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Biggest problem facing taxpayers? The tax code

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Cartoon / Brian Barling / The Christian Science Monitor / File

(Read caption) The tax code has become so complex – about 3.8 million words long, with hundreds of changes per year – that not only does nobody understand it, nobody even tries anymore. Tweaking and updating isn't enough: the tax code needs to be reset.

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Each year for the past decade, Nina Olsen, the National Taxpayer Advocate at the Internal Revenue Service, has issued a report to Congress on the most serious problems facing taxpayers. She usually focuses on individual provisions of the code, such as the Alternative Minimum Tax, or vexing tax administration problems. This year, Nina reached a quite different conclusion: The most serious problem encountered by taxpayers is…the Tax Code. The whole darn thing.

As the report says, “The most serious problem facing taxpayers—and the IRS—is the complexity of the Internal Revenue Code.”

Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That equal to a year’s labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.

Not only is the Tax Code massive—3.8 million words by Olsen’s count—but it is a constantly moving target. Her report estimates there have been more than 4,000 changes in the law over the past decade, and 579 last year alone. It is no wonder nobody understands it.

More troublingly, all this complexity is driving people to cheat. More than 60 percent of self-employed workers (whose income tax is not withheld) either under-report income or over-report deductions. Olsen attributes at least some of this behavior to taxpayers’ belief that they are paying more than their fair share while others are avoiding tax. Nobody, she says, wants to be a “tax chump.”

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