Candice Horbacz
The intricate web of the U.S. federal tax code continues to impose a substantial and growing burden on American taxpayers, both in terms of financial cost and time spent. Projections for fiscal year 2026 indicate that the total compliance cost will soar to an estimated $544.6 billion, requiring an astounding 6.9 billion hours from individuals and businesses to navigate the Internal Revenue Service (IRS) filing and reporting requirements. This colossal expenditure of resources, equivalent to more than 1.7 percent of the nation’s Gross Domestic Product (GDP), underscores the profound economic impact of tax code complexity, even as legislative efforts like the One Big Beautiful Bill Act (OBBBA) attempt to streamline parts of the system.
The Enduring Burden of a Complex Tax Code
While the OBBBA introduced various changes to the federal tax landscape, it largely preserved the fundamental structure and inherent complexity of the code. A previous analysis highlighted its mixed impact on simplifying and complicating the individual income tax. However, the broader economic cost of this complexity, often overlooked in discussions about tax policy, extends far beyond the direct revenue collected.
The federal government is projected to collect approximately $5.2 trillion in taxes in fiscal year 2025, consuming 17.3 percent of U.S. GDP. This significant portion of economic output is heavily reliant on individual and corporate income taxes. Economists at the Organisation for Economic Co-operation and Development (OECD) have consistently pointed out that these types of taxes tend to be among the most detrimental to economic growth, primarily due to their potential to distort investment, savings, and labor decisions. Beyond these direct fiscal impacts, the indirect costs associated with compliance represent a massive, often invisible, drain on productivity and economic dynamism.
Quantifying the Compliance Toll: Hours and Dollars
The sheer scale of the compliance burden is staggering. In fiscal year 2025, Americans filed 271.4 million tax returns. Of these, 176.5 million (about 65 percent) were individual and corporate income tax returns, while an additional 34.1 million were employment tax returns. Each of these filings contributes to a cumulative demand on taxpayer time and resources.
According to the latest estimates from the White House Office of Information and Regulatory Affairs (OIRA), Americans will collectively spend nearly 6.9 billion hours complying with IRS tax filing and reporting requirements in 2026. To put this into perspective, this is the equivalent of 3.32 million full-time workers dedicating an entire year solely to tax paperwork. This figure surpasses the entire population of major U.S. cities like Chicago and is almost 35 times larger than the IRS’s own workforce in fiscal year 2025. This vast expenditure of human capital represents an enormous opportunity cost for the U.S. economy.
Economists categorize this lost productivity as a significant economic cost. Assuming a reasonable hourly wage, the 6.9 billion hours spent on tax compliance translate into roughly $387.5 billion in lost productivity annually. This figure is derived by applying an average hourly compensation cost of $47.55 for individual income tax forms (combining a $33.54 average hourly wage with $14.01 in average hourly benefit costs for private sector workers) and a higher rate of $59.57 for business-related and more complex returns, such as those for estates, trusts, or depreciation schedules (combining the average hourly wage for accountants and auditors, $45.56, with the same $14.01 in average benefits).
In addition to the value of lost time, the IRS estimates that taxpayers incur approximately $157.1 billion in out-of-pocket expenses annually to comply with the tax code. These costs include expenditures such as purchasing tax software, hiring third-party preparers, and covering administrative expenses like printing and postage. When both the lost productivity and out-of-pocket expenses are combined, the total compliance cost for American taxpayers reaches an estimated $544.6 billion. This sum represents over 1.7 percent of U.S. GDP, a figure larger than the share of GDP collected by the federal corporate income tax and more than 28 times the IRS’s roughly $19.0 billion in expenditures in 2025.
Methodology Behind the Estimates: The Paperwork Reduction Act
The rigorous estimation of these compliance costs is mandated by the Paperwork Reduction Act of 1980 (PRA). This legislation requires federal agencies, including the IRS, to quantify the time and financial resources taxpayers must expend to complete each required form. The IRS has dedicated decades to refining its methodologies for estimating these compliance costs.
Initial studies in 1984, when paper tax returns were predominant, relied on survey data and mathematical models. Since then, the IRS’s model has undergone numerous updates to reflect the evolving economic landscape, changes in taxpayer demographics, shifts in filing methods (e.g., the rise of electronic filing and tax software), and modifications to tax laws. The current model integrates data from surveys of both individual and business taxpayers, alongside extensive IRS administrative data, to provide comprehensive estimates of both the time and out-of-pocket costs associated with tax filing.
An IRS white paper detailing its methodology defines taxpayer compliance burden as "the time and money taxpayers spend to comply with their tax filing responsibilities." This encompasses a wide range of activities, including diligent recordkeeping, proactive tax planning, gathering necessary tax materials, understanding the nuances of tax law, and the physical act of completing and submitting returns. Out-of-pocket costs specifically cover expenses like acquiring tax software, engaging professional tax preparers, and the costs of printing and mailing documents. It is crucial to note that this burden calculation explicitly excludes the actual tax liability, economic inefficiencies stemming from suboptimal choices related to deductions or credits, and any psychological costs associated with the taxing process.
While the IRS projects out-of-pocket costs at $157.1 billion for 2026, some critics, such as the National Taxpayers Union, suggest this might be an underestimate, particularly given that many forms are assigned a zero cost in these calculations.
Who Bears the Brunt? Individuals vs. Businesses
The burden of tax compliance is not evenly distributed across the economy. While individuals spend a considerable amount of time and money—more than 1.9 billion hours at a total annual cost of $142.4 billion—they account for approximately 26 percent of the total compliance cost and roughly 28 percent of the total hours. This indicates that the vast majority of the tax compliance burden, therefore, falls squarely on businesses.
The IRS notes that a significant portion—over half—of individual income tax compliance costs are related to "reporting and substantiating income, even for taxpayers with relatively simple sources of income." However, these individual costs are somewhat mitigated because a substantial portion of the administrative burden shifts to the entities that prepare and issue documents like W-2 and 1099-INT forms, which are predominantly businesses.
The total tax compliance burden on U.S. businesses is fragmented across a myriad of tax forms and regulations. Corporate income tax returns alone contribute over $130.2 billion in compliance costs. Employment tax returns and related forms add another $46.1 billion, while depreciation schedules account for $26.7 billion. Notably, compliance costs associated with business income and depreciation have shown an increase compared to previous years, reflecting ongoing regulatory demands and economic adjustments.
A stark illustration of this disparity can be seen in the average time required to comply with core tax forms. The IRS estimates it takes an average of 12 hours to comply with Form 1040, the main individual income tax form. This breaks down to 8 hours for individuals without business income and 21 hours for those with business income. While spending almost three full days on individual taxes may seem daunting, corporations face a far more demanding task. Compliance with Form 1120, the main form for taxable corporations, is estimated to take an average of 90 hours. For small corporations, this figure is 40 hours, but for large corporations, it skyrockets to 610 hours—the equivalent of more than 15 full-time weeks dedicated solely to tax compliance.
The Impact of Recent Legislation: OBBBA and IIJA
Recent legislative changes have played a significant role in shaping the current compliance landscape, often adding new layers of complexity.
The One Big Beautiful Bill Act (OBBBA), which became law on July 4, 2025, with many provisions taking effect for the 2026 filing season, has begun to introduce new compliance demands. For instance, a new line item for the "Trump Account" election appears for the first time, adding approximately 64.9 million hours or $3.9 billion to the compliance burden. Similarly, the application for an Employer Identification Number (EIN) has now entered the ranks of the 25 most burdensome collections. However, the full impact of the OBBBA is yet to be entirely reflected in the current estimates. While some new provisions, such as the vehicle loan interest deduction (estimated at 2 million hours), have standalone compliance cost estimates, others—like the deduction for qualified tips, the additional senior deduction, and the deduction for qualified overtime pay—do not yet have separate entries and are not fully integrated into general income tax return estimates.
Perhaps one of the most striking examples of newly imposed burdens comes from the Infrastructure Investment and Jobs Act (IIJA), particularly concerning cryptocurrency transactions. OIRA’s time estimates for complying with Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions," starkly illustrate the need for Congress to consider compliance costs before enacting new laws. In 2022, Form 1099-B required over 674 million hours to complete. Driven primarily by new rules enacted during the Biden administration as part of the bipartisan IIJA, that time commitment dramatically surged to nearly 2.2 billion hours at a cost of just over $130 billion, making it the most time-consuming form.
The Joint Committee on Taxation (JCT) had projected these provisions to raise about $28 billion in new tax revenues over a decade, or less than $3 billion per year. This revenue projection is a mere fraction of the compliance cost that the IIJA’s provisions imposed on taxpayers, raising questions about the cost-benefit ratio of such regulations. The IIJA specifically broadened the definition of "broker" to include cryptocurrency exchange operators, mandating them to report transactions involving digital assets on Form 1099-B. It also included a requirement for businesses to report digital asset transactions exceeding $10,000, although the IRS has stated this specific requirement will not be enforced until further regulations are issued.
It is important to note that the OIRA estimate for Form 1099-B has not been updated since April 2024. That projection, which anticipated roughly 4.4 billion annual responses each taking 30 minutes, predates significant developments, including the shift of digital asset reporting to a new Form 1099-DA (which brokers must use starting with 2025 transactions) and the anticipated repeal of reporting rules for decentralized brokers in early 2025. The compliance burden for Form 1099-DA was estimated at a much lower 2.3 million hours as of December 2024. Given that the 1099-B line item currently accounts for nearly a quarter of the total burden cost in this report, a revised estimate reflecting the transition to 1099-DA and other changes could substantially alter the overall compliance totals in future reports.
Broader Regulatory Landscape: IRS at the Forefront
The IRS’s role in the broader federal regulatory landscape is profound. OIRA estimates indicate that taxpayer compliance obligations now constitute a staggering 60.0 percent of the total 11.49 billion hours Americans spend complying with federal paperwork across all agencies. Furthermore, the IRS accounts for 78.0 percent of the $201.5 billion in government-wide out-of-pocket costs for federal regulations.
These figures are particularly striking considering the considerable advancements in technology designed to assist taxpayers. The IRS burden estimates already incorporate efficiency gains from the widespread adoption of tax software (used for 94 percent of individual federal tax returns) and electronic filing (used for 83 percent of all returns). However, these technological efficiencies have proven insufficient to counteract the persistent growth in tax complexity, which, as academic research suggests, has steadily increased decade after decade. The continuous stream of new legislation, deductions, credits, and reporting requirements often outpaces the ability of technology to simplify the underlying administrative burden.
Trends and Future Outlook
The data from this year continues an upward trend in compliance costs. The current estimate of $544.6 billion marks an increase of approximately $8.5 billion from last year’s estimate of $536.1 billion. A closer examination of this increase reveals nuanced shifts. While the total time burden actually decreased by about 190 million hours (from 7.09 billion to 6.90 billion), the dollar value of that time remained largely stable at $387.5 billion, declining by less than $1 billion. This stability in dollar value, despite fewer hours, is attributed to a rise in average hourly compensation over the same period. Consequently, the entire net increase in total compliance costs is attributable to out-of-pocket expenses, which climbed by approximately $9.1 billion, from $148.1 billion to $157.1 billion.
The decline in hours is primarily concentrated in two categories: individual income tax returns (down roughly 181 million hours) and business income tax returns (down roughly 78 million hours). Interestingly, this reduction in hours is not a result of decreased filing volume; the IRS processed an increased 271.4 million returns and other forms in fiscal year 2025, up from 266.6 million the prior year. Meanwhile, the increase in out-of-pocket costs is largely concentrated in business income tax returns, whose estimated costs rose from $71.6 billion to $79.2 billion.
The ongoing integration of OBBBA provisions into the compliance cost estimates will undoubtedly continue to shape future projections. As more elements of this legislation are fully reflected, it is anticipated that the estimated cost of compliance could rise further. Conversely, the expected updates to the 1099-B estimates, reflecting the transition to 1099-DA and other changes in cryptocurrency reporting, are likely to bring down the overall estimated cost of compliance in that specific area. However, the overarching trend of increasing complexity driven by legislative changes remains a significant concern.
The Call for Simplicity
As this report vividly demonstrates, a complex tax code is not merely an academic concern for policy wonks; it represents a tangible, heavy burden on American taxpayers. It imposes billions of dollars in out-of-pocket costs and diverts billions of hours away from productive economic activity or personal pursuits. For policymakers, the implications are clear: when considering any changes to the tax code, the factor of complexity and its associated compliance costs must be a primary consideration. Moving forward, a sustained focus on simplifying the tax code could yield substantial economic benefits, freeing up capital and labor that are currently consumed by the labyrinthine demands of tax compliance.
