It's Tax Time

Just filed our taxes and not a moment too late. Being a CPA in the past and also having been educated as a CFP, I have a reasonably detailed understanding of the tax code. But nobody and I repeat nobody could possibly understand all of the nuances of our tax code. Consider the following facts:

1. According to an analysis of IRS data by Taxpayer Advocate Service (TAS), U.S. taxpayers and businesses spend about 7.6 billion hours a year complying with the filing requirements of the Internal Revenue Code.  And that figure does not even include the millions of additional hours that taxpayers must spend when they are required to respond to an IRS notice or an audit.
   
2. If tax compliance were an industry, it would be one of the largest in the United States.  To consume 7.6 billion hours, the “tax industry” requires the equivalent of 3.8 million full-time workers.
3. Compliance costs are huge both in absolute terms and relative to the amount of tax revenue collected. Based on Bureau of Labor Statistics (BLS) data on the hourly cost of an employee, TAS estimates that the costs of complying with the individual and corporate income tax requirements in 2006 amounted to $193 billion – or a staggering 14 percent of aggregate income tax receipts.
4. Since the beginning of 2001, there have been more than 3,250 changes to the tax code, an average of more than one a day, including more than 500 changes in 2008 alone.
5. The Code has grown so long that it has become challenging even to figure out how long it is. A search of the Code conducted in the course of preparing this report turned up 3.7 million words.  A 2001 study published by the Joint Committee on Taxation put the number of words in the Code at that time at 1,395,000.  A 2005 report by a tax research organization put the number of words at 2.1 million, and notably, found that the number of words in the Code has more than tripled since 1975.
6. Tax regulations, which are issued by the Treasury Department to provide guidance on the meaning of the Internal Revenue Code, now stand about a foot tall.  The CCH Standard Federal Tax Reporter, a leading publication for tax professionals that summarizes administrative guidance and judicial decisions issued under each section of the Code, now comprises 25 volumes and takes up nine feet of shelf space. Two companies publish newsletters daily that report on new developments in the field of taxation; the print editions often run 50-100 pages and the electronic databases contain substantially more detailed information. The complexity of the Code leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay their tax or to become subject to IRS enforcement action for mistaken underpayments of tax. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.  
7. Individual taxpayers find the return preparation process so overwhelming that more than 80 percent pay transaction fees to help them file their returns. About 60 percent pay preparers to do the job, and another 22 percent purchase tax software to help them perform the calculations themselves.
8. The Code contains no comprehensive Taxpayer Bill of Rights that explicitly and transparently  sets out taxpayer rights and obligations. Taxpayers do have rights, but they are scattered throughout the Code and the Internal Revenue Manual and are neither easily accessible nor written in plain language that most taxpayers can understand.

Check this flow chart out on just which form to file from the New York State government.  And that is just which form to use. 

What is our government's response?  Well under the current administration instead of simplifying the code, it is to put onerous requirements on tax preparers.  Someone has said that our tax code complexity is only a few years from spiraling into oblivion meaning it will be physically impossible to yield accurate results.  When the IRS can't interpret its own code, it is time to punt.

It is time to start over.  Modifying this beast is impossible.