Anyone who prepares their own tax return, in fact just about anyone who pays taxes to the Internal Revenue Service, would agree with this statement from the Taxpayer Advocate Service’s 2008 Annual Report to Congress: “The most serious problem facing taxpayers is the complexity of the Internal Revenue Code.”

The Taxpayer Advocate Service is a federal government agency created to, as its name implies, advocate for the interests of taxpayers.  The fact that such an agency even exists is to some extent a reflection of how dysfunctional our federal government has become, but that’s a topic for another day.  The 2008 Annual Report to Congress provides many stunning examples of how the federal tax system has gotten completely out of control.

According to an analysis by the Taxpayer Advocate Service, taxpayers (including businesses) spend about 7.6 billion hours each year complying with the filing requirements of the tax code.  This means that the time spent filing tax forms and doing other things required by the tax code is the equivalent of a forty-hour week, fifty weeks a year, for 3.8 million workers.

Tax code compliance costs in dollars are just as staggering as those in worker hours. The Taxpayer Advocate Service estimates that compliance costs for individual and corporate income taxes in 2006 totaled $193 billion, an amount equal to 14% of all income tax receipts.  So for every $10 in income tax collected, $1.40 is spent on activities necessary to collect that $10.

A few more tidbits from the Taxpayer Advocate Service’s report that show how the tax system has exploded with complexity: the tax code has more than tripled in length since 1975; there have been more than 3,250 changes to the tax code since 2001 (an average of more than one per day over a period of eight years); there were more than 500 changes to the tax code in 2008 alone; and there are more than 100 provisions that are temporary and set to expire soon, up from about 21 in 1992.  Just making it more fair, right?

Now for some concrete examples of how the tax code has evolved into a bureaucratic nightmare.  You may have heard of the concept of “forgiveness of indebtedness income.”  The idea is that if a debt is forgiven, the amount of the debt forgiven counts as income to the debtor.  It has never made much sense to me, but it’s enshrined in section 61(a)(12) of the code.  Well, with the recent increase in mortgage foreclosures on properties where the debtor owes the bank more than the property is worth, Congress has created new exceptions to the “forgiveness of indebtedness income” rule, in addition to several other exceptions that already existed.  A taxpayer must file Form 982 to claim those exclusions.  Here is what Form 982 says about the estimated time involved in filing it: recordkeeping, 5 hours, 58 minutes; learning about the law or the form, 2 hours, 17 minutes; preparing and sending the form to the IRS, 2 hr., 28 min.  That’s over ten hours altogether for a one-page form.  No wonder that according to estimates cited in the Taxpayer Advocate Service’s report, tens of thousands and perhaps hundreds of thousands of taxpayers who qualify to exclude forgiven debts from their income don’t file Form 982 and therefore end up unnecessarily paying tax on forgiven debts.  But hey, that’s ok because the government needs the money to reduce the deficit, right?

Now for the example that is, to me, the most egregious of all: the dreaded “alternative minimum tax,” or AMT.  You may have seen varying reports on how this beast was born, so here is the straight dope from the Taxpayer Advocate Service’s report: it was originally enacted in 1969 “in response to a report that 155 high-income taxpayers had paid no income tax for the 1966 tax year.”  Just giving those rich tax-dodgers their just desserts, huh?  Well now, according to the report, it is estimated that about 77% percent of the additional income subject to tax under the AMT is attributable simply to the size of the taxpayer’s family or the fact that the taxpayer resides in a high-tax state.  I love the report’s pithy comment on this outrage: “Few people think of having children or living in a high-tax state as a tax avoidance maneuver, but under the unique logic of the AMT, that is how those actions are treated.”

Why hasn’t Congress repealed the AMT?  Again the Taxpayer Advocate Service’s report delivers a succinct analysis: the “government has become so dependent on AMT revenue that Congress to date has been unwilling to make permanent changes in law to curtail the AMT, and it is not likely that such changes will be made outside the context of major tax reform.”  Translation:  this beast is out of control, and its creators can’t, or won’t, do anything to get rid of it.

About 60% of individual taxpayers pay someone else to prepare their tax return for them, and another 22% use tax software, according to the Taxpayer Advocate Service’s report.  I don’t begrudge my friends in the accounting profession the ability to make a living (and all the tax gobbledygook makes lots of work for lawyers, too), but when more than eight out of ten individual taxpayers need assistance to file their returns, something needs to change.  In the words of the report:

The largest source of compliance burdens for taxpayers – and the IRS – is the overwhelming complexity of the tax code. The only meaningful way to reduce those burdens is to simplify the tax code enormously.

Anyone willing to wager that Congress will do it anytime soon?