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Tax compliance challenges, part 1: the complexity of the code

Tax avoidance is a perfectly honorable American tradition. You have every right as a taxpayer to take advantage of deductions, credits and other preferences to minimize or avoid taxes – as long as you stay within the law.

But staying within the letter of the law can be difficult when the tax code is so complicated.

In this two-part post, we will discuss how the complexity of the tax code affects taxpayers’ compliance efforts.

Let’s start with the sheer size of the code.

Overall, the U.S. tax code is about 2,600 pages long. For a country of more than 300 million people, it could be argued that this isn’t excessive. After all, if Stephen King’s three longest novels were added together, they would be longer.

But the code itself is in a sense only the tip of the tax iceberg. The tax regulatory structure that taxpayers also have to comply with also includes the voluminous regulations and case law that have grown up around the code.

The cost of complying with such complex requirements is considerable. For income tax compliance, the U.S. Treasury has estimated the overall cost for U.S. taxpayers to be around $125 billion a year.

That number is so large it bears repeating. Here is it again: $125 billion.

And then there is the problem of potentially making innocent mistakes out of ignorance or inattention. This can happen, for example, with very specific regulatory structures such as offshore filing requirements.

In the next part of this post, we will discuss how the IRS defines “willful” tax evasion.

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