Our tax code flummoxes even the IRS

A few days before this was written, the U.S. Senate bowed to common sense by killing the loopy 1099 reporting requirement for B2B transactions over $600 that was part of the Patient Protection and Affordable Health Care Act of 2010 (aka Obamacare). The lopsided 81-17 vote included 34 Democrats, most of whom voted in favor of the 2,000+ page Obamacare bill without reading it. They scrambled to undo some of their damage after being scorched by political heat over the obscure 1099 provision, which would have placed an excruciating burden on an estimated 40 million businesses, churches, charities and other organizations.

The 1099 provision was inserted into Obamacare by Congressional left-wingers who believe there to be widespread underreporting and sheltering of income by businesses. Widely reported estimates were that these omissions total some $17 billion a year.

That figure seems to have been plucked out of mid-air, but whatever the precise dollar tag, let’s give the devil his due and not argue with its basic premise. Of course there is widespread tax evasion by businesses large and small, as well as by wealthy individuals and those of moderate means. The poorest among us are exempt from paying federal taxes, and therefore may be the only totally scrupulous class of tax dodgers.

How could it be otherwise with a tax code of such complexity and dubious moral underpinnings?

The Taxpayer Advocate Service, an independent organization within the Internal Revenue Service, estimates that individual taxpayers and businesses spend a mind-boggling 6.1 billion hours a year trying to figure out their federal tax return. That is the equivalent of 3 million full-time workers.

According to a recent report by National Taxpayer Advocate Nina Olson, the 2010 tax code checks in at 3.8 million words. That’s almost five times more than the 790,000 words found in the King James Bible. The income tax regulations issued by the Treasury Department stand about a foot tall. The CCH Standard Federal Tax Reporter, a publication for tax professionals that tracks tax code administrative and judicial rulings, comprises 25 volumes and takes up nine feet of shelf space.

The U.S. tax code is so complicated it even flummoxes the IRS! According to Olson’s report, the IRS took over 110 million calls for help in 2009 and 2010, but was unable to answer more than a quarter of them.

No wonder some 60% of individuals now hire professional tax preparers, while another 29% pay money for tax software programs in an attempt to stay in the good graces of the IRS - and to ensure they don’t overpay. According to Olson, the annual average cost for an individual taxpayer to comply with the federal tax code is $258. For businesses and the self-employed, the cost of complying with corporate income tax requirements in 2008 was pegged at $163 billion or “a staggering 11% of aggregate income tax receipts.” The 1099 reporting provision would’ve upped that considerably had it passed into law.

Notable in the Taxpayer Advocate’s report is its frank admission that tax code complexity inevitably leads to moral degradation. From the report: “On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.”

As a result: “Taxpayers who believe they are unfairly paying more than others inevitably will feel more justified in ‘fudging’ to right the perceived wrong,” Olson wrote. “The outcome of this situation is predictable - taxpayers develop a sense of cynicism about the tax system and the government that has foisted it on them, and tax compliance takes a hit.”

No kidding. Anyone awake can see this observation play out among millions of otherwise honest, law-abiding nannies, housekeepers and handymen who get paid under the table; as well as among millions of business owners who routinely write off fishy personal expenditures as business related. Fear of an IRS audit keeps most citizens from going overboard, but the danger is remote and those who can afford top-notch tax advice are able to insulate themselves via perfectly legal avoidance tricks.

Yep, whoever in Congress snuck the 1099 provision into the Obamacare legislation (nobody has taken “credit” for authorship) was basically correct in figuring that there’s widespread fudging on taxes. It’s just that their cure would have been far worse than the disease.

 Jim Olsztynski


Jim is the editor of Supply House Times. He can be reached by email or 847/405-4006.