January 11, 2011

Americans do NOT spend 6 Billion Hours on their Taxes

A recent CNN article states that Americans Spend 6.1 Billion Hours on Their Taxes.    Sounds awful.   It would be awful if I thought it were true.   I just can't believe that people spend that much time filling in their tax forms and preparing their tax records.

The 6.1 billion hours number is what I believe to be an example of a "numerical fiction".    A "numerical fiction" is a term that Frank from Bad Money Advice came up with when he created Curmudgeon’s Law of Numerical Fiction.   In short the Curmudgeon's law of Numerical Fiction says that a fake number is numerical fiction if it meets 3 criteria which are :
1. The number reinforces previously held beliefs.
2. The number is remarkably extreme, but not ridiculous.
3. There is no organized [and credible] group that opposes the number.

I think that claiming it takes us 6.1 billion hours to do taxes annually as a nation fits all those items.  Everybody believes that taxes are difficult to do.  The number is extreme but not so high that people obviously know its bogus.   There is nobody out there I can think of who would really be arguing against such a number.    I think this fits the description of "numerical fiction" to the tee.

Why I suspected it isn't true.  

I just have a 'feeling' that this is a bogus number like other numerical fiction numbers. Someone throws out a giant figure and has nothing at all to back it up then it gets reported all around the news media.   Its like if I said that French people own 18 million ducks.   That sure sounds like a lot.   Probably too many.  Where did the number come from?  Who knows.   But who's to say its wrong?   People just accept it cause they don't have any real reason to think its invalid.

Once I am suspicious of the number I then turn to my own math to try and figure out how many hours we as a nation would spend on taxes.  No matter how I add it up I can't seem to come close to 6.1 billion hours.   One of the most straight forwards ways is to look at how many accountants we have in the nation if it doesn't pass that common sense check then I'm really doubtful of the legitimacy of the figure.

All the accountants in the nation...
Lets pretend that all the accountants in the entire country do nothing but fill out tax forms all year round.  There are 1.3 million accountants in the entire country.   If those accountants all spend 2000 hours a year working then that is a total of 2.6 billion hours.   Obviously accountants do many other things than simply handle taxes.  The amount of time that accountants spend on taxes is less than the 2.6 billion total.  

I honestly don't see any way that the nation really spends 6.1 billion hours when all the accountants in the entire country don't work half that long.   

Time spent per tax form
According to the IRS in 2008 there were a bit over 142 million individual tax returns filed   Lets round that up to 143M.   If we spent 6.1 billion hours each then that would be about 42.6 hours per form.   Now I know that taxes can take many people a while but I don't know anyone who spends a solid week filing their taxes or sorting their receipts.   I have a pretty complex tax return which includes state taxes for two states, rental income for multiple properties in different states, sales of stock and stock options, health savings account and itemized deductions.  Even with our multiple pages of forms I know for a fact that my CPA spends much less than 42 hours on it given how we can give her our stuff one day and get back the finished return within a day or two.  

Where do they get the number?
The article says that the figure comes from  someone named Nina Olson who is the current Taxpayer Advocate.  It took a bit of digging but I was finally able to find some data on the IRS site that says what they are counting for individual tax payer time requirements.    You can see the table titled Estimated Average Taxpayer Burden for Individuals by Activity   They estimate the total time per tax payer at 18 hours.   Sounds like a lot to me.   If you look at the table closer you can see that they break it into time required to fill out the form, keep records, submit the form, plan and 'all other'.   I don't know why it would take everyone 1 hour to submit their taxes.   If you're doing it online then don't you just hit the 'submit' button and it is then sent electronically?  If you are filling the forms out by hand don't you just put them in an envelope then mail them?   Do people filling out 1040EZ really need 2 hours for record keeping?  That form covers virtually very little except W2 wages and interest income.    Does it take 2 hours to manage those 2 things?   I highly doubt it does.    All these numbers seem grossly inflated.

Lots of people have easy forms

Over 20 million forms filed by individuals are the 1040EZ form which is 1 page long and could be done in an hour or two.   35 million forms are the 1040A which is a little more complex than the EZ but still not an all day long ordeal.


Out of curiosity on how long it would take me to do a 1040EZ form myself I filled one out using pretend figures.   I printed out the form which required putting new paper in the printer since it was out of paper.  I then looked up my W2 at my employers website and logged into my ING account to look up the interest paid on my savings.  I filled out the entire 1040EZ form including doing all the math, doing the 'making work pay credit' worksheet and calculating the tax refund.  Its really not that complex.   The main 1040EZ form has 4 arithmetic operations.   The form really is easy.  If you can follow simple instructions and add and subtract then using a calculator you can fill out 1040EZ   I then put the form in an envelope, addressed the envelope and pretend to put a stamp on it (I don't want to waste a real stamp.)   I started at 04 minutes after the hour and finished it at 17 minutes so in total it took me only 13 minutes to do the 1040EZ.    If you take 4 times as long as I do then you should be able to do a 1040EZ form within an hour.   Yet the IRS says it takes 2 hours to fill in this 1 page form.


Most people electronically file.

The majority of income tax forms are now filed via computer.   95 million of the 2008 forms were electronic.  Thats about 2/3 of the total.    One of the major benefits of computerized tax filing is that the computer program makes it 'easy' for you by guiding you through the process with simple questions on your filing.

My wife used to use software to do her forms so I asked her how long it took.   I asked her how many hours it took and she responded with "hours?"   She guessed it was "about 40 minutes" for her to do her 1040 form with computer software.   According to Turbotax "The average time to prepare a return using TurboTax is about 2 hours,"    Yes Turbotax obviously a biased source since they're trying to convince you to buy TurboTax software.   But honestly that 2 hour figure seems realistic and reasonable to me.  Even if you double it thats still less than 400 million hours spent by the electronic filers.


I think that the real number is closer to 1-2 billion

Lets say that 2/3 of the filers use electronic forms and spend 2 hours doing the form.   The other 1/3 spend an agonizing 8 hours to do their forms.   Combined that would be about 800 million hours to file forms.  If everyone spent 8 hours to sort out their shoe box of receipts then that would be another 1.1 billion hours.   I doubt most people spend half this amount of time.  Added up that would be 1.9 billion hours that people would spend.    If you add in 2.6 billion hours to account for time that accountants spend doing business tax forms then thats a total of 4.5 billion hours between individual and business taxes.   I still think this number is much higher than it probably would be in reality and its still only 3/4 of the 6.1 billion.  Of course this is just my rough estimation work. 

I think that 6 billion figure is numerical fiction.

How long does it take you to do your taxes?

6 comments:

  1. Good analysis of an outlandish claim (I like the Curmudgeon's criteria, too - very perceptive of him!).

    Our taxes are fairly complicated too, but I'm thinking it only took about an hour total last year to assemble all the information for the accountants (but I will say I'm pretty organized about tax records). The accountants called us last year within a few days to say that our returns were ready (state and federal).

    When we did the taxes ourselves with Turbo Tax, it only took an hour or so, but our income stream wasn't so complicated back then (which is why we turned it over to accountants).

    I'll definitely keep track of the total time this year!

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  2. It takes me around 40 hours, and I am a salaried employee with no side-income. The majority of this time (30 hours) is spent in record-keeping and planning during the year, not actual tax preparation. But if I had lousy records, then probably the tax preparation process would take much longer.

    If you spend 15 minutes per week just keeping your receipts organized for tax time, that is over 10 hours right there.

    Looking up cost basis for investments sold will be quite quick, but depends on good records. Which take another 10 hours per year to maintain.

    I have also found over the years that keeping up to date on tax law changes during the year (so I can take advantage of them the next year) takes up to 10 hours per year. For example - tax implications of healthcare plan selection, propetty tax payment timing, etc.

    Simply entering the numbers into TT takes 2 to 4 hours. And that include rolling over most data from the previous years return.

    I also have stock sales related to stock options and employee stock purchase plans. Again - looking up can be quick, but I also print a copy of the statements for proof in case of audit. Another hour.

    For the last two years, the print out from TurboTax was 75 pages. Just one minute per page for review is over an hour. And printing 75 pages is not instantaneous either.

    And then miscellaneous other tasks, such as writing the date on a manilla folder, clipping the forms together with the 1099s, checking that the submission was accepted, etc., take up a couple of hours.

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  3. I guess I didn't think to count the time keeping records as tax preparation. I would keep records anyway as part of knowing our spending habits and to reconcile bank and credit card accounts, etc. But I will concede that it is fair enough to tally your record keeping toward time for tax preparation. So you're right - that's at least 10 hours at just 15 minutes per week.

    I forgot how Turbo Tax would print out all the worksheets, analyses, etc., but yes, that would take awhile to print. I used to store all that as a pdf file and print out just the forms. I have all those lovely, detailed files on CD's, just in case!

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  4. Lola & Mark,

    Thanks for comments. Interesting to see how much time it takes people. I do think that record keeping is one of the bigger time sinks for taxes. The IRS has record keeping taking 8 hours average per tax payer. They say the 1040EZ has 2 hr and the 1040 is 11. Those numbers are fairly believable.

    Mark, I would say that a 75 page print out is a very complicated tax form. Given the IRS thinks the 1 page 1040EZ should take an hour to fill out they might assume you would take 75 hours to do your forms. Or not, I wish the IRS had more specific data on how they figure the time amounts.

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  5. Jim: TT prints out copies of everything - way too much really. My actual tax return was much les sthan that.

    Lola: I was thinkiing specifically of records needed at tax-time. For example, this year I need to total up all the sales tax I paid last year. Going through every receipt for that will take much longer than just recording the total under "Groceries".


    I print it because formats change. My old floppy disks don't work any more, and I have already had a couple of laptops with no CD drive.

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  6. Keep in mind that 6.1 billion hours includes the time businesses use to prepare taxes, recording keeping, information gathering and many other taxes. "Doing taxes" on a 1040ez is not the "norm" for everyone. Actually doing your taxes accurately for a business, home owner and many other circumstances can take a normal person upwards of 40 hours. Keep in mind the world does not mimic your life and things are different elsewhere.

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