By Albert B. Crenshaw
Washington Post Staff Writer
Saturday, March 7, 1998; Page A01

From the IRS Highlights of 1997 tax changes Install Adobe Acrobat Reader to download: Schedule D form IRS instructions for Schedule D

As the April 15 tax-filing deadline draws near, tax preparers and accountants report that many Americans are confused, frustrated and irritated by the complexity of many of the tax cuts passed with such fanfare last year.

One of the main sources of complaint concerns a central objective of Republican leaders -- a reduction in the tax on capital gains, such as mutual fund profits. Schedule D, which is used for calculating the capital gains tax, grew to 54 lines from 23 lines, and depending on the income of the taxpayer, the type of asset and when it was sold, the tax can be 10 percent, 20 percent, 25 percent or 28 percent.

Even one of the principal architects of the new tax law agrees that it is too complex.

House Ways and Means Committee Chairman Bill Archer (R-Tex.), who does his own tax return, spent "two full days last weekend" working on it.

After years of doing it longhand, Archer said, he used a computer for the first time. "I was amazed," he said. "Even I didn't realize how complicated the tax code is until I went through that interview process" that tax software uses to make sure it has everything set up correctly.

And Archer said he did have to fill out Schedule D. "I got through it but it was laborious," he said.

"Schedule D is definitely the crowd favorite," said Bill Schwartz, a tax manager in the Vienna office of Arthur Andersen & Co., the big accounting firm. "And it gets even better if the taxpayer is subject to the kiddie tax," which requires children under 14 to pay tax at their parents' rate on investment income.

"I don't want to review these things myself and I do this for a living," Schwartz said.

Tax preparers said they were seeing an increase in business and in cries of frustration from existing clients. H&R Block reported a 10 percent increase in business in January -- and that was before the Internal Revenue Service managed to get Schedule D out to the public.

Alice Ward, a Rockville retiree who prides herself on doing her own tax return, said she "kept coming up with zeros all the way through" her first few trips through Schedule D. Then she bought a commercial tax guide, only to find a note saying that as it went to press, the Schedule D chapter wasn't available. The guide directed her to send in a postcard for the missing information.

"I was thinking I might have to [go to a professional tax preparer], and it really annoyed me to think that," she said.

Why the complexity? Computers, in the hands of politicians, get part of the blame. As the Clinton administration and congressional Republicans wrestled over what became the Taxpayer Relief Act of 1997, they ended up compromising on a wide range of issues, as both sides sought to please their own constituencies. These compromises took many forms: varying rates, and different effective dates, thresholds, ceilings and cutoffs.

The increasingly computerized revenue-estimating system on Capitol Hill made it easier for lawmakers and administration officials to tinker with provisions to get the revenue or expense numbers they needed. Thus, a long list of tax changes were manipulated to fit into the $90 billion box for tax relief envisioned in the balanced budget deal.

"Provision too expensive? Lower the income cutoff a few thousand [dollars] or make it effective next year or the year after. Or phase it in. It's easy," recalled a congressional staff member, explaining how some of the dates and ceilings found their way into the law.

The result? Preparing tax returns suddenly got much harder for many people.

It is true, of course, that millions of Americans have only wage and interest income, and can easily prepare their returns. In many cases, they can even file over the telephone. But it is also true that more people than ever before have money in the stock market, either directly or through mutual funds. While they stand to benefit from the lower rates applied to profits from such investments, they are also paying the higher price in terms of complexity.

Previously, for instance, the tax on capital gains income was figured by simply excluding a portion of the gains from taxation. But last year, Congress created different brackets related to income. Lawmakers also enacted different rates for different assets, and different rates for different holding periods.

Archer said he favored simply excluding half of capital gains income, thus halving the rate for everyone. But he said that proved too expensive. "It was all revenue-driven," he said.

To cope with what emerged, the Internal Revenue Service created a new Schedule D, four parts and 54 lines long; the old schedule essentially had two parts and 26 lines. And though the IRS and many experts say the main requirement is a careful reading of the instructions and attention to what the form asks, many taxpayers are finding it unintelligible.

And while the new capital gains system seems to be causing the most grief, it is not the only bewildering provision.

Folks who sold their homes last year may be subject to the old system, which imposed tax on the profits unless they are rolled over into a new residence ($125,000 could be excluded by individuals 55 and older); the new system, which drops the rollover requirement and instead excludes from tax the first $250,000 of profit ($500,000 for a married couple); or they may be able to choose one or the other. It all depends on whether they sold their home before May 7, from May 7 to Aug. 5, or after Aug. 5, 1997.

There also are new tax credits for adoption expenses, changes in employee business expense deductions, medical savings accounts and a host of other changes affecting various groups of taxpayers.

Still other new provisions, such as the widely publicized Roth individual retirement accounts and various tax breaks for higher education, don't take effect until this year. However, tax experts said they were getting many questions from taxpayers asking how they can take advantage of these provisions in 1997 tax returns due April 15.

"They call me all excited about these tax-saving ideas and then I have to give them the bad news" that they have to wait until next year, said Schwartz of Arthur Andersen.

Or worse, the taxpayers may not be eligible for the breaks, usually because they are over an income ceiling.

"Most of the goodies [enacted] last year have an income limitation on them," which hasn't sunk in with many taxpayers, Schwartz said. "All they hear about is the goodies, and once they find out they don't qualify, it makes them angry." The income ceilings vary with the Roth IRA, a new education IRA and the traditional IRA, each phasing out at different income levels.

Ironically, the new tax law was enacted within weeks of a major report on the IRS, which concluded, among other things, that many of the agency's failings can be blamed on an overly complex tax code.

Sen. Bob Kerrey (D-Neb.), who along with Rep. Rob Portman (R-Ohio) co-chaired the commission that produced the report, acknowledges that "much of the blame belongs right here" in Congress.

Indeed, some of what is going on with the tax laws borders on the bizarre.

Realizing that the 1997 bill was unclear in places and offered some taxpayers the opportunity to game the system, Congress and the Treasury Department agree that a technical corrections bill is needed. The House passed such a measure last year but the Senate did not.

However, based on assurances of congressional leaders that action will be taken, Treasury and the IRS have proceeded as if the bill did pass. Thus some of the forms and directions taxpayers are wrestling with do not actually match current law. There is no need to worry, Capitol Hill and Treasury officials said. It will all be fixed eventually.

Taxpayers, meantime, have to play the hand they've been dealt.

Ward said she "decided to see if calls to the IRS would work," and they did. "A very nice young man" returned her call and was able to help her locate her error on her Schedule D.

However, a South Carolina woman, who requested anonymity, said she got tired of waiting for an IRS call back and decided the IRS probably wouldn't know anyway.

"I had figured out that my guess was as good as anyone's, and let's see what happens," she said.