Complex Tax Compliance Rules Cost Americans $546 Billion Yearly

Tax forms from previous years are displayed at Latino Taxes in Oakland, Calif., on April 10, 2007. (Justin Sullivan/Getty Images)

Compliance with tax rules in the United States costs the country more than half a trillion dollars annually as taxpayers attempt to follow the onerous regulations, according to a recent report by the nonprofit Tax Foundation.

This year, Americans are expected to spend over 7.9 billion hours complying with Internal Revenue Service filing and reporting requirements, the Tax Foundation said in an Aug. 6 report. “If we assume a reasonable hourly wage, the 7.9 billion hours Americans spend complying with the tax code costs the economy roughly $413 billion in lost productivity,” the foundation said.

“In addition, the IRS estimates that Americans spend roughly $133 billion annually in out-of-pocket costs to comply with the tax code. This brings the total compliance costs to $546 billion, or nearly 2 percent of GDP.”

The IRS was identified as the “primary source” of regulatory costs in the United States. Out of the 12 billion hours Americans spend annually to prepare federal paperwork, around two-thirds was accounted for by efforts to comply with IRS regulations.

Much of the burden of adhering to tax regulations fell on businesses. Individual tax forms made up a third of the total cost and time of tax compliance, with corporate forms and other business costs making up the remaining two-thirds.

Many Americans have expressed frustration at the complexity of the federal tax system. A Pew survey last year found that 85 percent of American adults were distressed by the issue.

Meanwhile, technology has not particularly helped taxpayers with reducing the burden of preparing and filing complexities, according to the Tax Foundation. The tax complexity has only increased “steadily decade after decade,” despite advances in tech.

The Epoch Times has reached out to the IRS for comment.

Reasons for Complex Tax Rules

The National Taxpayers Union Foundation (NTUF) cites multiple reasons why the U.S. tax rules are complicated. “One factor behind the complexity and confusion associated with tax compliance is the sheer size of the tax code,” it said in a report.

As of this year, Internal Revenue Code and IRS regulations combined have over 16.21 million words, almost double from three decades ago. And to interpret the tax laws, the Treasury Department has published 22 volumes of the Code of Federal Regulations (CFR), which has more than 17,000 pages.

Another factor is “substandard taxpayer services,” the NTUF said. The Inflation Reduction Act (IRA) provided the IRS with $79.4 billion in supplemental funding. However, the IRS only set aside $3.2 billion from these funds to boost taxpayer services, the NTUF noted.

According to the IRS, the agency’s taxpayer services saw several key improvements in the first year of IRA funding.

“This filing season, we have answered more than one million phone calls than last year, while increasing our level of service (the percentage of callers that speak to a Customer Service Representative) and reducing the average call wait time from 28 minutes in 2022 to an average of three minutes this year,” the IRS said in May.

The NTUF cited a study that found while the IRS had a higher response rate to taxpayer phone calls in 2023 compared to the previous year, this was largely due to a “steep decline” in the number of calls made by taxpayers. In 2022, Americans made more than 63 million calls to the IRS, which fell to nearly 26 million in 2023.

“Moreover, this does not shed light on whether taxpayers got the answers they were hoping for when they tried to contact the IRS. ... Some may have ended up getting an automated response and hung up disappointed. According to the IRS, this would count as an answered call,” the NTUF said.

A July 30 report from the U.S. Treasury Inspector General for Tax Administration highlighted the issue of the IRS’s poor call response.

As part of its investigation, the TIGTA called all 76 local Taxpayer Advocate Service (TAS) telephone lines in the United States. TAS is an independent organization within the IRS that seeks to help taxpayers resolve problems. Out of the 76 telephone lines, only two were answered by a representative.

Lawmakers have also raised concerns that complex tax rules are putting needless pressure on America’s small businesses.

During a Senate hearing last year, Sen. Mike Crapo (R-Idaho) cited a survey to state that almost two-thirds of small businesses faced significant administrative burdens due to the federal tax code.

“We need to get the government out of the way of the small business engine of our economy,” he said.