When federal agencies issue new regulations, the Paperwork Reduction Act requires that they estimate the real-world impact on taxpayers. This calculation is based on how much time and money compliance will actually cost.
That issue was front and center in a proposed rule issued by the Internal Revenue Service (IRS) and the Department of the Treasury in 2024 addressing partnership reporting requirements for certain complex transactions. The IRS’s initial estimate of the paperwork burden, however, significantly understated the true burden imposed on filers by using unrealistic costs for the hourly rate of professional tax advisors.
Following a recommendation by NTU President Pete Sepp suggesting a more realistic method to calculate the costs, the IRS listened and revised its cost calculation.
The IRS’s Original Low Estimate
The 2024 proposed rule would expand reporting requirements for certain partnership-related “Transactions of Interest,” requiring taxpayers and their advisors to disclose additional details to the IRS using forms such as Form 8886 and Form 8819. These disclosures were intended to help the IRS identify complex tax strategies where the IRS believes there may be the potential for tax avoidance, but they also would impose significant new compliance obligations on filers.
To estimate the burden of these requirements, the IRS relied on an average hourly wage of just $102 for taxpayers completing these forms. That figure drives the entire cost estimate: multiply time by wage, and you get the total burden. In addition, the IRS estimated that it takes an average of over 21 hours to fill out Form 8886, so the costs involved could be significant, at $2,195 per form.
But, for many filers subject to these proposed rules, that wage assumption is unrealistically low. The “Transactions of Interest” are, by definition, complex and often require careful analysis, documentation, and coordination with tax advisors. These forms are not routine filing and they frequently involve highly-paid accountants, attorneys, and other specialists.
In formal comments submitted to the docket and cross-posted here, NTU recommended a more accurate benchmark: $177.29 per hour, better reflecting the true cost of compliance for affected taxpayers.
A Meaningful Revision
In its recently updated rulemaking to repeal the 2024 proposal, Treasury and the IRS adopted NTU’s recommendation and updated the figure to account for inflation, noting:
[O]ne commenter indicated that a better estimate is approximately $177.29 (2022 dollars, equivalent to $190.03 in 2024 dollars) per hour, as many affected individuals may seek specialists with higher hourly fees. The Treasury Department and the IRS have accepted the commenter’s suggested wage. Therefore, the estimated burden of filing Form 8886 equals $4,088.81 (2024 dollars) (that is, $190.03 × 21 hours and 31 minutes).
Using more realistic wage assumptions, Treasury and the IRS now estimate that compliance with the reporting requirements tied to “Transactions of Interest” will cost taxpayers roughly $163 million annually for the most commonly used forms related to these transactions.
Conclusion
The Treasury Department and the IRS deserve credit for incorporating NTU’s recommendation and improving the accuracy of their analysis. This revision demonstrates that the regulatory process can work as intended: stakeholder feedback is considered, and final estimates better reflect real-world conditions.
It also highlights a broader opportunity. Many IRS paperwork burden estimates remain incomplete, particularly when it comes to out-of-pocket costs for complex forms and compliance activities. As NTU Foundation has noted in research last year, When Zero Isn’t Nothing, gaps in these estimates can obscure the true cost of compliance and limit the usefulness of the analysis for policymakers and the public.
Feedback from filers and subject-matter experts is important to help the IRS refine its methodology to ensure that burden estimates are more accurate and reflective of the impact on taxpayers.