The Tax Compliance Costs of IRS Regulations

In a pattern that has become all too common in recent decades, the newly enacted Inflation Reduction Act (IRA) added yet another layer of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. complexity to an already complex and burdensome federal tax code. While the InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. Reduction Act increased the Internal Revenue Service (IRS) budget by roughly $80 billion over 10 years, it also created two new corporate taxes and either expanded or launched 26 tax credit programs. These provisions will increase the administrative burden on the IRS and the tax compliance burden on taxpayers—costs that divert precious time and resources away from the private economy.

The federal tax code imposes many costs on the U.S. economy. The most direct costs, of course, are the resources taken out of the nation’s economy. Federal taxes consume nearly 20 percent of U.S. gross domestic product (GDP). Our tax system is heavily reliant on individual and corporate income taxes which economists at the Organisation for Economic Co-operation and Development have determined are the most harmful for economic growth.

A less direct cost is the precious time taken out of our lives to comply with a Byzantine tax code that requires billions of hours completing mountains of IRS paperwork and tax returns. In 2021, the IRS collected more than $4.1 trillion in total taxes from all sources. To do so required Americans to file 261 million tax returns in 2021. Some 75 percent of these, or 197 million, were income tax returns (both individual and corporate), while another 33.8 million were employment tax returns.

According to the latest estimates from the White House Office of Information and Regulatory Affairs (OIRA), Americans will spend more than 6.5 billion hours complying with IRS tax filing and reporting requirements in 2022. This is equal to 3.1 million full-time workers doing nothing but tax return paperwork—roughly equal to the combined populations of Philadelphia and San Antonio—and 39 times the workforce at the IRS.

The accompanying table lists the 25 most burdensome tax regulations. It shows that more than half of the 6.5 billion hours Americans spend on tax compliance is on complying with income tax returns. Taxpayers spend 2 billion hours complying with individual income returns (including small business returns) and over 1.1 billion hours complying with corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. returns, plus 1.4 billion hours complying with business deductions and quarterly tax returns. The remaining 2 billion burden hours are attributable to complying with hundreds of other tax forms and schedules, everything from wage and tax statements for employees to estate tax returns.

Tax Complexity Will Cost the U.S. Economy Over $313 Billion This Year

Besides the checks that taxpayers send to the IRS every April 15^th, complying with the tax code imposes a real cost on the economy. Every hour spent complying with tax forms and returns is an hour that parents cannot spend with their families or business owners cannot spend growing their firm. Economists call these opportunity costs.

Using hourly wage and benefit estimates for tax preparers and certified public accountants from the Bureau of Labor Statistics (BLS), we can estimate what tax compliance time costs taxpayers. For individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. provisions, we used BLS estimates for the average wage and benefits for (13-2082) Tax Preparers as of May 2021. The average wages for Tax Preparers are $24.56 to which we added the average benefits for private sector workers of $11.42.

For the remaining business-related returns and more complex provisions—such as returns for estates and trusts, or depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules—we used an hourly compensation cost of $53.08 for (13-2011) Accountants and Auditors. The average hourly wage for these workers is $41.66, to which we added the average benefits for private sector workers of $11.42.

Put in dollar terms, the 6.5 billion hours needed to comply with the tax code conservatively computes to $313 billion each year in lost productivity. This is equal to 1.4 percent of U.S. GDP and is 23 times larger than the IRS’s annual budget.

The burden costs to individual taxpayers (including small businesses) are nearly $74 billion annually, about 24 percent of the overall cost of tax compliance. The burden on corporate entities of complying with just their income tax returns is more than $60 billion. However, businesses bear additional costs, totaling the vast majority of the remaining $179 billion in costs, complying with the hundreds of remaining tax forms and regulations in the code.

Indeed, one of the most costly requirements for business taxpayers is calculating the depreciation and amortization of their capital assets, such as machinery, computers, and buildings. These forms alone cost businesses $24 billion each year to comply with. To put this in perspective, the most sophisticated semiconductor manufacturing machines on the market today cost $150 million each. The $24 billion in burden costs of depreciation and amortization schedules could pay for 160 of these machines. Allowing firms to expense the cost of their capital investments in the year they are purchased would eliminate these burden costs.

The income tax returns for estates and trusts impose a burden cost of $17.7 billion per year. If we include the numerous other forms required for gifts and generation-skipping returns, the total cost of estate planning rises to roughly $18 billion annually. To put this in context, the Office of Management and Budget (OMB) estimates estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. revenues will total $25 billion this year, which means the tax costs taxpayers nearly as much to comply with as it raises in revenues.

Tax Compliance Burden Will Cost $313 Billion

IRS Tax Form(s) or Regulation	Total Annual Burden Hours	Total Annual Burden Cost
U.S. Individual Income Tax Return	2,048,000,000	$73,687,040,000
U.S. Business Income Tax Return	1,138,000,000	$60,405,040,000
Proceeds From Broker and Barter Exchange Transactions	674,360,608	$35,795,061,073
Employer’s Quarterly Federal Tax Return	580,656,074	$30,821,224,408
Depreciation and Amortization (Including Information on Listed Property)	448,368,447	$23,799,397,167
Deduction for Qualified Business Income (Form 8995 and Form 8995-A)	336,107,360	$17,840,578,669
U.S. Income Tax Return for Estates and Trusts	333,541,340	$17,704,374,327
Wage and Tax Statements W-2/W-3 series	126,988,903	$6,740,570,971
TITLE: Employer’s Annual Federal Unemployment (FUTA)	105,271,229	$5,587,796,835
U.S. Tax-Exempt Income Tax Return	58,220,000	$3,090,317,600
Declaration and Signature for Electronic and Magnetic Media Filing	53,783,747	$2,854,841,291
IRA Contribution Information	48,731,780	$2,586,682,882
Form 1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.	46,628,604	$2,475,046,300
Returns regarding payments of interest	46,403,150	$2,463,079,202
Form 1099-DIV–Dividends and Distributions	32,119,195	$1,704,886,871
Form 1099 MISC – Miscellaneous Income	30,828,818	$1,636,393,659
W-8 BEN, W-8BEN-E, W-8EIC, W-8EXP, W-8IMY	30,561,468	$1,622,202,721
Heavy Highway Vehicle Use Tax Return	27,120,040	$1,439,531,723
Certain Government Payments	24,709,380	$1,311,573,890
Information Reporting by Applicable Large Employers on Health Insurance Coverage Offered Under Employer-Sponsored Plans	22,600,002	$1,199,608,106
Form 1098 Mortgage Interest Statement	20,131,656	$1,068,588,300
Preparer e-file Hardship Waiver Request and Explanation for Not Filing Electronically	18,270,900	$969,819,372
Employment Tax Adjustments and Rules Relating to Additional Medicare Tax	16,900,000	$897,052,000
Sales of Business Property	16,614,000	$881,871,120
Employer/Payer Appointment of Agent (Form 2678)	13,731,200	$728,852,096
All other IRS forms and regulations	259,255,039	$13,761,257,470
Totals	6,557,902,940	$313,072,688,055
Source: Reginfo.gov for paperwork hour estimates. Notes: For cost burden estimates, the author relied on BLS data on the hourly wage and benefit costs of Tax Preparers and Accountants and Auditors. For Tax Preparers the average hourly wage was $24.56 and benefits were $11.42 for a total of $35.98 (See https://www.bls.gov/oes/current/oes132082.htm). For Accountants and Auditors the average hourly wage was $41.66 and benefits were $11.42 for a total of $53.08 (See https://www.bls.gov/oes/current/oes132011.htm). For benefits for all private sector workers see https://www.bls.gov/news.release/ecec.t04.htm

Another Cost of the Tax Code—Time on Hold

When OIRA calculates the time it takes a taxpayer to comply with tax regulations they only account for the time it takes to prepare and complete a specific form. OIRA doesn’t include the thousands, or even millions, of hours Americans spend trying to call and get help from the IRS. According to the IRS’s Taxpayer Advocate’s FY 2023 report to Congress, the IRS received more than 72.8 million phone calls for help during the 2022 filing season, but customer service representatives (CSRs) answered just 10 percent of those calls, or 7.4 million.

On the IRS Accounts Management line, the average wait time (for answered calls) was 28 minutes. On the Form 1040 help line the wait time was 26 minutes. And for the Consolidated Automated Collection System Lines the wait time was 36 minutes. Tragically, millions of taxpayers waited on hold but never got a CSR to answer the call for help. They will never get that time back.

Tax Simplification Will Save Time and Money

A simpler tax code is better for taxpayers and the tax collectors. As the Inspector General for Tax Administration at the Internal Revenue Service (IRS) wrote in his October 7, 2007 report to Congress: “Tax complexity and frequent revisions to the Internal Revenue Code make it more difficult and costly for taxpayers who want to comply with the system’s requirements, and for the IRS to explain and enforce the tax laws. Tax law complexity results in higher costs for both tax administration and tax compliance.”

The Tax Foundation has modeled and recommended several reforms that would help simplify the tax code, including but not limited to:

• Better cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. for capital investment: Allowing a full and immediate deduction for all investment, i.e., full expensing.

• Better cost recovery for R&D and a simpler R&D tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. : R&D investment incentives can be improved by permitting R&D expenses to be fully expensed permanently and by simplifying the R&D tax credit’s design.

• Reduce and simplify international tax rules: Doing this would be consistent with rules found in other industrialized countries and in the manner of the global tax agreement.

• Streamline social benefits: The complicated nature of today’s tax credit system presents an opportunity for reforms to simplify the filing process for taxpayers and administrators by consolidating child-related benefits (Child Take Credit) into one provision and work-related benefits (Earned Income Tax Credit) into another.

• Remove tax barriers from personal savings: Streamlining or removing complex rules to create universal savings accounts.

• Clean up the structure of the individual income tax code: Simplifying components of the Tax Cuts and Jobs Act, such as elimination of the Pease limitation and the Alternative Minimum Tax, should also be prioritized for permanence.

• Clean up the structure of the business tax code: It is possible to raise large amounts of tax revenue while cleaning up the structure of the business tax code by eliminating unsound business tax expenditures.

Tax Foundation economists frequently use macroeconomic modeling to show how tax simplification can improve economic growth, boost wages, and encourage new investment throughout the economy. However, the Tax Foundation’s model results don’t factor in how much time Americans will save complying with a simpler tax code.

The latest official estimates of the eye-popping amount of time and money that Americans lose each year in complying with IRS paperwork—6.5 billion hours and $313 billion in lost productivity—indicate that the most important benefit of tax simplification may be the gift of time.

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