"If tax compliance were an industry, it would be one of the largest in the United States," says the report by Nina E. Olson, the National Taxpayer Advocate.
The days of most taxpayers sitting down with a pencil and a calculator to figure out their taxes are long gone, Olson said. Since 2001, Congress has made almost 5,000 changes to U.S. tax law. That's an average of more than one a day.
As a result, almost 60 percent of filers will pay someone to prepare their tax returns this spring. An additional 30 percent will use commercial software. Without the help, Olson says, most taxpayers would be lost.
Lawmakers need to overhaul the tax code completely and soon to reduce the "significant, even unconscionable, burden" placed on taxpayers just to file a tax return, the Internal Revenue Service's ombudsman told Congress.
"On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments," Olson said. "On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities."
In her annual report, Olson ranks complexity as the most serious tax problem facing taxpayers and the Internal Revenue Service. She urges lawmakers to make tax laws simpler, clearer and easier to comply with.
One of the advocate's suggestions for streamlining the tax code was to repeal the alternative minimum tax, a parallel tax system intended to make sure rich Americans pay a fair amount in taxes, which is increasingly engulfing middle-class taxpayers. Another was to reduce the number of income exclusions, deductions and credits, known collectively as "tax expenditures," that clutter up the tax code.
Momentum is building in Congress to overhaul the tax code for the first time since 1986. But Washington's divided government has yet to show it can tackle such a task.
President Barack Obama and Republican leaders in Congress say they are onboard, although they have rarely seen eye to eye on tax policy. They struggled mightily just to avoid the year-end fiscal cliff, passing a bill that makes relatively small changes in the nation's tax laws.
Undaunted, the top tax writer in the House says he is determined to pass reform legislation this year.
"This report confirms that the code is 10 times the size of the Bible with none of the good news," said Rep. Dave Camp, chairman of the House and Ways and Means Committee. "Our broken tax code has become a nightmare of loopholes and special interest provisions that create added complexities and costs for hardworking taxpayers and small businesses."
"Comprehensive tax reform will make sure everyone is playing by the same rules and help businesses create more jobs and invest in their workers," Camp said.
The general formula for tax reform is widely embraced on Capitol Hill eliminate or reduce some tax credits, exemptions and deductions and use the additional revenue to pay for lower income tax rates for everyone. There is, however, no consensus on which tax breaks to scale back.
That's because Americans like their credits, deductions and exemptions the provisions that make the tax law so complicated in the first place. Would workers want to pay taxes on employer-provided health benefits or on contributions to their retirement plans? How would homeowners feel about losing the mortgage interest deduction?
Those are the three biggest tax breaks in the tax code, according to congressional estimates. Together, they are projected to save taxpayers nearly $450 billion this year.
In all, taxpayers will save about $1.1 trillion this year by taking advantage of tax breaks, according to the Joint Committee on Taxation, the official scorekeeper for Congress. That's almost as much as individuals will pay in income taxes.
To avoid angering millions of constituents who rely on popular tax breaks, politicians prefer to endorse tax reform without getting into specifics. Instead, they say they want to reform the tax code by eliminating special interest "loopholes" that help only small but well-connected groups of taxpayers.
Obama has repeatedly said he wants to eliminate tax breaks for hedge fund managers and companies that buy corporate jets. Throughout the recent fiscal cliff debate, House Speaker John Boehner said he favored raising additional tax revenue by reducing unspecified tax loopholes rather than raising income tax rates.
Olson defines "loopholes" as tax breaks that benefit someone else. She warns that targeting only narrow provisions won't raise enough revenue to significantly lower rates or make the law much simpler.
"That's what we've been trying to say to taxpayers, that the special interests are us. It's not just oil and gas or whatever you want to point your finger at," Olson said. "That's not where the money is."
The national taxpayer advocate, an independent position with the IRS that Congress created to assist taxpayers in resolving problems, also criticized Congress' recent budget cuts to the IRS.
On a budget of $11.8 billion in the 2012 fiscal year, the IRS collected $2.52 trillion, meaning it brought in $214 for every dollar it spent. On the margin, the IRS is estimated to bring in about $7 for every additional dollar it spends.
"It is ironic and counterproductive that concerns about the deficit are leading to cuts in the IRS budget, when those cuts are making the deficit larger," Olson wrote in the report.
The New York Times contributed to this story
Top tax breaks for individuals
U.S. tax law is filled with so many credits, deductions and exemptions that Americans will be able to reduce their tax bills by about $1.1 trillion this year, according to congressional estimates.
Employer contributions toward workers' medical insurance premiums and medical care are not taxed: $181 billion.
Retirement plan contributions and earnings are not taxed: $165 billion.
Mortgage interest deduction: $101 billion.
Lower tax rates on long-term capital gains and qualified dividends: $84 billion.
Deduction for state and local taxes: $69 billion.
Deduction for charitable contributions: $46 billion.
Most Social Security and veterans' benefits are not taxed: $45 billion.
Interest on tax-exempt state and local government bonds is not taxed: $26 billion.
When someone dies, the capital gains on his investments is not taxed: $24 billion.
Income from some life insurance products is not taxed: $23 billion.
Sources: National Taxpayer Advocate (www.taxpayeradvocate.irs.gov/2012AnnualReport); Joint Committee on Taxation.
Tax filing season starts Jan. 30 for most filers
The Internal Revenue Service says late changes to federal tax laws should mean that more than 120 million taxpayers about 80 percent of all filers should be able to start filing their 2012 federal returns on Jan. 30. Others will have to wait until late February or March to file because the agency needs time to update and test its systems.
Those who will have to wait include people claiming residential energy credits, depreciation of property or general business credits. The filing season had been set to start Jan. 22 but was delayed because of the big tax package passed by Congress Jan. 1.
For information, go to http://www.irs.gov/Filing