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Ready to Fill Out Another Tax Return?by
David Keating Apr 15, 2003 The war
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 old “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 will have to spend 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) 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 difficult enough
already.
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 335,000-member National
Taxpayers Union, an Alexandria, VA-based citizen group founded in
1969 to work for lower taxes, less wasteful spending, and taxpayer
rights at all levels of government. He served on the National Commission
on Restructuring the IRS.
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