It is no secret that filing and paying U.S. taxes is very challenging. Estimates show that in 2017, U.S. individuals and businesses spent almost 9bn hours complying with their tax requirements. Furthermore, along with the administrative burden of tax compliance, there are also financial costs. According to the Taxpayers Advocate Service, individuals and businesses spent $11.6 billion on tax prep and filing fees in the 2017 fiscal year. This is an immense burden on taxpayers and highlights the difficulties of dealing with the U.S. tax code.
Tax Code Complexity
The complexity of the U.S. tax code is one of the main causes of the difficulty filing and paying taxes. The Internal Revenue Service Code was last amended in 2017 and contains approximately 10 million words in its entirety. This, coupled with the constant change in tax regulations and the numerous deductions and incentives available, can leave taxpayers feeling confused and overwhelmed. Furthermore, the IRS must reconcile the numerous interactions between different provisions in the tax code, and an integrated structure is lacking which makes it difficult to trace the impacts on a particular individual or business. It is no wonder why the Taxpayer Advocate Service estimates that the average taxpayer spends 11 hours per year navigating the tax code.
For businesses, the complexity of the tax code is compounded further due to the various tax forms they must use to file their returns. According to the Small Business Administration, a small business may be required to file up to 30 separate forms per year. When you are dealing with multiple entities such as corporations, partnerships and sole proprietorships, the number of forms can grow even larger. Not only does this create an immense administrative burden for businesses, but it also creates uncertainty when interpreting the tax code due to the lack of an integrated structure.
Additionally, there is also the challenge of preparing and filing taxes for entities with operations in multiple states. As you can imagine, the tax rules and requirements vary from state to state, which means the business’s tax rate can be different depending on where the income was earned. In this case, businesses must keep track of the various tax rules for each state and make sure their taxes are filed accurately, or else they can face hefty fines.
Tax Credits and Deductions
The numerous tax credits and deductions available can also make filing taxes a difficult process. These credits and deductions allow taxpayers to reduce the amount of income they must pay in taxes, and they are a great way to save money. However, understanding the different credits and deductions can be challenging, especially since not everyone is eligible for them. Furthermore, the rules for claiming these credits and deductions can be complicated and often times require the help of a tax professional to ensure they are done correctly.
In addition to the complexity involved with the various credits and deductions, there is also the challenge of tracking what deductions and credits were claimed in previous years. This is important since many of the deductions must be “carried over” from year-to-year if they are not claimed in one particular year. This can cause confusion and is a source of difficulty for some taxpayers.
Finally, it is also worth noting that many of the tax credits and deductions can be difficult to understand since they are often technical and require that the taxpayer have a thorough knowledge of the tax code. Taxpayers must often research each tax credit and deduction to determine if they are eligible for it, and even then there is no guarantee it will be approved. This can be a daunting task for those less familiar with the tax system and its intricacies.
In conclusion, filing and paying U.S. taxes is a complicated and arduous process. The complexity of the tax code and the numerous credits and deductions available can make filing taxes a challenging endeavor. Additionally, depending on the nature of the business or individual, there may be taxes owed in multiple states, which further complicates things. Ultimately, in order to be successful at filing and paying U.S. taxes, taxpayers should seek professional help or become familiar with the tax code and seek to understand the various rules and regulations.