Tax Complexity Leads to Tax Cheating

August 2, 2006

The costs of tax compliance are high: in 2005 complying with the federal income tax code cost the nation an estimated $265.1 billion, which amounts to a 22-cent tax compliance surcharge for every dollar the tax system collected. Individuals, businesses and nonprofits spent an estimated 6 billion hours complying with the tax code.

But the costs of tax compliance may include even more than hours and dollars lost. According to a recent Investor’s Business Daily article, rampant tax cheating—intentional or inadvertent—is one of the costs of complying with our complex tax code. Citing a Senate subcommittee report that determined tax cheating costs the federal treasury as much as $70 billion a year and is “so pervasive it cannot be brought under control,” the article attributes tax cheating to the length and complexity of the income tax code:

If Washington were truly interested in knowing why Americans, from the richest to the most meager of wage earners, cheat or try to avoid taxes, it wouldn’t have to look any further than the more than 65,000 pages that make up the federal tax code and the inconceivable 582 tax forms. But that’s just today. Both of those numbers regularly grow as Congress rewards and punishes special interests as politics dictates.

The tax code is a patchwork of needless complexity, filled with loopholes, exceptions and byzantine rules that confound the Internal Revenue Service’s own agents, who give out the wrong information about half the time when taxpayers call in with questions.

It is an operating manual for social engineering and a nightmare so terrifying that more than six in 10 U.S. taxpayers use professional help to prepare their returns. They spent $265 billion in 2005 just to comply with the filing process — yet Money Magazine reports that there’s a 99% chance that professionally prepared returns are not fully correct.

Because of the tax code’s complexity, 40% of Americans, a figure provided by the IRS, simply doesn’t [sic] bother to comply with the tax code. The rest of us probably err on the side of caution because we — justifiably — fear the IRS and consequently overpay.

The article concludes, “What’s needed is an entirely new system that is so straightforward that it can be neither misunderstood nor mangled.”

For more on tax compliance costs and complexity, click here.


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