* First in a series
Unless you filed a short form, you may -- at this time of year -- be finding income tax regulations confusing. Don't be dismayed. So do most of the nation's accountants and tax lawyers. Even agents of the Internal Revenue Service can be baffled.
The tax code has become so complex that hardly anyone has anything good to say about it -- or about Congress, which passes tax laws, and the IRS, which enforces them. It's time for an overhaul, but no one believes it will happen soon.
One of the most scathing denunciations is directed at the Revenue Reconciliation Act of 1990. "The new law is in many respects absurd, frivolous and dilatory: Congress ran amok, inebriated with the exuberance of its own verbosity," says Stephan R. Leimberg. An attorney and professor of taxation and estate planning at the American College at Bryn Mawr, Leimberg predicts Congress will have to institute significant changes to make it work.
Some critics are kinder. "I'm not sure members of Congress really know a whole lot about what they're doing," says Jack Oppenheimer, a certified public accountant from Orlando, Fla. "They rely an awful lot on their staffs. Frankly, I don't know how they can keep up on everything they have to do."
How bad is the situation? Some observers say our whole system of voluntary tax compliance will collapse if there aren't comprehensive changes that make paying taxes less complex. "Ultimately, when tax laws are difficult to understand and comply with, taxpayers lose respect for the system itself," Jay Starkman, another CPA, of Atlanta, Ga., observes. This, he points out, reduces the government's revenues.
Is the IRS to blame for tax complexity? The IRS only enforces the law. Doug Stives, CPA, of Red Bank, N.J., applauds what the IRS has accomplished. "Since the 1986 law became effective, tax returns are simpler for the average taxpayer. On the 1990 return, the automatic deduction for a joint return was $5,450, encouraging more married couples to use the standard deduction. A lot of people just don't come up with anything near that in their itemized deductions, and that simplifies their return."
Further, the IRS is trying to ease the filing burden by simplifying forms and has done so for millions of taxpayers -- as many as 90 percent, by one estimate. This year the IRS took another step forward, introducing experimentally the ultimate short form, called 1040EZ-1. Those who received it had only to attach their W-2 forms, declare any taxable interest income, sign the form and mail it. The IRS will complete the calculations and mail refunds or bills for any taxes due.
Yet, some people who might use a short form are forestalled by restrictions designed for the rich that trickle down to ordinary taxpayers.
"There are numerous provisions in the regulations that are difficult for small taxpayers to handle -- matters you think wouldn't apply to a 1040A," says Victor Barton, a certified public accountant in Washington, D.C.
"For example," he says, "child care credit can be complex. Take a taxpayer who is not living with his wife and has a daughter in a drug rehabilitation program six months of the year. Can he take the daughter as a dependent? Who paid what? And people who itemize have difficulty calculating the interest deduction -- not to get into the alternative minimum tax. There now are seven different ways you have to compute depreciation."
Who is responsible for the complexity of taxes? It would be convenient to blame Congress, but some authorities say the responsibility is yours, the individual taxpayer. They say Congress can't act because you are not aware of the issue or you simply lack interest. And without a strong constituency of irate individual taxpayers, Congress has no incentive to act. Your silence condones the preferences given to special interest groups who can deliver votes. And, often, you belong to one or more of these groups.
Tax subsidies that benefit particular groups are the single biggest cause of tax complexity, according to Starkman. These include home mortgage interest, charitable deductions, individual retirement accounts, personal and dependent exemptions, the standard deduction and child-care credit. Other powerful constituencies support oil and gas depletion allowances, accelerated depreciation and the like. Would your congressman dare vote any of these out of existence?
NEXT: How your taxes can be simplified.