Let's stop hiding the income and outlay pie charts in an instruction booklet few read

Pie Charts from Form 1040 Instructions for 2025
see links below to get to a larger version

I've written and blogged on this topic before,* but I think it is worth repeating ...

IRC §7523 enacted in 1990 requires the IRS to include pie charts with explanation in the Form 1040 instruction booklet - actual text at §7523(a) is for "any booklet of instructions for Form 1040, 1040A, or 1040EZ."  We don't even have 1040A or 1040EZ anymore and people have not been mailed instruction booklets since 2010. While a pdf of the instructions is readily found on irs.gov, who looks at them?!  Someone might look at them to find information about a line on a return, but they likely don't get to page 121 out of 125 pages of the 2025 instruction booklet (see draft here and soon it will be here).

The charts show the percentage of income and outlays of the federal government within broad categories. The income one also show how much comes from borrowing (27% for 2024) and the outlays one shows that 13% of them go to pay interest on the this borrowing. While these are general charts, I think they are helpful for anyone to get a basic understanding of federal government activities and perhaps generate questions for elected officials and those running for office.

I suggest the following basic enhancements for this information:

• Along with the % put the dollar amount.
• Highlight that outlays are direct spending and not also spending in the tax system via special exclusions, deductions, and credits. Another pie chart showing tax expenditures by category, as the Joint Committee on Taxation and Treasury use when they present reports on tax expenditures. These categories include national defense, int'l affairs, energy, housing, transportation and education.
• Information on the tax gap should also be included such as from the IRS website which at 12/30/25 shows a net tax gap of $606 billion which is more than we collect from the corporate income tax ($530 billion for 2024 per JCT report at page 30).

And the pie charts need to be published beyond the 1040 instruction booklet and moved to the digital era.  They should be an icon perhaps on all federal government websites where people can click to get more details.

What do you think?

*"Time to move Sec. 7523 budget information into the Digital Age," AICPA Tax Insider, 11/8/12.  This article includes the first pie charts that appeared in the 1991 Form 1040 instructions + the 2010 charts.

Blog post of 11/10/12

"'Oh, I see:' Suggestions for Greater Tax Transparency," Tax Notes State, 11/20/17

More Necessary But Overlooked Tax Changes

Well, back to what I started with a June 21, 2021 post where I'm sharing my ever-growing list of what I think are necessary but usually overlooked tax changes. It would be terrific to see these in the next tax reform bill or even some picked up in other legislation. I hope you'll review my first list and this one, check back for future posts (I have more reform ideas on my list) AND please post a comment with your reaction and your tax reform ideas.

• Reform the personal income tax to its basic framework where reasonable deductions to produce income are deductible (they are not limited to 2% AGI or disallowed for 8 years (2018 through 2025)).
  
  
• Modernize §197 to include 21st century intangibles – see page 5 of my 2017 article.
  
  
• Update §170(f)(11) on qualified appraisals to expand situations where an appraisal is not needed because there are public listings of value, such as for most virtual currencies.
  
  
• Update §7503, Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday – Some language here is outdated, such as reference to “internal revenue district.” Also, to avoid confusion regarding state holidays or those celebrated in the District of Columbia, consideration should be given to just using the national list of holidays at 5 USC 6103. This change will avoid confusion particularly when a DC or state holiday falls on the weekend so is possibly celebrated on Friday or Monday instead. For example, see Notice 2006-23 where the IRS had to clarify tax due dates where Patriots’ Day (relevant in Maine, Massachusetts, New Hampshire, New York, Vermont, Maryland, and DC) fell on Monday April 17, 2006 (Patriot’s Day is the third Monday of April and an April 15 Saturday makes April 17 Monday the date with Patriot’s Day then making the due date for those states April 18 Tuesday).
  
  
• Update §7523, Graphic presentation of major categories of Federal outlays and income, to not only include them in the 1040 instructions but have them on the IRS website, those of elected officials and other agencies. Consider having a more interactive tool to help taxpayers understand all federal taxes they pay, info on the taxes, marginal rates, etc. See Nellen, “Time to move Sec. 7523 budget information into the Digital Age,” AICPA Tax Insider, 11/8/12.

More later ...

What do you think? and please post your tax reform ideas in the comment box. Thanks!

NTA suggests greater transparency - great ideas!

https://taxpayeradvocate.irs.gov/reports/2018-annual-report-to-congress/NTA-Purple-Book 

The IRS National Taxpayer Advocate's Annual Report to Congress released in February ( IR-2019-11 (2/12/19) + Report) includes the 2nd edition of the “Purple Book” with 59 legislative recommendations to improve taxpayer rights and tax administration. Two of the recommendations aim to strengthen taxpayer rights. They also improve the transparency of the tax system, which is a principle of good tax policy.

The two recommendations:

1. Codify as Section 1 of the Internal Revenue Code:
        a. The Taxpayer Bill of Rights (at present, see Section 7803(a)(3)).
        b. A Taxpayer Rights Training Requirement, and
        c. The IRS Mission Statement

2. Require the IRS to issue all taxpayers a "receipt" that shows how their tax dollars are spent.

For details, see links and all 59 recommendations here.

These are great ideas as they bring greater attention to these important items to help taxpayer better understand the tax system and the federal budget. 

I recommend they go farther:

• Prominently display a link to the Taxpayer Bill of Rights on the IRS website (taxpayers won't read IRC Section 1, although I suspect the training requirement means IRS must help taxpayer to know of the TBOR).
• Create lesson plans for high schools that explain tax basics and the TB)R. The IRS already has some materials on its website, although most likely don't know it is there.
• A taxpayer receipt should be producible on the IRS website and lawmakers should be required to include a link on their websites. Individuals should be instructed where to find their tax liability on their 1040 and W-2 forms. The website should also have a tool for helping the individual estimate how much gasoline, alcohol, tobacco, airline, and other excise taxes they paid. And why not help them understand indirect taxes by including their share of the corporate income tax.
• The receipt should provide additional information such as:
• Average and marginal tax rates and how they compare to other taxpayers.
• Highlight tax breaks they received such as credits, itemized deductions such as the mortgage interest deduction, and exclusions such as employer-provided health care, etc. and the tax savings they derived from these preferences (perhaps even refer to them as subsidies).
• Their share of the national debt (and others in their filing family).
• Where to get more information to help them understand federal taxes and the budget.
• Contact information for their elected officials.
• I have more here - https://www.thetaxadviser.com/newsletters/2016/apr/transparency-for-individual-taxes.html.
  
• Update Section 7523 which requires Form 1040 instruction books to include a pie chart showing broad categories of federal revenues and another one showing broad categories of federal spending to be on the IRS website and linked on the webpage of other federal agencies and every member of Congress. For more, see my 2012 article on this topic.

I hope these recommendations are enacted. Our tax system and taxpayer benefits from greater transparency as people better understand their taxes and the system as a whole. They can ask better questions of their elected officials as to why rules are written the way they are, how the national debt will be paid down (and how we'll pay the growing interest expense on it).

What do you think?

Time to move the 1040 pie charts to the web

The first pie charts included in the 1991 Form 1040 instruction booklets.  Click here for a larger format.

In 1990, Congress decided it would be good to get more budget information in the hands of taxpayers. In 1990, a great avenue for accomplishing this was to include the information in the 1040 instruction booklets that were mailed to all individual taxpayers. Perhaps they would find these pie charts - one showing sources of federal revenues and the other uses of federal dollars.

Well, these pie charts are still in the 1040 booklets, but they are no longer mailed to taxpayers. While there are available online, they are likely looked at by very few individuals given that the vast majority of filers use a paid preparer or software.  Even if someone does use the online instruction booklet, they are not flipping pages, they are likely using a "find" feature of their browser to find the information they need.

I think it is time to modernize Code Section 7523 that calls for putting the information in the instruction booklets.  I have a short article on this in the 11/8/12 AICPA Tax Insider - with copies of the pie charts from the first one published in 1990 to the one for 2010 data. And, additional information should be added, such as on the national debt level.

What do you think?
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