As taxpayers enter crunch time to hit the April 15 income tax filing deadline, many of them likely agree the federal government’s four-million-word tax code is too long and complex.
National Taxpayer Advocate Nina Olson made that assessment in a report to Congress earlier this year. She said the tax code is difficult for the government to administer and taxpayers to comply with. Her report also said individuals and businesses spent $168 billion to comply with the tax code in 2010 (the last year for which full figures are available), or about 15 percent of income-tax receipts.
“Lowering rates in exchange for broadening the tax base would be an excellent bargain. We are confident that in the end, public support for a simpler code will be strong and deep,” wrote Olson, whose office is an independent organization within the IRS.
Compliance Made Difficult
The complexity of the tax code, particularly the Alternative Minimum Tax, makes compliance difficult, so an overhaul that would streamline incentives for education and retirement, discourage temporary tax breaks, and simplify or end income-based phase-outs of tax provisions, is in order, according to the report.
“There is no question that the complexity of the tax code is on people’s minds,” said Dan Pilla, a best-selling author of books on how to deal with the IRS and operator of TaxHelpOnline.com. He is also a former consultant to the National Commission on Restructuring the IRS.
“About 50 to 55 percent of people are using professional tax preparers, and another 20 percent are using tax preparation software,” says Pilla. He added most taxpayers who use preparation software do so because they don’t know enough about the law to do their taxes without the additional help.
“For example, people don’t understand the mechanics for the self-employed,” Pilla said. “They need to fill out a Schedule C, a Schedule SE, they might have depreciation, they might have special disclosures…”
It’s Not About Revenue
The tax code was originally instituted to raise revenue, but that is no longer the main function of the law, according to Pilla.
“It’s not about raising revenue any more. It’s more about being a means of creating social welfare programs. It’s about using the tax law to encourage behaviors that are considered desirable and about discouraging behaviors that are considered undesirable. The problem is that what is considered fair and unfair changes so often.”
The Tax Reform Act of 1986, which simplified tax law, was being changed back toward complexity “before the ink was even dry,” said Pilla.
Pilla doesn’t expect any major move toward simplification until the tax law becomes so unwieldy that it becomes unenforceable. He added the tax burden is growing, so more people are avoiding paying taxes. For some it’s a choice between paying taxes or buying food for the family.
States Could Drive Change
He said states could help drive changes in the federal tax law by disassociating themselves from it. The states that have income taxes base much of their law and calculations on the federal law. By cutting the cord from the federal tax rules, states would be open to revamping their own tax systems – perhaps moving away from income taxes. This would make it easier for the federal law to be changed because the change would not affect the states as well as the federal government, Pilla said.
In the report, Olson said federal budget cuts would make tax enforcement more difficult. The IRS needs resources not only for enforcement, but also to combat identity theft. Identify theft cases, largely involving persons falsely claiming refunds with a legitimate taxpayer’s name, have increased.
Olson’s office handled almost 55,000 cases in Fiscal Year 2012, up from about 7,100 four years earlier. That includes only the cases that reach her office, which typically occurs when taxpayers are unsatisfied with the IRS’s response.
Taxpayer Advocate 2012 Annual Report to Congress: http://apps.irs.gov/app/scripts/exit.jsp?dest=http://www.taxpayeradvocate.irs.gov/2012-Annual-Report/FY-2012-Annual-Report-To-Congress-Full-Report