Tax compliance costs US economy over $536B, Tax Foundation finds

The increasing complexity of the tax code is having real consequences on the American economy, with a new analysis projecting a price tag of more than half a billion dollars yearly borne by the country's households and businesses.

According to a new analysis from the Tax Foundation, the annual cost of complying with the federal tax code now exceeds $536 billion, including dollar costs and the estimated financial cost of wasted time.

The Tax Foundation analysis, which draws on official estimates from the White House Office of Information and Regulatory Affairs, finds that Americans will spend nearly 7.1 billion hours this year meeting IRS filing and reporting requirements – a figure equivalent to the work of 3.4 million full-time employees for an entire year.

The direct out-of-pocket costs for tax compliance are projected at $148 billion, covering expenses such as tax software, third-party preparers, and related materials. But the larger share of the burden comes from lost productivity, with the value of time spent on tax paperwork estimated at $388 billion. Together, these costs amount to nearly 1.8% of US gross domestic product.

“Every hour spent complying with tax forms and returns is an hour that parents cannot spend with their families or business owners cannot spend growing their firm,” the Tax Foundation notes, emphasizing the opportunity costs involved.

While individual taxpayers shoulder a hefty portion of the compliance burden, the report highlights that businesses bear the brunt of the most complex and time-consuming regulations. Among the most burdensome requirements:

• Proceeds from broker and barter exchange transactions (Form 1099-B): Compliance with this regulation now requires nearly 2.2 billion hours annually, at a cost of $127.6 billion.
• US individual income tax return (Form 1040): Americans spend over 2.1 billion hours and $146.9 billion each year complying with this form, which remains the most widely filed.
• US business income tax returns: Businesses collectively spend 935 million hours and $126.3 billion on these filings, reflecting the complexity of corporate and pass-through entity taxation.
• Depreciation and amortization schedules: These requirements add another 448 million hours and $26.2 billion to the annual compliance tally.

The report singles out the expanded crypto reporting rules as particularly onerous.

“The [bipartisan Infrastructure Investment and Jobs Act] increased the reporting requirements around digital assets, expanding the term ‘broker’ to include cryptocurrency exchange operators and requiring brokers to report transactions for cryptocurrencies on Form 1099-B,” the analysis states. Businesses must also report digital asset transactions over $10,000, adding to the compliance load.

Notably, the Tax Foundation points out that the compliance cost for Form 1099-B alone now dwarfs the additional tax revenue expected from the new crypto provisions.

According to the Joint Committee on Taxation, these rules were projected to raise less than $3 billion per year – “a fraction of the compliance cost the IIJA imposed on taxpayers,” the report observes.

Despite advances in tax software and electronic filing, the overall compliance burden has continued to climb. The Tax Foundation concludes that “efficiency gains from increased computing speeds have proved no match for tax complexity, which increases steadily decade after decade.”