The success of American forces in Iraq continues to command just about everyone’s attention, but there’s still one frustrating facet of our lives we literally can’t afford to ignore: tax-filing season:
You know tax complexity is getting out of control now that the “short” form is double the length of the “long” form used in 1945. And that the 85 pages of instructions for the short form now exceed the 84 pages needed to explain the long form used just seven years ago.
But if you think your taxes are confusing now, how would you feel about preparing two federal-income-tax returns instead of one to calculate your tax? There’s an excellent chance you’ll be doing that by the end of the decade.
It’s already so confusing that the IRS now estimates that the average taxpayer spends 27 hours and 48 minutes on the 1040 form and necessary recordkeeping, including the common schedules for interest, dividends, capital gains, and deductions.
That’s just one instruction booklet. Often, the answer you need to your tax-law question can’t be found there. If you need help beyond the basic form, the IRS now prints at least 1101 publications, forms, and instructions containing 16,339 pages, up from 943 documents with 12,933 pages two years ago.
This waste of manpower now tops an estimated 6.4 billion hours on tax forms and recordkeeping, accounting for 80% of the federal government’s entire paperwork burden. These estimates are almost certainly too low since they ignore the countless hours spent on tax-minimization strategies.
Complexity has forced growing numbers of taxpayers to seek professional help or computers to prepare their returns. Six in 10 taxpayers will use a tax pro this year, a jump of over 58% since 1980. Most taxpayers who go it alone will use a computer.
No wonder H&R Block, the nation’s largest tax-preparation firm, has been doing so well. This year it reports its “average fee per tax return rose 9.4 percent to $112.42,” reflecting the complexity faced by average taxpayers. Since 1980 the average H&R Block tax-preparation fee has increased 311%, or 77% after accounting for inflation.
Yet, tax complexity is certain to get worse, much worse, by the end of the decade. The alternative minimum tax (AMT), a tax originally aimed at 155 rich taxpayers who paid no taxes in 1966, now threatens to soak the middle class.
By 2010 as many as 36 million taxpayers, or one in three, would be forced to complete a second tax return for (and pay for) the AMT. Most of those paying the AMT will earn under $100,000 per year — comfortable perhaps, but hardly rich. As if one tax return wasn’t already difficult enough.
As bad as these statistics seem, they understate the problem. Three out of four taxpayers who currently must file the AMT form don’t even owe the AMT — they just are forced to fill out a complicated form to prove it.
The AMT form is a daunting 57 lines (up by three lines from last year) and a major detour in tax preparation. As a consequence, over 80% of taxpayers who owed the AMT paid a tax pro to compute their taxes. The IRS National Taxpayer Advocate notes that the AMT is “so complicated that many taxpayers are not aware that they may be subject to it.”
Despite the fact that tax-rate brackets, personal exemptions, and the standard deduction rise with inflation, the AMT tax structure is frozen. With each passing year, the AMT identifies a growing number of taxpayers as “rich” even though their real income hasn’t changed.
The best solution for the AMT would be to simply get rid of it altogether, a solution recommended by the IRS National Taxpayer Advocate. But if Congress can’t or won’t do that, then it should at least adjust the tax’s application for income growth and the 2001 tax cuts to avoid a tax complexity nightmare for taxpayers and the IRS.
Even these measures might amount to fiddling with the house of cards that is our tax code — a house that’s close to collapsing under the weight of its own complexity. Well, at least the new Iraqi government will know how not to construct a tax system.
— David L. Keating is Senior Counselor for the National Taxpayers Union. He served on the National Commission on Restructuring the IRS. Write to him at 108 N. Alfred St., Alexandria, Va., 22314.