TOPICS > Economy

Despite Complexity, Millions of Americans will File Taxes by April 15

April 12, 2005 at 12:00 AM EDT
REALAUDIO SEE PODCASTS

TRANSCRIPT

PAUL SOLMAN: Ronald Reagan’s 1984 State of the Union Address:

PRESIDENT RONALD REAGAN: I am asking Secretary Don Regan for a plan to simplify the entire tax code.

PAUL SOLMAN: Two decades after taxes actually were simplified, an IRS walk-in-center in lower Manhattan:

PAUL SOLMAN: Do you do your own taxes?

MAN: No, I don’t.

PAUL SOLMAN: Why not?

MAN: Because I don’t know how.

PAUL SOLMAN: Do you do your own taxes?

WOMAN: No, I don’t.

PAUL SOLMAN: Why?

WOMAN: Why? Because it’s too complicated.

PAUL SOLMAN: Have you ever tried to do your own taxes?

MAN: No, no, no.

PAUL SOLMAN: You wouldn’t even begin to try?

MAN: No. It’s too complicated.

PAUL SOLMAN: Cy Okolie would like to do the taxes for his new business, if he could only get the right form.

CY OKOLIE: “1065 comes into mind. Do you have a 1065 form?” And he goes, “I can’t really speak on that. I’m not qualified.” I go, “you’re an Internal Revenue agent!”

He suggested maybe I should go on the Internet. I said, “If you can’t answer the question and give me the form, how am I supposed to navigate your site and find the form that I need?”

PAUL SOLMAN: Ire at the IRS is becoming a big issue in the U.S. these days. President Bush mentioned it in his state of the union speech.

PRESIDENT GEORGE W. BUSH: Year after year, Americans are burdened by an archaic, incoherent federal tax code. I’ve appointed a bipartisan panel to examine the tax code from top to bottom.

PAUL SOLMAN: The panel which resulted met in March and put numbers on the tax frustration.

SPOKESMAN: For many families and businesses, the current income tax system is highly complex, and that complexity is costing the economy about $135 billion per year.

PAUL SOLMAN: That’s $10 billion for the IRS, $40 billion for businesses, $85 billion for individuals in time and money spent on professional help.

SPOKESPERSON: This includes the value of 3.5 billion hours of taxpayer time per year, the equivalent of nearly two million hidden IRS employees, we the taxpayers.

PAUL SOLMAN: Nina Olson just spent some extra hours herself.

NINA OLSON: But two weeks ago, I prepared my son’s taxes. He’s going to school part-time. And the software spewed out for me what educational provision we should use on his tax return.

But for me, to determine why that was the right result, I had to read for two hours to feel confident that was the right result. And I am still hard-pressed to know what I should be doing next year.

PAUL SOLMAN: A hapless victim of the tax code? Hardly. Nina Olson is a tax lawyer who prepared returns for a living for 26 years, until becoming the national taxpayer advocate, working within the IRS to represent the interests of us all.

NINA OLSON: Complexity has just happened by what I call “complexity creep.”

PAUL SOLMAN: You add a tax break here, a new regulation there, which leads to new ways of getting around the rules, which in turn leads to even newer regulations.

NINA OLSON: And then you ultimately come up with the 1.5 million-word Internal Revenue Code that we have today, with six volumes of regulations.

PAUL SOLMAN: Just how complex is it? Well, consider the so-called “short” form, the 1040-A. According to the government’s own study, it takes the average taxpayer eleven and a half hours to complete it, about as long as the much more extensive 1040 used to take a decade ago.

As for today’s 1040, usually filed with Schedules A, B, and D, it now takes 28 hours and 30 minutes to complete. No wonder nearly two-thirds of all taxpayers now have their returns done by paid preparers. And even then, some of them wind up at the taxpayer advocate’s office.

WOMAN: They cry. They beg. They threaten.

PAUL SOLMAN: We’re in a training session Nina Olson is holding for some of her New York staff. Some of the biggest complications, it turns out, hinge on the simplest of questions, from raising children –

NINA OLSON: Who gets to claim the kid as a dependent, okay?

PAUL SOLMAN: — to withdrawing funds from retirement plans without penalty.

NINA OLSON: Individuals can have an Individual Retirement Account on their own. They can have a 401(k); something called a simple IRA; what we call a 457-B Plan; what’s called a 403-b plan.

And each one of these plans have different rules, and each one of them have different definitions of what constitutes a hardship exception.

PAUL SOLMAN: The thorniest complications these days may actually be posed by something called the alternative minimum tax, or AMT, which Congress created in 1969.

The problem back then was that a few very high-income Americans were paying no federal income tax at all, thanks to huge deductions, mainly from tax- sheltered investments.

The alternative tax calculations jacked their taxable income back up, by canceling out many of those deductions and other write-offs, like state and local taxes, health care costs, even the exemption for children.

But this was only for the rich, remember. However, for decades, the AMT wasn’t adjusted for inflation, so today it affects millions of ordinary Americans.

PAUL SOLMAN: Nina Olson uses the ’70s sitcom The Brady Bunch to show how anachronistic the AMT has become.

NINA OLSON: So we have Mr. and Mrs. Brady. They’re able to take the standard deduction for married filing jointly in 2004, which is $9,700.

PAUL SOLMAN: They’ve also got those six darling exemptions: $3,100 each off their income. Now, let’s assume Mr. Brady makes an average salary as the California architect he supposedly was, and that Mrs. Brady works part-time.

NINA OLSON: So based on that income of Mr. Brady, a W-2 taxpayer of $73,000, and Mrs. Brady, a W-2 taxpayer with $25,000, the Bradys owed $3,394 in taxes under the regular tax system.

PAUL SOLMAN: But then along comes the AMT formula, which adds back certain deductions, and makes you pay the higher amount: Either your regular tax bill, or the alternative minimum.

NINA OLSON: Under the alternative minimum tax, you have to add back in those six children. And so what happens is, their taxes raise to $4,442 or $1,048 more than the regular tax system.

PAUL SOLMAN: And here’s a sobering thought, NewsHour viewers: This could happen to you.

NINA OLSON: I do know, what is projected is by 2010, I believe, there will be 34.8 million taxpayers, or a third of our taxpayers, in our system in the AMT.

PAUL SOLMAN: And by then, the AMT will be raking in about a trillion dollars a year, more than the regular income tax, making it very expensive to repeal. In fact, I discovered while doing this very story, Nina Olson’s top aide pays the AMT.

KEN DREXLER: Yes, that’s correct, last year, for tax year 2003.

PAUL SOLMAN: So did Olson herself in 2001, when her son lived with her, and she claimed him as her dependent.

NINA OLSON: And I said, “Okay, now it’s personal,” you know. I mean, I now understand what it’s like. It matters to me personally now that we do something about this.

PAUL SOLMAN: It matters to lots of people personally, it turns out. Eric Wood, for instance, who runs an audio recording firm in Brooklyn.

ERIC WOOD: Because I pay state and local taxes, which the federal government tells me that I can deduct, and I deduct them. But then they say, “Okay, that was too much, so now we’re going to pile on more taxes.”

PAUL SOLMAN: This is the…

ERIC WOOD: AMT.

PAUL SOLMAN: The Alternative Minimum.

ERIC WOOD: The alternative minimum tax was added back to my tax bill because I paid my other taxes. They’ve imposed something on me that I can’t understand, that I have to hire professionals then and pay them to figure out for me.

PAUL SOLMAN: That would be his tax preparer, Kathryn Keane.

KATHRYN KEANE: In the industry, we call tax simplification the tax professionals’ retirement plan, because every attempt to simplify it has just made it more and more deadly.

Some of my clients are smarter than I’ll ever be. They can tell you the inner workings of a neutron. And you explain to them the AMT, and they look at you. They turn their head, and they go, “huh?” It’s like talking to Scooby Doo.

PAUL SOLMAN: Okay, we probably didn’t have to use yet another ’70s TV show to convince you at this point: Tax complexity is bad. But, I asked Nina Olson:

PAUL SOLMAN: Isn’t the complexity of the tax code mainly a reflection of the fact that we’re an advanced democracy with a lot of rights that get expressed, among other places, in the tax code?

NINA OLSON: I think that’s right to some extent, because taxpayers want their specific circumstances reflected in the code. You pass a general law, and somebody says, “But wait, this isn’t fair to me.” So you come back and you pass an amendment to that law that reflects that particular circumstance, and then–

PAUL SOLMAN: So, like blind people or something?

NINA OLSON: Exactly. Or someone who has a special investment in some kind of area, and it requires some special type of attention or an approach.

PAUL SOLMAN: Someone special like Cy Okolie. But as his case makes clear just as there are benefits to this system, so are there costs.

CY OKOLIE: The agency, the red tape is too much.

PAUL SOLMAN: Now, if I could produce the national taxpayer advocate, how would you feel?

CY OKOLIE: Oh, it would be the best.

PAUL SOLMAN: It would be the best. Well, now, wait a minute. She’s right here.

CY OKOLIE: I can’t believe you’re real.

PAUL SOLMAN: Citizen Okolie began entreating advocate Olson.

CY OKOLIE: And even the clerks don’t even know what to answer because they are afraid. They don’t want to answer because they are afraid. They don’t want to say the wrong thing.

NINA OLSON: Well, because the law is so complex, it’s really hard to say the right thing. It’s even harder for taxpayers. I understand that.

CY OKOLIE: It’s incredible. But they are very aggressive to collect.

NINA OLSON: Yeah.

CY OKOLIE: How can you collect when your employees don’t know what you should be collecting?

PAUL SOLMAN: Well, we left that question hanging. But Nina Olson did have one closing suggestion for the rest of the overwhelmed Cy Okolies out there: Complain to Congress about complexity.

NINA OLSON: Start saying this is not acceptable to me, for me to spend the number of hours that I do, or that I can’t get an answer to a form question, a simple “What form should I file?” It’s not acceptable. And the answer isn’t to make the law more complex; the answer is to make it less complex.

PAUL SOLMAN: Yes, concedes Olson, it may be a somewhat quixotic mission, but one, she argues, that’s worth undertaking, time after time, year after year, decade after decade.