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The Color of Money

Complexity of IRS codes costs taxpayers for preparation, inadvertent mistakes

By Michelle Singletary
February 24, 2009
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Taxpayers and businesses in the United States spend 7.6 billion hours a year complying with tax-filing requirements, according to data from the National Taxpayer Advocate's office. In the last eight years, changes to the tax code have been made at a rate of more than one a day - including more than 500 changes in 2008 alone, according to Nina E. Olson, the national taxpayer advocate.

The complexity of the tax code is a serious problem, Olson writes in her 2008 annual report to Congress, released last month.

If you could sum up Olson's report in just one word, it would be simplify. About 60 percent of individuals pay professionals to prepare their tax returns. Another 22 percent purchase tax software. The report estimates US taxpayers spend $193 billion a year complying with income tax requirements.

Olson reports to Congress what many taxpayers already know - the complexity of the tax code has led to "perverse results."

"On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay their tax or to become subject to IRS enforcement action for mistaken underpayments of tax," her report says. "On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities."

Among her recommendations, Olson suggests Congress repeal the alternative minimum tax provision. The AMT's original goal was a good one - to target high-income taxpayers who were claiming so many deductions that they owed little or no tax.

The AMT, which is a separately figured tax, eliminates many deductions and credits, ultimately increasing the tax liability for anyone who would otherwise pay less. In 1970, the year after the AMT was enacted, only 20,000 filers were affected. By 2010 more than 33 million - a third of all taxpayers - will be subject to the AMT, according to the Tax Policy Center.

What's maddening is that the AMT requires taxpayers to compute taxes twice - once under the regular rules and again under the AMT guidelines - and then to pay the higher of the two amounts. Isn't one enough?

In her report, Olson speaks for the many who will find they have a higher tax bill because of debt that has been canceled. Generally, if a creditor forgives a debt, the amount you don't have to pay back is taxable income.

But there are exceptions. For example, the Mortgage Forgiveness Debt Relief Act of 2007 allows homeowners to exclude debt canceled relating to mortgage loans. But you can only qualify for the part of the loan used to buy or improve a principal residence. If you used some to pay off a car loan, credit card balances, student loans, or medical bills, you can't exclude that forgiven debt from income.

Michelle Singletary is a syndicated columnist. She can be reached at singletarym @washpost.com.

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