Though relief is on the way in the form of the most comprehensive overhaul of the Tax Code in three decades, the Tax Cuts and Jobs Act (TCJA), compliance costs under the old rules totaled over $300 billion for tax year 2017.
Thanks to the increased standard deduction in the TCJA, an estimated 31 million filers will no longer need to itemize their taxes. This will reduce the compliance burden by 248 million hours, a huge amount of time that is equivalent to $14 billion of labor savings (on top of the lower actual tax bills that TCJA is delivering).
Even more time and monetary savings from compliance costs will result from a massive drop (90 percent or more) in filers subject to the dreaded Alternative Minimum Tax, fewer Americans’ estates being subject to the death tax, and expanded expensing of investments for businesses large and small.
Still, there is a great deal more work to do, which is why Congress should remain committed to additional reforms that will streamline the laws, improve customer service, and protect taxpayers’ rights. 2018 will be the last year of the more complex pre-TCJA Tax Code, and the compliance burden it imposes is costly.
We can estimate the value of the nearly 8.1 billion-hour time burden associated with tax compliance by framing it in terms of private sector labor costs. U.S. employers spent an average of $33.72 per hour worked on total non-federal civilian employee compensation in December. The billions of hours spent on taxes is equivalent to $271.9 billion in labor – a valuable opportunity cost that will instead be lost to Tax Code compliance.
In addition, taxpayers were forced to spend $31.9 billion for out-of-pocket costs, mostly for software and professional preparation services.
Altogether, the total economic value of compliance burden of the Tax Code can be calculated at $303.8 billion. This is the first time in the history of our analysis that the $300 billion mark has been exceeded. In context, the tax compliance burden:
o Represents about 15 cents on every tax dollar collected through the corporate & individual tax.
o Is equivalent to 1.5 percent of GDP
o Approaches the amount of the net interest payments on the federal debt for 2018 ($316 billion);
o Is about equal to the combined budgets of the Departments of Agriculture, Commerce, Education, Energy, Homeland Security, and the Interior.
o Exceeds annual earnings of every individual company on Forbes’s Global 500 list, except for two: Walmart (with revenues of $486 billion) and State Grid, the Chinese state-owned electric utility ($315 billion).
Since 1998, the Tax Code has grown by over 37,000 words per year, from 3.2 million to just under 4 million words in the current version. Because of this expansion, plus the massive quantity of tax guidance issued by the IRS each year, 56 percent of taxpayers use a paid preparer and 34 percent use tax software.
The inflation-adjusted cost of a paid preparer at one of the leading firms has nearly tripled since 1980, suggesting that the growth in tax complexity is outpacing even the technological and administrative improvements that have been made to professional preparation firms in that time.
The overall wait time for calling the IRS has improved to 8.4 minutes (down from nearly 18 minutes a year ago), but only 44 percent of taxpayers on the phone to the IRS about a specific collection issue had their call answered and they had an average wait of 42 minutes. Those who called about an installment agreement to pay their tax liabilities had a 40 percent chance of getting through and an average wait of 47 minutes. Furthermore, the IRS has declared vast areas of the Tax Code “out of scope” meaning that taxpayers seeking answers from the IRS’s call lines will be out of luck.
The IRS’s technology is woefully outdated. The systems that track individual and business tax records are based on a low-level computer language from the 1950s. Equally bad is that there are approximately between 60 and 200 different “case management” systems that lack coordination and make it difficult for a taxpayer to resolve an IRS problem with a government representative.
On April 11 the House Ways and Means Committee took steps toward a better tax system by preparing for floor action a package of a dozen bills that includes reforms such as: protecting small businesses from unfair IRS property seizures, strengthening the independent appeals process for taxpayers in audits, creating leadership and new procedures to upgrade the IRS’s information technology and identity theft safeguards, providing better access to tax assistance and remedies for past-due tax payments for moderate-income families, and calling on the IRS to prepare a restructuring plan. Taxpayers, take heart!