Candice Horbacz
The intricate web of the federal tax code continues to impose substantial hidden costs on the U.S. economy, with projections for 2026 indicating that Americans will dedicate nearly 6.9 billion hours and incur $544 billion in direct out-of-pocket expenses to comply with IRS regulations. This staggering burden, equivalent to the full-time labor of over 3.3 million individuals, underscores a persistent challenge despite legislative efforts like the One Big Beautiful Bill Act (OBBBA) and technological advancements in tax preparation. While the OBBBA, enacted on July 4, 2025, introduced numerous changes to the federal tax code, it largely preserved the underlying complexity that drives these immense compliance costs. A separate analysis explored the specific ways the OBBBA affected the individual income tax; however, this report delves into the broader scale of the code’s inherent complexity, quantified through official estimates of the cost of compliance.
The Economic Cost of Complexity: A Deeper Dive
The federal tax code levies multiple costs on the U.S. economy, extending beyond the direct collection of taxes. For fiscal year 2025, federal taxes are estimated to reach approximately $5.2 trillion, representing 17.3 percent of the nation’s Gross Domestic Product (GDP). This substantial portion of economic output primarily stems from individual and corporate income taxes, which economists at the Organisation for Economic Co-operation and Development (OECD) have consistently identified as among the most detrimental forms of taxation for economic growth due to their potential to distort investment and labor decisions.
Beyond these direct financial levies, a less tangible but equally impactful cost is the sheer volume of time extracted from Americans’ lives to navigate a tax system often described as "Byzantine." This labyrinthine code necessitates billions of hours spent on IRS paperwork and the meticulous filing of tax returns. In fiscal year 2025 alone, Americans submitted 271.4 million tax returns. Of this total, approximately 65 percent, or 176.5 million, were individual and corporate income tax returns, with an additional 34.1 million employment tax returns contributing to the administrative load.
The White House Office of Information and Regulatory Affairs (OIRA) provides the latest official estimates, projecting that Americans will spend almost 6.9 billion hours complying with IRS tax filing and reporting requirements in 2026. To put this figure into perspective, it is equivalent to more than 3.32 million full-time workers dedicating an entire year solely to tax return paperwork. This workforce is larger than the population of Chicago and nearly 35 times the number of employees the IRS itself employed in FY 2025, highlighting the disproportionate burden placed on taxpayers.
Quantifying the Opportunity Cost: Billions in Lost Productivity
The time spent complying with tax regulations represents a significant opportunity cost for the U.S. economy. Every hour an individual spends poring over tax forms is an hour not spent with family, pursuing education, or engaging in leisure activities. For businesses, it translates into hours diverted from innovation, expansion, or direct customer service. Applying a reasonable hourly wage to these billions of hours reveals a substantial economic drain.
Using hourly wage and benefit estimates from the Bureau of Labor Statistics (BLS), the 6.9 billion hours Americans are expected to spend complying with the tax code conservatively translates to approximately $387 billion in lost productivity annually. This calculation factors in an hourly compensation cost of $47.55 for individual income tax forms, combining the average hourly wage for all occupations ($33.54) with average hourly benefit costs for private sector workers ($14.01). For more complex business-related returns, such as those for estates, trusts, or depreciation schedules, a higher hourly compensation cost of $59.57 is used, reflecting the average hourly wage for accountants and auditors ($45.56) combined with the same average benefits.
In addition to this lost productivity, the IRS estimates that Americans spend roughly $157 billion annually in out-of-pocket expenses to comply with the tax code. These direct costs include purchasing tax software, engaging third-party preparers, and expenditures on printing and postage. When both the lost productivity and out-of-pocket expenses are combined, the total compliance cost escalates to $544 billion, exceeding 1.7 percent of the nation’s GDP. This figure is particularly striking when compared to the federal corporate income tax, which collects a smaller share of GDP, and is more than 28 times the IRS’s own expenditures of approximately $19.0 billion in 2025.
The IRS’s Methodology for Measuring Compliance Burden
The meticulous estimation of taxpayer compliance costs is mandated by the Paperwork Reduction Act of 1980 (PRA). This legislative act requires federal agencies, including the IRS, to assess and report the time and financial resources taxpayers expend to fulfill their reporting obligations. The IRS has dedicated decades to refining its methods for estimating these compliance costs, reflecting a commitment to understanding the administrative burden it imposes.
Initially, in 1984, when paper tax returns were the predominant filing method, the IRS commissioned a foundational study. This study utilized a combination of survey data and a mathematical model to quantify the compliance costs associated with tax regulations. Over the years, this model has undergone numerous updates to adapt to the evolving economic landscape, shifts in taxpayer demographics, changes in filing methodologies (e.g., the rise of electronic filing), and continuous modifications to tax laws. The current model integrates insights 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 expenses involved in tax filing.
According to an IRS white paper detailing its methodology, taxpayer compliance burden is precisely defined as "the time and money taxpayers spend to comply with their tax filing responsibilities." This encompasses a wide range of activities, including diligent recordkeeping, strategic tax planning, gathering necessary tax materials, understanding complex legal provisions, and finally, completing and submitting the required returns. Out-of-pocket costs are quantified as expenses such as the acquisition of tax software, fees paid to professional third-party preparers, and the costs associated with printing and mailing. It is crucial to note that this definition explicitly excludes the taxpayer’s actual tax liability, any economic inefficiencies resulting from suboptimal choices related to tax deductions or credits, and any psychological costs associated with the taxing process. While the IRS projects out-of-pocket costs to reach $157 billion in 2026, critics, such as the National Taxpayers Union, have suggested this figure might be an underestimate, particularly since many forms are controversially assigned a "zero cost."
Businesses Bear the Brunt of the Burden
While individual taxpayers dedicate a significant amount of time and resources to compliance, businesses shoulder a disproportionately larger share of the overall tax burden. The data reveals that individuals account for roughly 26 percent of the total compliance cost, translating to over 1.9 billion hours and an annual cost of $142.4 billion. This means the vast majority of the remaining compliance burden falls squarely on the shoulders of U.S. businesses.
The IRS estimates that over half of individual income tax compliance costs are linked to "reporting and substantiating income," even for taxpayers with relatively straightforward income sources. However, these individual costs are somewhat mitigated because a substantial portion of the administrative burden, such as preparing W-2 and 1099-INT forms, is borne by businesses and other entities that issue these documents to individual taxpayers.
The total tax compliance burden on U.S. businesses is distributed across a multitude of tax forms and categories. Compliance costs for corporate income tax returns alone exceed $130.2 billion. Employment tax returns and related forms contribute an additional $46.1 billion, while intricate depreciation schedules add another $26.7 billion to the national tab. Notably, both business income and depreciation compliance costs have seen an increase compared to the previous year’s estimates, indicating a growing pressure on the business sector.
A comparative analysis of hours spent per form further illustrates the outsized compliance burden on businesses. The IRS estimates that 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 filing individual taxes may seem onerous, corporations face a far more demanding task. The IRS estimates an average of 90 hours to comply with Form 1120, the primary form for taxable corporations. For small corporations, this can be around 40 hours, but for large corporations, it can skyrocket to 610 hours—equivalent to more than 15 full-time weeks dedicated solely to tax paperwork.
The Cryptocurrency Conundrum: A New Frontier of Complexity
The emergence of cryptocurrency transactions has introduced a significant new layer of complexity to the tax code, dramatically impacting compliance costs. The OIRA’s time estimates for complying with Form 1099-B, "Proceeds from Broker and Barter Exchange Transactions," serve as a stark reminder of the critical need for Congress to meticulously estimate compliance costs before enacting new legislation. In 2022, completing Form 1099-B required over 674 million hours. However, largely driven by new rules implemented during the Biden administration through the bipartisan Infrastructure Investment and Jobs Act (IIJA), this time commitment surged to nearly 2.2 billion hours at a cost of just over $130 billion, making Form 1099-B the single most time-consuming tax form.
According to the Joint Committee on Taxation (JCT), these IIJA provisions were projected to generate approximately $28 billion in new tax revenues over a decade, or less than $3 billion per year. This revenue forecast represents a mere fraction of the compliance cost that the IIJA subsequently imposed on taxpayers, raising questions about the cost-benefit analysis of such legislative measures.
The IIJA specifically introduced new reporting requirements for cryptocurrency transactions. Form 1099-B is traditionally used by brokerage firms and barter exchanges to report capital gains and losses from individual transactions. The IIJA significantly broadened the scope of "broker" to include operators of cryptocurrency exchanges and mandated that these brokers report cryptocurrency transactions on Form 1099-B. Furthermore, the act requires businesses to report transactions involving digital assets exceeding $10,000, although the IRS has stated this specific requirement will not be enforced until corresponding regulations are formally issued.
It is important to note that the OIRA estimate for Form 1099-B has not been updated since April 2024, when the IRS projected approximately 4.4 billion annual responses, each taking 30 minutes. This projection predates several crucial developments: the shift of digital asset reporting to a new Form 1099-DA, which brokers must use starting with 2025 transactions, and the subsequent repeal of reporting rules for decentralized brokers in early 2025. The estimated compliance burden for Form 1099-DA was approximately 2.3 million hours as of December 2024. Given that the 1099-B line currently accounts for nearly a quarter of the total compliance burden cost in this report, the overall headline estimate remains sensitive to this single, likely outdated projection. A revised 1099-B estimate, accurately reflecting the transition to 1099-DA and other changes, could substantially alter next year’s reported totals.
The IRS: A Primary Driver of Regulatory Costs
Beyond the realm of taxation, OIRA estimates reveal that taxpayer compliance with IRS requirements now constitutes a staggering 60.0 percent of the 11.49 billion total hours Americans spend complying with all federal paperwork across the government. Furthermore, it accounts for 78.0 percent of the $201.5 billion in government-wide out-of-pocket costs for regulations. These figures are remarkable, particularly considering the significant advances in technology designed to assist taxpayers in preparing and filing their returns. The IRS’s burden estimates already incorporate efficiency gains from the fact that 94 percent of individual federal tax returns are prepared using software, and 83 percent of all returns are filed electronically. However, these technological efficiencies have proven insufficient to counteract the relentless increase in tax complexity, which, as economic studies indicate, continues to escalate steadily decade after decade.
This year’s data continues this persistent trend. The estimated total compliance cost of $544.6 billion represents an increase from last year’s estimate of $536.1 billion, an uptick of approximately $8.5 billion. Analyzing the composition of this increase reveals nuanced dynamics. The total time burden actually decreased by about 190 million hours, from 7.09 billion to 6.90 billion. However, the dollar value assigned to this time remained relatively stable at $387.5 billion, declining by less than $1 billion, primarily because average hourly compensation rates rose 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 concentrated in two main categories: individual income tax returns, which saw a reduction of roughly 181 million hours, and business income tax returns, down by approximately 78 million hours. It is important to note that this reduction in hours is not due to a drop in filing volume; the IRS processed 271.4 million returns and other forms in fiscal year 2025, an increase 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.
This year’s data also begins to reflect the initial impacts of the OBBBA. 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. Additionally, the application for an Employer Identification Number now ranks among the 25 most burdensome collections. However, not all new OBBBA provisions are fully reflected. While specific provisions like Trump Accounts and the vehicle loan interest deduction (estimated at 2 million hours) have standalone compliance cost estimates, other new deductions, such as those for qualified tips, the additional senior deduction, and qualified overtime pay, currently lack standalone entries and are not yet fully integrated into the broader income tax return calculations. Furthermore, as in previous years, some large provisions, including the pass-through deduction (Section 199A, Form 8995), no longer appear as separately estimated line items and have effectively been folded into other categories. In 2024, the compliance cost of the pass-through deduction alone was estimated at $19.8 billion.
Going Forward: The Unfolding Impact of Legislation
The 2026 report on tax compliance costs only partially captures the full implications of the One Big Beautiful Bill Act (OBBBA), which became law on July 4, 2025, with many of its provisions taking effect for the 2026 filing season. As more OBBBA provisions are fully incorporated into the IRS’s compliance cost models, the estimated cost of compliance is anticipated to rise further. Simultaneously, however, the next updated estimate for Form 1099-B, reflecting the transition to Form 1099-DA for digital asset reporting and the repeal of rules for decentralized brokers, is expected to bring down the overall estimated cost of compliance related to cryptocurrency.
As this comprehensive analysis has demonstrated, a complex tax code is not merely an abstract legal framework; it represents a tangible, significant extra burden on taxpayers. It necessitates substantial out-of-pocket expenditures and demands billions of hours of time, diverting resources that could otherwise be channeled into productive economic activities or personal pursuits. Therefore, it is imperative that lawmakers, when contemplating any changes to the tax code, give explicit and serious consideration to the implications for compliance complexity. Prioritizing simplification and clarity in tax legislation could yield substantial economic benefits by reducing the hidden costs currently borne by American individuals and businesses alike.
