Caught in A Brier Patch of Changes

By Daniel Benjamin

For Susan Lee, a Manhattan tax preparer, the consequences of tax reform became strikingly clear during a consultation in her office. While helping a client with his return, she watched as the middle-aged artist became increasingly agitated. Hoping a break would calm him, Lee handed the man an article on tax reform and directed him to a chair in the corner of her office. But within minutes of returning to deskside, the client was gesturing so violently with his arms that he walloped a lamp, sending it headlong into a wall and shattering the bulb. Said a sympathetic Lee: "This is the worst tax year possible."

Welcome to the first stressful season of filing under the Tax Reform Act of 1986, a law that was widely expected to make the code not only fairer but simpler as well. Yet taxpayers now contemplating one of their least-favorite civic duties seem to be of one mind. "The new system stinks," said Angel Martinez, a retired Army jungle-warfare expert, as he emerged from an information session at an Internal Revenue Service taxpayer-assistance office in Brooklyn. "I went to college for three years, and now I can't even do my own taxes." The record keeping alone has overwhelmed Arlene Lind, a San Francisco psychologist: "I'm just going to staple the similar-colored papers together, let my accountant figure it out and hope he knows what he's doing."

The 1986 reform was designed to make the system more straightforward by eliminating most shelters and reducing the number of tax brackets from 14 to five for the 1987 tax year. For many of the 107 million U.S. taxpayers, reform has been a blessing. At least 2 million low-income citizens are no longer required to file at all. Moreover, the creation of a standard deduction and the raising of thresholds for medical expenses and other write-offs means that about 25% of the estimated 40 million taxpayers who itemize will be better off if they use the short forms instead. But for the remaining 30 million Americans who have any significant deductions, the tax-reform law is a brier patch of ambiguities, shifting rules and vanishing preferences. The tax code contains hundreds of changes this year, for which the IRS has published 48 new tax forms. At least one new IRS release is a hit: Publication 920, which explains tax reform in layman's language. Copies requested so far: 17 million.

The blizzard of paperwork has sent millions more people than usual scurrying for tax help. Ordinarily, about 40% of all taxpayers require professional assistance. This year that figure is expected to reach 60%. Says Jack Brownrigg, an accountant in Honolulu: "I'm getting a flood of calls from people I never heard from before." Proponents of tax reform contend that the confusion will recede as taxpayers learn the new rules. "We are in the transition part," says Robert McIntyre of Citizens for Tax Justice, a Washington lobbying group. "The system will get simpler as things like consumer-interest deductions are phased out."

But all it takes to become perplexed is a look at the fine print. Perhaps the most dreaded new paperwork is Form 8598, a two-page work sheet that must be filed by some of the taxpayers who have taken out home-equity loans or refinanced their dwellings since August 1986. To determine their taxes, those homeowners must explain how they spent the proceeds, what the home originally cost, exactly how much was spent on improvements, and a host of other figures. Most contributions to individual retirement accounts have been eliminated as a deduction, but those who have put money in nondeductible IRAs must now tangle with the thorny Form 8606. Also newly infamous is Form 8582, on which taxpayers have to come to grips with the sharply reduced deductibility of their losses on tax-shelter investments. What complicates those calculations is that by March 1 the IRS had issued only one-third of the regulations, a full 261 pages, for handling such losses.

Taxpayers will find other breaks disappearing too. Sales tax can no longer be written off. The deduction for interest on consumer borrowing, ranging from credit-card balances to auto loans, has been reduced from 100% in the past to 65% for 1987, 40% for 1988 and zero by 1991.

The accounting profession saw the turmoil coming and tried to prepare. Peat Marwick Main, a Big Eight firm, ran week-long seminars during 1987 for its 3,900 staffers. Yet even the experts are often stymied. One reason is that many rules remain up in the air. Congress is long overdue in passing a technical-corrections act to deal with more than 300 ambiguities and errors in the law.

Yet accountants and other tax preparers claim they are neither getting rich nor feeling especially powerful as a result of the daunting new rules. Gripes Miami Accountant Brenda Stout: "I'm spending twice as much time to complete people's taxes, but there's no way we can double our fees. My rates are about 25% higher than last year, and like many others, I'm just eating the difference." Some have even given up, as did the tax preparer who was helping Bryn Barnard, a free-lance illustrator from New Jersey, and his wife Rebecca. Says Barnard: "He saw what was involved and decided he wants nothing to do with it."

The IRS is not always much help to either accountants or taxpayers. A survey by the General Accounting Office last year found that the agency's telephone assisters answered taxpayer queries incorrectly 21% of the time. The IRS was determined to do better this year, since it expects to help 22 million callers on its toll-free phone lines this season, up from 17 million in 1987. The agency, which has invested 2.5 million hours in training its entire staff for tax reform, has increased its ranks of telephone assisters by 1,000, to 4,500. To determine whether correct information is going out, the IRS is making 20,000 anonymous calls in which common tax problems are posed to its assisters. So far the results are disappointing. After 5,000 calls, the error rate is 25%.

Yet in terms of processing returns, ironically, the IRS seems to be plowing resolutely through reform's storm. "So far, the filing season is one of the best that we have ever had," says Lawrence Gibbs, the IRS commissioner. By early March 36.7 million returns had been filed, only 2.4% fewer than at the same time last year. The IRS is processing them at about the same rate as last year and mailing refunds, which average $801, up from $755 last year, in the usual three to four weeks after the filing. Perhaps most surprising is the decline in cheating. Gibbs believes the lower rates and closed loopholes will reduce the amount of evaded taxes -- $100 billion in 1987 -- to as little as $80 billion this year.

With reporting by Gisela Bolte/Washington and Wayne Svoboda/New York