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?

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