Complicated tax returns befuddle and frighten Americans

Tax CountdownFor almost half a century, attorney J. Harlan Stamper has sorted through U.S. tax law. He’s only recently stepped back from preparing other people’s returns.

So how does he do his own taxes? He uses a tax software program.

“Before, I always came away hoping I did it right, but I was never sure,” said the Kansas City lawyer. “Even somebody like me who has done this for so many years, it makes your head hurt. I’d like to come to the right answer.”

Americans are frightened by the tax form.

The annual math-meets-law-quiz is a national anxiety. Less than 20 percent of us brave the exam without help.

From could-be Cabinet member Kathleen Sebelius to couldn’t-be Cabinet member Tom Daschle to Treasury boss Timothy Geithner, prominent Americans have seemingly failed to pay their taxes correctly. Their explanations ranged from the arguably disingenuous to the plausibly confused. It’s fair to assume they had help from professionals.

Even the Internal Revenue Service’s taxpayer advocate declares that “it adds insult to injury that … taxpayers today find filing so complicated that they feel compelled to pay transaction fees simply to file their taxes.”

A code that is almost 3 inches thick in fine print accompanied by a foot-tall document of IRS regulations backed by 25 volumes of explaining “summaries” that fill 9 feet of shelf space, the 6.7-million-word riddle that determines what you owe Washington is the enemy of simple. And it’s getting more aggressively convoluted all the time.

The changes in tax code since 2001 average out to more than one daily, including 500 in 2008 alone. The size of the code has tripled since 1975. Not one, but two newsletters publish up to 500 pages daily to keep professionals clued in to the shifting U.S. tax landscape.

The IRS is not the real bogeyman here. As Pogo said decades ago, the enemy is us _ or at least those people on Capitol Hill so intent on pleasing us. Deduction for your home mortgage interest? Few homeowners would part with that savings. A break for home energy conservation or a hybrid car? Green is gold. Allowances for college bills? Every little bit helps. And so it goes.

But the sum total of good intentions piles on one after another, making for an April 15 nightmare.

“On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay” or pick a fight with the taxman, says a report by the IRS taxpayer advocate. “On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.”

Consider Josh Gregory, who makes a modest living delivering pizzas, giving dance lessons and performing with a fire dance troupe. The 27-year-old Kansas Citian walked into Liberty Tax Service last week with an accordion folder, a handful of forms, a spiral notebook and some anxiety about getting this thing right.

“There are some things that I’m confused about,” he told his tax preparer, Susan Waterman.

Last year, he came with a small blizzard of random papers, and both filer and preparer ended up sprawled on the floor trying to make sense of things. He’s become more organized, but a puzzle still lies ahead.

Since he lives in a loft that’s rented in the name of one of his ad hoc businesses, are repairs there deductible? Probably not. What about costumes and props for the dance group? Sure. Mileage delivering pizzas and driving to performances and lessons? Yeah, but how well documented are those trips?

One of the theatrical companies he earned money from put a dollar amount in the wrong box on his 1099.

“Let’s just put it in the right one,” Waterman said. But that brings with it the fear that somewhere down the line an IRS examiner will see that correction as a mistake, or at least as an inconsistency.

Even as Waterman is guided by her company’s software and her own accounting background, things come up as asides in their conversation. Two other people with the same facts but a different rapport might miss some options _ and produce a different return.

Now the IRS is sending signals that tax preparers will be more subject to penalties if they knowingly push a taxpayer beyond the limits.

“The message is clear. They want more uniformity. They want better compliance,” said Stamper, the tax attorney.

At the Tax Institute, operated by tax preparation behemoth H&R Block, executive director Amy McAnarney said confusion and fretfulness are driving more people to turn to professionals.

“There are so many moving parts in the tax code, more people are thinking that maybe it’s time to see an expert,” she said.

The company’s surveys find that 72 percent of Americans say they are not aware of changes in tax laws. Nearly as many didn’t know they could amend mistakes in previous years _ and get returns for overpayments.

In 2006, taxpayers were allowed to claim a one-time credit worth $30 to $60. Yet more than a fourth of those eligible didn’t make the request for what the IRS called “essentially free money.”

“The only plausible explanation,” the agency said, “is that taxpayers missed the credit because of the complexity of the law and the tax forms.”

For instance, rates for mileage deductions for the first half of 2008 are different for those driven in the second half of the year.

A World Bank survey ranked the United States 122nd out of 175 countries in the simplicity of tax filing. The IRS estimates that tax compliance _ the time we all spend gathering our records and translating them into returns to the federal government _ consumes about 7.6 billion hours a year, or the equivalent of 3.8 million full-time workers.

Congress and the Reagan administration tried smoothing over the process with the 1986 Tax Reform Act. It broadened the tax base and lowered the top rate from 50 percent (it had been at 94 percent in 1929, fell, and rose back to the 90s during the 1950s and 1960s) down to 28 percent.

But the process of revision began almost immediately, and experts widely agree that today’s taxes are far more complicated than the pre-1986 overhaul.

For some, the problem isn’t so much the exemptions, it’s the rates. Lower taxes _ the top rate has inched back up to 35 percent for 2008 earnings _ would go a long way to easing Americans’ anxiety about their exchanges with the IRS.

“If every complexity made you pay less, you wouldn’t complain about it,” said Grover Norquist, president of Americans for Tax Reform. “When the tax rate’s so high, people will fight for exemptions and deductions and organize their lives around them.”

Steve Forbes twice became a Republican presidential contender by arguing for a flat tax free of exemptions, a tax return that he boasted could fit on the back of a postcard. Appealing as such an approach might be, it’s regularly shot down by those who point out that it would obliterate the progressiveness of the existing code that shifts more of the burden to the rich.

A flat tax also would leave out room for ways the code encourages homeownership and the stability of community that follows, or supports business investment in new equipment and a slew of other things the country largely sees as positive behavior.

That use of the tax system as a social engineering tool, to some, has gotten out of control.

“Congress is increasingly using the tax code to micromanage the economy,” said Chris Edwards, the director of tax policy at the libertarian Cato Institute.

He, like other analysts, sees little chance of simplification on the horizon.

The issue rarely came up in last fall’s elections, and Capitol Hill is more consumed with trying to resuscitate the economy.

Meanwhile, the tax preparation business remains a growing industry.

“The country’s in the worst economic downturn of our lifetimes, and my business is up,” said Andy Banker, owner of Liberty Tax Service franchises in Kansas City and Roeland Park. “People are coming in because they’re getting more and more scared about making mistakes.”

Copyright 2009 The Associated Press.