How is a mugger different from the Internal Revenue Service? Both take your money, but the mugger doesn’t make you fill out forms.
Every year the Tax Foundation calculates the cost of this added indignity. Since it’s hard to put a dollar figure on annoyance and anxiety, the D.C.-based think tank sticks to estimating the time involved in keeping records and completing returns: some 6 billion hours in 2005. It multiplies these hours by the average hourly compensation for professional tax preparers or, for the share of taxpayers who file their own returns, the average hourly compensation for U.S. workers. The resulting figure represents the cost of complying with the federal income tax, which the Tax Foundation projects will be $279 billion this year.
That amounts to 22 cents for every dollar collected, about the same as in 2005 but up from 14 cents in 1990. The compliance burden does not include the costs associated with litigating tax disputes, with operating the IRS and the U.S. Tax Court, or with tax planning aimed at minimizing liability.
Graph (not available online): Federal Income Tax Compliance Costs (in billions, 2005 dollars)