WASHINGTON – Some evidence that the tax code is getting impossibly complicated: More than half a million taxpayers paid the federal government an average of $610 apiece more than they owed in 1998 because they chose the standard deduction when they could have itemized.
In an unpublished draft report, the General Accounting Office discovered that in 1998, some 510,000 taxpayers who chose to take the standard deduction could have gotten a bigger deduction by itemizing because they had mortgage interest payments.
The GAO, which is the investigative arm of Congress, estimated that these people paid the IRS $311 million over what they should have. That number will likely be higher after investigators check for state and local tax deductions and charitable deductions taxpayers could have claimed, but didn't.
"People are frustrated, and it's costing them millions of their tax dollars every year," said House Majority Leader Dick Armey, R-Texas, an advocate of changing to a simple one-rate "flat" tax who requested the GAO study. "There is no fairness or justice in a tax code that only highly paid accountants can understand."
As millions of taxpayers finish their returns this week to meet Monday's midnight deadline for most people, the bewildering complexity of tax law, says the Internal Revenue Service's own taxpayer advocate, "continues to be the most serious and burdensome problem facing America's taxpayers."
"The most basic aspects of tax law," continues the IRS advocate's recent report to Congress, "are complicated and contain exceptions and special rules that many taxpayers do not understand."
David Keating, senior counselor at the National Taxpayers Union, a tax watchdog group that advocates lower taxes and taxpayer rights, pointed out several trends that show how difficult doing one's own taxes has become:
—In 1945, the instructions for the basic 1040 income tax form ran all of four pages. Ten years later, they ran 16 pages and by 1985 had reached 52 pages. This year, the booklet is 117 pages long.
—Roughly 58 percent of taxpayers will hire a paid preparer to do their taxes this year. In 1980, the figure was 38 percent. Combined with computer-prepared returns, at least three-quarters of taxpayers will seek professional help in completing their taxes this year. Through April 6, over 5 million people had filed returns using their home computer — almost 36 percent more than last year.
—Four basic individual tax forms — the 1040 form and Schedules A, B and D — now require more than 27 hours of a taxpayer's total time, according to IRS estimates. In 1988, those forms consumed just under 18 hours.
Another way of looking at complexity is examining the fees taxpayers are charged by professionals such as H&R Block, which prepares about one in seven individual tax returns. Adjusted for inflation, Block's fees on average have risen from over $75 in 1985 to $108.80 through March 31. The fees are based in part in the number of forms and time it takes to prepare a return.
There are a host of reasons this has happened, but most result from political decisions made by Congress in the tax bills that pass almost every year. For instance, as politicians fall over themselves to help families with children, they have created a $500 child tax credit, a child care credit, education credits, personal exemptions for dependents and adoption credits.
"Politicians like to take credit for one thing or another, including a tax break for some social need," Keating said.
To contain costs or reduce perceptions that tax cuts are predominantly helping upper-income people, Congress frequently limits a tax break to taxpayers of certain incomes.
For example, the $500 child tax credit is reduced by $50 for every $1,000 in income a married couple filing jointly earns above $110,000 in adjusted gross income, until it disappears. Simply determining that amount of credit to claim or whether a taxpayer qualifies requires several computations on a separate worksheet.
There are 20 such income phaseouts in the tax code, said Charles R. Enis, associate accounting professor at Penn State University. Ending a few of them, Enis added, "would cut taxes across the board and simplify the tax code."
President Bush proposed doing just that for the child tax credit, by raising the income threshold for a married couple from $110,000 to $200,000. So far, however, even the president's Republican allies in Congress have ignored the proposal, which invites Democratic claims that Bush's tax cuts are tilted to the wealthy.
But in his 10-year, $1.6 trillion tax cut, Bush also proposed a number of new tax credits and deductions aimed at certain income groups and social needs, such as a health insurance tax credit targeted at those earning less than $60,000.