Individuals, Corporations Spend Nearly $300 Billion on Tax Compliance

Published July 1, 2009

Complying with the nation’s income tax code costs American families and businesses more time, money, and frustration than ever, according to the National Taxpayers Union’s latest annual study of tax complexity.

Taxpayers using any of the 1040 tax form series are spending an average of 26.4 hours and $209 completing their returns for the most current tax year, up from 25.4 hours and $185 four years ago.

“The paperwork burden alone imposed by tax compliance is staggering,” study author David Keating, NTU’s senior counselor, said. “If our study tells us anything, it’s that Americans are ready to toss the U.S. tax code overboard and start anew with a simpler and more transparent version.”

7.75 Billion Hours on Paperwork

U.S. Treasury Department paperwork, some 90 percent of which consists of personal and business income tax forms, imposes a burden of 7.75 billion hours on Americans. That’s equal to 3.7 million employees working 40-hour weeks year-round without vacation, according to NTU’s study—more than are employed at the five biggest Fortune 500 companies combined.

Individual taxpayers will spend about 3.8 billion hours complying with income tax laws this year—up from 3.6 billion hours last year. This time is worth $110.6 billion. They’ll also spend an estimated $29.33 billion for tax software, tax preparers, postage, and other direct out-of-pocket costs.

The cost of paperwork time burdens for corporations facing the federal income tax (3.2 billion hours) adds up to $159.4 billion—equivalent to 54 percent of corporate income taxes collected in FY 2008. The expense is generally passed along to consumers, employees, and shareholders.

Real Costs, Perverse Incentives

Taken together, these three factors total $299.3 billion, more than $100 billion higher than estimates from the IRS National Taxpayer Advocate’s Office.

“The cost of tax compliance is a real cost to society, and complex taxes create perverse incentives to shelter and disguise legitimately earned income,” said Matt Moon, manager of media relations for the Tax Foundation, a national taxpayer advocacy organization.

“The fundamental purpose of taxes is to raise necessary revenue for programs, not micromanage the economy with subsidies and penalties,” Moon added. “The tax system’s central aim should be to minimize distortions in the economy and interfere as little as possible with the decisions of free people in the marketplace.”

Tripling of Instructions

NTU’s study found the number of lines on the 1040 “long form” decreased—by one line—for the first time in 12 years, because of the removal of the residential energy credit. But the instruction booklet for the return grew by another six pages, to 161, more than triple the number of pages in 1985, the year before taxes were “simplified.” Instructions for the 2008 “short form” total 84 pages, equal to those of the long form in 1985.

The average 1040 long-form taxpayer will incur $264 in out-of-pocket filing costs in the 2008 tax year—up from $242 in 2004—and spend nearly 33 hours in the process. The average self-employed taxpayer will spend more than $447—up from $408 in 2004—and 57 hours preparing and filing taxes. The latter figure doesn’t include the burden other small-business entities such as S corporations and partnerships must bear, nor do the numbers account for innumerable hours spent year-round on tax planning strategies.

“For business owners and entrepreneurs in this day and age—in this really tough economy when every penny and every moment counts—to be spending more than a week or two filing taxes and complying with the Tax Code means less time is being put into marketing, into hiring individuals, into innovation, and into being more competitive,” said Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council. “So it’s a true burden not only for business owners but the entire economy as well.”

With the pending expiration of the Bush tax cuts, temporary Alternative Minimum Tax “patches,” and uncertainty over the future of the death tax, tax law complexity is likely to worsen.

Natasha Altamirano ([email protected]) is communications manager for the National Taxpayers Union.

For more information …

“NTU Policy Paper 126, A Taxing Trend: The Rise in Complexity, Forms, and Paperwork Burden”: