5 Biggest Reasons the Tax Code Needs a Major Overhaul

There are actually about 6.1 billion reasons the federal tax code needs a major overhaul. That's the estimated number of hours we spend each year preparing our taxes, according to a new report from a pretty good source: The national Taxpayer Advocate division of the Internal Revenue Service.

The Taxpayer Advocate -- "our" voice at the IRS -- is required to send an annual report to Congress detailing what's not working for taxpayers. In the just-released 2010 report, Taxpayer Advocate Nina Olson targeted one over-arching problem: The tax code is so complex it is a hotbed for mistakes, induces cheating, and makes the entire preparation process a massive drain of both our time and money.

Olson's suggested fix is the title to this year's report: The Time for Tax Reform is Now." Here are five of the main reasons Olson is calling for a massive renovation of the federal tax code:

1. Dealing with taxes is a colossal time suck. The estimated 6.1 billion hours spent preparing our taxes is the equivalent of about 3 million full-time jobs. By comparison, Walmart, the country's biggest public employer, has 2.1 million employees on its payroll. In our over-scheduled, ever-demanding lives, a nice stimulus gift D.C. could give us would be to reduce the time we have to spend dealing with our taxes (or CPAs). And just think how it might improve the mood in your household in early April.

2. It costs us $163 billion a year to prepare our taxes. To be clear, that's just the cost of paying experts and buying software to help us do our taxes; we're not talking about all the taxes we owe. That $163 billion price tag for prep work equals 11 percent of all the tax collected by the IRS. That's just sad.

3. The tax code is nearly five times as long as the Bible. Olson noted that when her office did a word count, it found an astounding 3.8 million words in the current tax code. That is about three times the verbiage that existed in 2001 and 80 percent more than in 2005.

For those of you who like a little context, the Bible (King James version) clocks in somewhere in the vicinity of 785,000 words. Or for anyone who ever took on the marathon of reading Marcel Proust's Remembrance of Things Past, that book's 1.5 million words isn't even half that of the tax code's.

Maybe next year Olson and her gang can take a stab at how many of those words are for the benefit of special interests.

4. All that complexity makes us cynical...and dishonest. As Olson laid it out in her report:

No one wants to feel like a "tax chump" -- paying more while suspecting that others are taking advantage of loopholes to pay less. Taxpayers who believe they are unfairly paying more than others inevitably will feel more justified in "fudging" to right the perceived wrong.

Olsen also hammered home the long-lamented fact that complexity magnifies inequity -- for instance, the fact that the wealthy can hire tax pros to navigate them through every possible loophole. She also called out a handful of especially smelly special interest gimmes, including the golf-cart/electric car credit that MoneyWatch's Kathy Kristof has chronicled.
5. Even the IRS can't handle the burden.

The report states that the tax code is so complex "the IRS has difficulty administering it." (Note to the IRS: We feel your pain...times 10.)

Exhibit A: In each of the past two years, the IRS received 110 million phone calls from stressed-out Americans trying to wrestle their tax return into submission. Think about that for a sec; there are only 232 million American at least 18 years old, and many households file one joint return. And as Olson points out, 90 percent of us have a CPA or use software. And still we're flooding the IRS with 110 million calls of tax-time desperation.

Exhibit B: We're not necessarily getting answers. The IRS was unable to answer more than 25 percent of calls made to it in 2009 and 2010. And in its 2008 fiscal year, when the Economic Stimulus Act was in play, it failed to answer more than 50 percent of the 167 million calls it received. Given the Republican push to reduce the size of government, I am guessing the solution here won't be to add to the 100,000 IRS employees already on the federal payroll. A better option? Simplify the code and maybe we won't need to call so much.

Olson also made an interesting point that in recent years the IRS has increasingly been asked to be the implementer of new laws and regulations. For example, it was left to the IRS to oversee the implementation of the recent First Time-Home Buyer tax credit, and the Make Work Pay credit. It has also been tasked with putting into place various parts of the Affordable Care Act. Those tasks seem a bit far-flung from the IRS' main mission of enforcing tax collection.

What's Your Favorite Reform?
When the folks in charge of making sure we all follow the tax code are pushing for reform, I think that's a pretty solid data point on how bad things really are. There have indeed been some rumblings in Washington this week that tax reform may be something Congress is ready to pay serious attention to. The President has been signaling he's up for "a conversation" although the focus, so far, seems to be on reforming the corporate tax system -- a move tied to spurring economic growth.

In the meantime, you can join the Taxpayer Advocate's crusade to overhaul the code. Olson's office just launched a new online "submit your best tax reform ideas" service. Have a go at it. If Congress doesn't take on reform this year, it sure would be interesting if next year's Taxpayer Advocate report to Congress includes a detailed breakdown of our reform ideas.

Photo courtesy Flickr user David Reber's Hammer Photography

More on MoneyWatch:

• How to Fix the Tax Code
• The Obama Tax Cuts: What They Mean for You
• Obama Tax Cuts: Winners and Losers