Too intimidated to fill out your tax return without help? Join the club.
At nearly 4 million words, the U.S. tax law is so thick and complicated that businesses and individuals spend more than 6 billion hours a year complying with filing requirements, according to a report Wednesday by an independent government watchdog.
That’s the equivalent of 3 million people working full-time, year-round.
“If tax compliance were an industry, it would be one of the largest in the United States,” says the report by Nina E. Olson, the National Taxpayer Advocate.
The days of most taxpayers sitting down with a pencil and a calculator to figure out their taxes are long gone, Olson said. Since 2001, Congress has made almost 5,000 changes to U.S. tax law. That’s an average of more than one a day.
As a result, almost 60 percent of filers will pay someone to prepare their tax returns this spring. An additional 30 percent will use commercial software. Without the help, Olson says, most taxpayers would be lost.
“On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken under- payments,” Olson said. “On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.”
Olson ranks complexity as the most serious tax problem facing taxpayers and the Internal Revenue Service in her annual report to Congress. She urges lawmakers to overhaul the nation’s tax laws, making them simpler, clearer and easier to comply with.
Momentum is building in Congress to overhaul the tax code for the first time since 1986. But Washington’s divided government has yet to show it can tackle such a task successfully.
President Barack Obama and Republican leaders in Congress say they are onboard, though they rarely have seen eye to eye on tax policy. They struggled mightily just to avoid the year-end fiscal cliff, passing a bill that makes relatively small changes in the nation’s tax laws.
Undaunted, the top tax writer in the House says he is determined to pass reform legislation this year.
“This report confirms that the code is 10 times the size of the Bible with none of the good news,” said Rep. Dave Camp, chairman of the House and Ways and Means Committee. “Our broken tax code has become a nightmare of loopholes and special- interest provisions that create added complexities and costs for hardworking taxpayers and small businesses.”
“Comprehensive tax reform will make sure everyone is playing by the same rules and help businesses create more jobs and invest in their workers,” Camp said.
The general formula for tax reform is widely embraced on Capitol Hill: Eliminate or reduce some tax credits, exemptions and deductions and use the additional revenue to pay for lower income-tax rates for everyone. There is, however, no consensus on which tax breaks to scale back.
That’s because Americans like their credits, deductions and exemptions — the provisions that make the tax law so complicated in the first place. Would workers want to pay taxes on employer-provided health benefits or on contributions to their retirement plans? How would homeowners feel about losing the mortgage- interest deduction?
Those are the three biggest tax breaks in the tax code, according to congressional estimates. Together, they are projected to save taxpayers nearly $450 billion this year.