IRS Tax Compliance Costs US Economy $546B Per Year
The federal
tax is a mandatory payment that local, state and national governments collect from individuals and businesses to cover costs of government services, goods and activities.
The code has many costs for the US economy. The federal taxes of $4.9 trillion, which consume 17 percent of the US GDP, are by far the most direct cost. Our tax system is heavily reliant upon individual and corporate income tax, which economists from the Organisation for Economic Co-operation and Development have determined to be the most harmful for the economic growth. In 2023, Americans submitted 271.5 million tax return. Nearly 71 percent of these, or 192.3 millions, were individual and corporate taxA corporate tax (CIT), is levied on business profits by the federal and state governments. Many companies are exempt from the CIT, as they are taxed under the individual income taxes.
returns, while another 36.3 million were employment tax returns.According to the latest estimates from the White House Office of Information and Regulatory Affairs (OIRA), Americans will spend more than 7.9 billion hours complying with IRS tax filing and reporting requirements in 2024. This is equivalent to 3.8 millions full-time employees who spend their entire working day on tax return paperwork. Los Angeles’ population is roughly equal to this number. The IRS estimates that Americans pay $133 billion in out-of pocket costs each year to comply with tax laws. This brings the total compliance costs to $546 billion, or nearly 2 percent of GDP.Measuring Taxpayer’s Compliance Burden
The Paperwork Reduction Act of 1980 (PRA) requires the IRS to estimate how many hours it takes taxpayers to complete each form and the amount of out-of-pocket costs they must spend to prepare each form. The IRS has spent decades experimenting with different methods of estimating compliance costs. The model has been updated several times to reflect changes in tax laws, the economy, and taxpayer populations. The new model uses input from surveys of individual and business taxpayers in addition to IRS administrative data to estimate both time and out-of-pocket costs of filing taxes.
According to a IRS whitepaper explaining their methods:
Taxpayer compliance burden is generally defined as the time and money taxpayers spend to comply with their tax filing responsibilities. Time-related activities are recordkeeping, tax planning and gathering tax materials. They also include learning about the law and completing the return. Out-of pocket costs include expenses like purchasing tax software, hiring a third-party to prepare your return, and paying for printing and postage. Taxpayer compliance burden does not include a taxpayer’s tax liability, economic inefficiencies caused by sub-optimal choices related to tax deductions or credits, or psychological costs.
The IRS estimates taxpayer out-of-pocket costs will total $133.3 billion in 2024.
The Price of Our Time Totals Nearly $413 Billion Annually
Complying with the tax code costs more than just the out-of-pocket expenses and money on the checks that taxpayers send to the IRS every April 15th. Each hour that is spent on tax forms and returns means that parents or business owners are not able to spend time with their family. These are called opportunity costs by economists. The U.S. has a progressive income-tax system where rates increase as income increases. The Federal Income Tax was created in 1913, with the ratification 16th Amendment. Individual income taxes, which are only 100 years old but are the biggest source of tax revenue for the United States, have been around since 1913.
This figure combines the average hourly wage of $31.48 for all occupations with the average hourly benefit costs of $13.02 for private sector workers. This figure combines the $31.48 average hourly wage for all occupations with the $13.02 average hourly benefit costs for private sector workers.
For business-related and more complex returns–such as returns for estates and trusts or
depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Depreciation is a method of determining the multi-year period over which the cost of an asset, such as machinery or a factory, can be deducted from taxable income.
According to the BLS, the average hourly wage for these workers is $43.65, and we added $13.02 in average benefits for private sector workers. The BLS estimates that the average hourly wage of these workers is $43.65, and we added the average benefits of $13.02 for private sector employees. When we add the $133.3 billion in out-of-pocket costs, it raises the total tax compliance cost to American taxpayers to a staggering $546.1 billion.
These tax compliance burden costs are equal to 1.9 percent of US GDP. This is more than the 1.8 % of GDP that the corporate income tax will collect in 2024. Moreover, $546 billion is also 26 times the IRS’s 2024 annual budget.
Much of the Tax Burden Falls on Businesses
The table below lists the 25 most burdensome tax regulations. The majority of taxpayers spend their time and money on individual tax forms. This is over 2.2 billion hours with a total cost of $145 billion per year. However, this only accounts for one-third of total time and burden costs of tax compliance. Thus, most of the remaining tax compliance burden is borne by businesses.
The IRS estimates that “that over half of the individual income tax compliance costs are associated with reporting and substantiating income, even for taxpayers with relatively simple sources of income.” Yet, they note, these individual costs are minimized because much of the administrative burden falls on the parties that prepare documents issued to individual taxpayers–such as W-2 and 1099-INT forms; parties that are predominately businesses.The total tax compliance burden on US businesses is split among myriad tax forms. Nearly $119 billion is spent on compliance costs for corporate income tax returns. The forms required by pass through businesses, such S-corporations or LLCs, in order to receive the 20% deduction for qualified business earnings cost these taxpayers more than $19 billion. While many pass-through businesses are individually owned, we’ve applied the higher accounting wage to this calculation because of its complexity.The income tax returns for estates and trusts impose a burden cost of $20.2 billion per year. The Office of Management and Budget (OMB), estimates that estate and
gift taxes are a tax imposed on the transfer of a person’s property without payment or exchange of value. Typically, the tax is owed by the donor and not the recipient.
As an alternative to the massive compliance burden placed on businesses, consider the IRS’s estimate that it takes on average 13 hours to complete the main form for individuals, the 1040. This is 9 hours for those without business income, and 24 hours for those with business income. The IRS estimates that it takes an average of 105 hours to complete form 1120, which is the main form for tax-paying corporations. New Cryptocurrency Requirements Added 1.4 Billion HoursOIRA’s updated time estimates for complying with Form 1099B, “Proceeds from Broker and Barter exchange Transactions,” is a testament as to why Congress should estimate compliance costs before enacting new laws. In 2022, the forms would have required more than 674,00 hours of work. But thanks in large part to the new rules enacted in the bipartisan Infrastructure Investment and Jobs Acts (IIJA), these hourly costs have jumped to nearly 2.2 billion hours at a cost of nearly $123.7 billion.According to the Joint Committee on Taxation (JCT), these provisions were expected to raise about $28 billion in new tax revenues over a decade, or less than $3 billion per year, a fraction of the compliance cost the IIJA imposed on taxpayers.
The IIJA included new reporting rules on cryptocurrency transactions. Form 1099-B is used by brokerage firms to report capital gains or losses. It also requires businesses to report transactions made with digital assets that exceed $10,000. It also requires businesses to report transactions made with digital assets of over $10,000.
The IRS is the Primary Source of Regulatory Costs in America
OIRA estimates show that taxpayer compliance now comprise 66 percent of the 12 billion total hours Americans spend complying with federal paperwork and 72 percent of the $184 billion in government-wide out-of-pocket costs for regulations.
What is remarkable about these shocking figures is that advances in technology to assist taxpayers in preparing and filing their tax returns have nonetheless resulted in extraordinary compliance burdens. The IRS estimates of compliance burdens include the efficiency gains of the 94 percent of federal tax returns that are prepared using software, and the 90 percent electronic filing of all returns. Tax law has trumped Moore’s Law. Tax law has trumped Moore’s Law.
America’s Tax Compliance Burden in 2024 Will Top 7.9 Billion Hours and $546 Billion
Taxpayers will spend over $133 billion in out-of-pocket costs to comply with tax forms. The value of the time they spend complying with the code will reach roughly $413 billion.
IRS Tax Form(s) or Regulation
Total Annual Burden HoursTotal Dollar Value of Burden HoursTotal Out of Pocket Cost
Total Annual Burden Cost
US Individual Income Tax Return
2,249,000,000
$100,080,500,000
$45,365,000,000
$145,445,500,000
Proceeds From Broker and Barter Exchange Transactions
2,182,421,900
$123,677,849,073
$0
| $123,677,849,073 | US Business Income Tax Returns | 920,000,000 | $52,136,400,000 | $66,717,000,000 |
|---|---|---|---|---|
| $118,853,400,000 | Employer’s Quarterly Federal Tax Return | 456,000,000 | $25,841,520,000 | $18,910,000,000 |
| $44,751,520,000 | Depreciation and Amortization (Including Information on Listed Property) | 448,368,447 | $25,409,039,891 | $0 |
| $25,409,039,891 | US Income Tax Return for Estates and Trusts | 356,948,857 | $20,228,291,726 | $0 |
| $20,228,291,726 | Deduction for Qualified Business Income (Form 8995 and Form 8995-A) | 336,107,360 | $19,047,204,091 | $0 |
| $19,047,204,091 | Wage and Tax Statements W-2/W-3 Series | 150,570,830 | $0 | $0 |
| $0 | US Tax-Exempt Income Tax Return | 75,500,000 | $4,278,585,000 | $1,978,400,000 |
| $6,256,985,000 | Declaration and Signature for Electronic and Magnetic Media Filing | 54,018,359 | $3,061,220,405 | $0 |
| $3,061,220,405 | IRA Contribution Information | 48,731,780 | $2,761,629,973 | $0 |
| $2,761,629,973 | Form 1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. | 46,628,604 | $2,642,442,989 | $0 |
| $2,642,442,989 | Form 1099-INT – Interest Income | 46,403,150 | $2,629,666,511 | $0 |
| $2,629,666,511 | Dividends and Distributions | 45,259,481 | $2,564,854,788 | $0 |
| $2,564,854,788 | Third-Party Disclosure Requirements in the IRS Regulations | 33,931,417 | $1,922,893,401 | $0 |
| $1,922,893,401 | Form 1099-MISC — Miscellaneous Information | 30,828,818 | $1,747,069,116 | $0 |
| $1,747,069,116 | W-8 BEN, W-8BEN-E, W-8EIC, W-8EXP, W-8IMY | 30,562,942 | $1,732,001,923 | $0 |
| $1,732,001,923 | Certain Government Payments | 24,709,380 | $1,400,280,565 | $0 |
| $1,400,280,565 | Reporting Requirements for Recipients of Points Paid on Residential Mortgages | 24,308,656 | $1,377,571,536 | $0 |
| $1,377,571,536 | Heavy Highway Vehicle Use Tax Return | 23,748,641 | $1,345,835,485 | $0 |
| $1,345,835,485 | Information Reporting by Applicable Large Employers on Health Insurance Coverage Offered Under Employer-Sponsored Plans | 22,600,002 | $1,280,742,113 | $0 |
| $1,280,742,113 | Nonemployee Compensation | 22,253,880 | $1,261,127,380 | $0 |
| $1,261,127,380 | Tax Returns or Statements; Specified tax return preparers required to file individual income tax returns using magnetics media, waiver requests | 18,270,900 | $1,035,411,903 | $0 |
| $1,035,411,903 | Employment Tax Adjustments and Rules Relating to Additional Medicare Tax | 16,900,000 | $957,723,000 | $0 |
| $957,723,000 | Sales of Business Property | 16,614,000 | $941,515,380 | $0 |
| $941,515,380 | All Other IRS Forms and Regulations | 237,470,497 | $13,457,453,065 | $375,781,445 |
| $13,833,234,510 | Total | 7,918,157,901 | $412,818,829,314 | $133,346,181,445 |
| $546,165,010,759 | Sources: | Hourly and out-of-pocket estimates: Office of Information and Regulatory Affairs (OIRA), “Inventory of Currently Approved Information Collections,” Downloaded 6/27/2024, https://www.reginfo.gov/public/do/PRAMain | Wages for all occupations: U.S. Bureau of Labor Statistics, “May 2023 National Occupational Employment and Wage Estimates,” (00-0000 All Occupations), | Wages for 13-2011 Accountants and Auditors: https://www.bls.gov/oes/current/oes132011.htm |
| Average benefits for private sector workers: | Stay informed on the tax policies impacting you. | Subscribe to get insights from our trusted experts delivered straight to your inbox. | Subscribe to our Newsletter | Share |
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