By KAREN HUBE
Staff Reporter of THE WALL STREET JOURNAL
Harold Tanyzer is a literacy specialist who often appears as an expert witness in product-liability cases to interpret instructions and warranties.
But when it comes to deciphering instructions for one of the forms needed to prepare his tax return, the 69-year-old Great Neck, N.Y., resident admits he is stumped. "It's an exercise in demystification," says Mr. Tanyzer, who spent 40 years as a professor of reading at Hofstra University. "It's gobbledy-gook."
Taxpayer complaints about indecipherable forms and mind-numbing instructions are nothing new, of course. But the problem only seems to get worse. For every glimmer of clarity, there always seems to be a new source of frustration. Even the Internal Revenue Service, which has devoted considerable resources to reducing the strain of the annual filing ritual, concedes it has a hard time coping with the growing complexity of the tax laws and regulations.
"The level of complexity continues to get greater and greater every year," says Bob Erickson, chief of the review section of the IRS's tax-forms development branch. "We're always trying to do the best we can to make it as simple as possible, but we're constrained because the tax law is so complicated."
New evidence of taxpayers' confusion came this week when the IRS discovered that several hundred people who filed 1998 returns had converted to Roth IRAs from traditional individual retirement accounts last year even though they weren't eligible to do so.
Not only does this show perplexity over the tax law, but also the problem of people either not reading instructions on forms thoroughly or not comprehending them. Form 8606 for Roth IRA converters clearly indicates that only singles and couples whose income doesn't exceed $100,000 are eligible to convert, an IRS spokesman points out.
Other major goofs also have been spotted so far this tax season. Last month, the IRS discovered some 30,000 filers eligible for the child tax credit had filled out their tax return wrong. They didn't fill in the credit amount on their 1040 or 1040A forms, risking not getting the benefit.
It is no wonder that an increasing number of taxpayers are seeking help with their taxes every year. Since 1990, the proportion of people turning their returns over to professional tax practitioners has been growing, according to the IRS.
Meanwhile, sales of sophisticated personal-computer software, designed to make it easier and more convenient to prepare returns at home, are booming. So far this year, Intuit Inc. has sold approximately 4.1 million copies of TurboTax and MacInTax. "That's 800,000 more units than we sold all of last year," says Bob Meighan, an Intuit vice president.
Those who dream of a streamlined filing process need only look back about a decade to see that it is possible.
In the late 1980s, tax preparation became a lot more straightforward, thanks to the 1986 tax act, which simplified the tax law, says Thomas P. Ochsenschlager, a partner at Grant Thornton in Washington. "But since then, Congress has not been able to resist the temptation to add some complexities back into the law." Often as not, those complexities make filing a tax return even more confusing.
For example, even with the reduced capital-gains tax rates, Schedule D, for reporting capital gains and losses, is a puzzle to many taxpayers.
Form 6251, for the notorious alternative minimum tax, is enough to make even some professional tax preparers weep.
"Schedule D and Form 6251 involve a lot of different tax rates, and this can cause confusion," says Anthony J. Manziano, tax director at Bederson & Co., West Orange, N.J. "There's an awful lot of understanding of the law that has to go into these forms."
But the newly expanded Form 8606, the form that Mr. Tanyzer has found so agonizing, has given rise to more confusion than some tax preparers say they have ever seen for a two-page form.
In response to numerous questions, the IRS recently released a 2 1/2 page supplement to the original eight pages of instructions for the form. Merrill Lynch and Salomon Smith Barney have printed special pamphlets to help investors fill out the form properly.
"It's been a fairly traumatic source of confusion," says Jim McCarthy, Merrill Lynch's vice president and manager of tax-product development. Many tax specialists suspect people doing their own taxes are simply muddling through the form, doing the best they can -- but getting it quite wrong.
Until this year, the 8606 form and instructions took up two pages. Investors who contributed to nondeductible IRAs were required to fill out the form to record contributions. But the form was broadened this year for use by investors who make conversions to Roth IRAs or who take distributions from an education, traditional or Roth IRA.
One point of confusion: On line eight of Form 8606, it says to add lines six and seven and input the sum. But in the instructions, it says to add lines six, seven and 14c.
But this isn't an error -- certain taxpayers are to follow instructions on the form, while others are to see the instructions in the accompanying booklet.
Got that? At the top of the form, it says that if you converted part or all of your IRA to a Roth IRA in 1998, go to the instruction booklet.
"Most people are not going to go to the supporting instructions... . They'll probably focus in on the form," says Ed Slott, an accountant in Rockville Centre, N.Y.
It gets particularly confusing for investors who converted to a Roth and then reverted their account back to a traditional IRA. These people will have more than one 1099R, the record issued to investors when assets are shifted out of an IRA. The IRS has posted on its Web site (www.irs.ustreas.gov) a step-by-step explanation of how to report the 1099R data on forms 1040 and 8606, but few people are apt to simply stumble across it. (Go to "tax information for you" at the sight, then click on "Internal Revenue Bulletins," then look for Internal Revenue Bulletin 1999-13.)
The problem for many taxpayers is that the words used in some of the forms are completely foreign to them, says Mr. Tanyzer, the literacy specialist. "Recharacterization" is the word the IRS uses to refer to reverting a Roth IRA back to a regular IRA. Investors who haven't heard the term before may find the tax form bewildering.
Where can taxpayers go for help?
The IRS Web site has a feature that allows people to post questions that are answered by e-mail, typically after one or two days. The agency also provides a toll-free number (800-829-1040).
Other sources of free taxpayer help include Web sites run by Ernst & Young (www.ey.com), Intuit's Quicken (www.quicken.com), and H&R Block (www.hrblock.com). H&R Block also says it will answer questions free over the phone, as long as a preparer has time to do so.