had to do it by hand!!!”

  8. Evening Fix | Progressive Fix  ::  3:24 pm on January 7th, 2011:

    […] Howard Gleckman highlights the negative consequences of the complexity of the tax code: “Individuals and businesses spend 6.1 billion hours preparing their returns. That’s equal to a year’s labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that …89 percent either pay a preparer or buy commercial software to help with the paperwork.” […]

  9. Michael Bindner  ::  4:31 pm on January 7th, 2011:

    We will see if anyone in the White House or Congress is listening.

    Her approach seems to bode well for the recommendations of Len Burman as advanced by the Bipartisan Policy Center to make tax filing for most unnecessary while retaining paycheck visibility.

    It also validates my proposals and those of Michael Graetz to make visibility and filing for 80% of households unnecessary at all.

    I suspect that the Tea Party’s annual protest has as much to do with the desire to avoid the intrusion of filing as it is a desire to pay less tax, especially since taxes are actually at the lowest point in recent history. I am not sure that the Burman/BPC approach satisfies their desire to get what they earn in salary – since they will still regard a bite from their paychecks as a form of theft. Having them not be the objects of taxation at all – and simplifying any other individual taxation to a page – might just satisfy them (assuming it is taxes they are protesting and not the demographics of the POTUS).

  10. Michael Bindner  ::  4:36 pm on January 7th, 2011:

    Len Burman/Bipartisan Policy Center’s recommendations as well as mine and Michael Graetz’s would save most people from filing – which is why HRB & JH oppose them and put money behind that oppossitiion.

  11. J  ::  6:17 pm on January 7th, 2011:

    Your links appear to be broken. I believe they contain an unnecessary “http//”.

  12. J  ::  6:23 pm on January 7th, 2011:

    The paid preparer costs more than $50.

  13. J  ::  6:27 pm on January 7th, 2011:

    I’m confused. Isn’t that kind of what we do now? So, you just don’t like the graduated rates or the standard deductions? And I’m confused how you said all income and then deducted off the top the reasonable and necessary expenses. So, the person living below the poverty line should have to pay income tax at a 50% rate on the person’s income? What are your reasonable and necessary deductions? Your system sounds … oddly complicated.

  14. J  ::  6:28 pm on January 7th, 2011:

    Agreed.

  15. J  ::  6:30 pm on January 7th, 2011:

    I think it’s more complicated than that with above the line and below the line deductions and phase-outs and limits. It can actually get pretty complicated. And don’t even get me started on the IRA compliance rules and stretch-out and rollovers. Freaking mine-field.

  16. James Russell  ::  10:15 am on January 8th, 2011:

    Okay, I cannot accept NO, not by 2012. This is sad to think that a consumption tax reform plan for both houses must come after more years of economic instability. It is not about the thousand of income tax over payers… getting screwed by the complex codes.

    We need jobs… first and then watch out for real tax reform.

  17. James Russell  ::  9:55 am on January 10th, 2011:

    It is time for all good men to go to their PC’s and “Push Tax Reset”
    at this website.

  18. Beamy  ::  9:03 am on January 11th, 2011:

    Guter Eintrag, vielen Dank. Ich bin schon seit 9 Jahren DER wahnsinniger Star Trek Fan. Meiner Meinung nach ist Star Trek ein enormer Höhepunkt in der Geschichte der Science-Fiction Historie, nicht umsonst haben die Werke vierzehn Oscar-Nominierungen erhalten und über 1,5 Milliarden Euro eingespielt. Mein absoluter Favorit ist der Film „Star Trek Generations“. Ich denke dass die Star Trek Saga noch lange fortgesetzt wird.

  19. Tony  ::  12:39 pm on January 19th, 2011:

    The mean is the average. Your definition matches the median.

  20. Lenard Amith  ::  5:07 am on February 3rd, 2011:

    It’s a pattern the U.S. has repeated over and over for 100 years. It first supports thugs and dictators for “pragmatic­” or “national interest” reasons, then is caught totally flat-foote­d when people rise up, overthrow them, and bitterly hate the U.S. thereafter­.

  21. Eugenio Paulmino  ::  5:42 pm on February 19th, 2011:

    I sometimes ponder how somebody can live in poverty. All I know for certain is that I thank God that I am in the USA.

  22. sabo gimba  ::  7:51 am on June 23rd, 2011:

    What are problems facing tax administration

  23. John Cole  ::  3:55 am on September 26th, 2011:

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  24. JJMallory  ::  4:10 pm on June 27th, 2013:

    When I’m going through everything at the end of the year, it always seems like such a scramble to get everything together. As a landlord, there are endless documents that need to be filed in order to avoid problems. I’ve been looking into self directed IRA for real estate recently and think it might be a great idea to keep everything in one place and well organized.