Figuring Income Tax May Become a Bit Easier

Ever since the government vowed to simplify taxes in 1986, it seems it has become increasingly harder to file your annual tax return.

Admittedly, the Internal Revenue Service has added a few shorter forms for those with no deductions and no dependents. But, by and large, those who have families and mortgages and credit card bills have been spending more time trying to figure out how much they owe to the IRS. And often, they’ve thrown up their hands and opted to hire professionals.

The IRS now says nearly half of the nation’s taxpayers are using professional preparers. And preparers say it can take a solid 40-hour workweek to fill out just one individual taxpayer’s return.

But some relief may be on the way, thanks to a three-year push from an unlikely quarter--the American Institute of Certified Public Accountants (AICPA). The accountants, who are doing land-office business because of all the complexity, complain that the tax code is now too complicated for many of them to understand without hours of additional training. That training--and the extra hours they spend filling out returns--costs them money, much of which is impossible to recover, they say.

“Taxpayers are not willing to pay what it really costs to prepare a tax return today,” said Janice M. Johnson, director of tax policy for the New York State Society of Certified Public Accountants. “There is a limit to what you can reasonably expect to charge.”

The AICPA has been lobbying on behalf of two separate bills that might make it a bit easier for consumers and businesses to file their returns. And legislative experts believe that there is enough support to get at least one of these bills passed.

But there is a catch. Part of what is making the bills politically viable is they don’t do much of anything.

The consumer-oriented provisions in these bills include dropping one segment of the calculation for the earned-income credit, which is a tax break for low-income workers; slightly liberalizing the rules on passive losses, which are usually related to certain investments, and making it a bit easier to roll over the gain from the sale of a personal residence. Consumers would also be allowed to pay their tax bills via credit card. And the Treasury would vow to study ways to make tax forms simpler.

Would these bills significantly alter the highly complicated rules relating to interest income and deductions? Not really. Would they reduce the number of schedules, or forms, individuals need to file? Not at all. Would they significantly help consumers calculate credits and allowable deductions? Nope.

In fact, these changes are so modest, consumers might not even notice if and when they are made.

“These are little tiny measures,” allowed Robert G. Nath, principal at Odin, Feldman & Pittleman in Fairfax, Va. “They will not have a huge impact on tax-return filers.”

Nevertheless, some believe that these bills are a step in the right direction. If they are passed and well received, Congress might make simplification a higher priority, Johnson said. In the long run, that could help consumers.

“Every journey has to begin with one step,” agreed John D. Barrett, partner in charge of the tax department at Coopers & Lybrand in Los Angeles. “Maybe this is just one step in the right direction that starts the whole mechanism moving. At least, we are making some progress.”

How did the tax code get so complex, and why is so little being done about it?

One reason is politics. The government wants more money, but it knows that individuals are not interested in tax hikes. So instead of raising tax rates, legislators have started eliminating deductions and credits for certain groups of taxpayers. That’s more politically palatable, but it forces everyone to figure out whether they fall into those groups.

Special-interest groups also play a role. Lobbyists representing everyone from realtors and bankers to colleges and charities push for tax breaks that will favor them. Strong arguments can be made for allowing many of these tax breaks. But each deduction adds a certain level of complexity, Nath said.

Finally, and possibly most importantly, those who pay for the complexity by spending extra hours filling out their returns, or by simply passing returns along to professional preparers, don’t scream about it.

“People don’t have enough at stake to get them up in arms about it. For them, taxes are a once-a-year affair,” Nath said. “But this is a year-round vigil for the forces that create complexity. They are much more concentrated in their efforts than Joe Filer, who wants to get the code simplified.”