A report submitted to Congress this week by National Taxpayer Advocate Nina E. Olson urged lawmakers to enact fundamental simplification of the the US tax system to ease the tax reporting burden for legitimate taxpayers, while cutting down opportunities for those attempting to evade taxes.
The annual National Taxpayer Advocate's report also highlights the Internal Revenue Service's eagerness to focus on enforcement at the expense of service to taxpayers.
“Our tax code has grown so complex that it creates opportunities for taxpayers to make inadvertent mistakes as well as to game the system,” Olson noted in her report, submitted to Congress on Tuesday.
Olson went on to observe that:
“As taxpayers become confused and make mistakes, or deliberately ‘push the envelope,’ the IRS understandably responds with increased enforcement actions. The exploitation of ‘loopholes’ leads to calls for new legislation to crack down on abuses, which in turn makes the tax law more complex."
"Thus begins an endless cycle – complexity drives inadvertent error and fraud, which drive increased enforcement or new legislation, which drives additional complexity. In short, complexity begets more complexity. This cycle can only be broken by true tax simplification, followed by ongoing legislative and administrative discipline to avoid ‘complexity creep.’”
According to Olson, the US tax code should be revised to incorporate the following six core principles:
The report also makes legislative recommendations to reduce noncompliance in the “cash economy”; to simplify the Code’s family-status provisions; to revamp the rules governing joint-and-several liability on joint returns as well as community property in the collection of tax; to require brokers to track and report cost basis for stocks and mutual funds to both investors and the IRS; to lessen the burdens of tracking the cost basis of stocks and mutual funds if the current-law step-up in basis on death is eliminated as scheduled in 2010; and to restructure and reform the Code’s collection due process (CDP) provisions.
By statute, the National Taxpayer Advocate is required to identify at least 20 of the most serious problems encountered by taxpayers. In this year’s report, Olson identifies trends in taxpayer service as the most serious problem.
While expressing support for a strong IRS enforcement presence, Olson expressed concern that the IRS is expanding enforcement at the expense of taxpayer service. The report states that the IRS has eliminated TeleFile, significantly reduced the number of returns IRS personnel prepare for taxpayers who seek IRS assistance, reduced the percentage of taxpayer calls IRS telephone assisters answer as compared with FY 2004, and substantially reduced its taxpayer education function for small businesses.
“Significantly, these actions are taking place without any empirical evidence that the reductions will not harm taxpayers and not result in decreased compliance,” Olson wrote.
“Although the IRS maintains that it is difficult to measure the impact of high quality taxpayer service on compliance, the National Taxpayer Advocate finds that position unpersuasive. Too much is at stake not to conduct the appropriate research and develop cutting-edge strategies that will provide world-class taxpayer service," her report added.
The report cites Criminal Investigation (CI) refund freezes as the second most serious problem facing taxpayers. The report states that CI places “freezes” on hundreds of thousands of refunds each year due to a suspicion of fraud and then makes a “determination” whether the returns are, in fact, fraudulent without notifying taxpayers that their refund claims are under review or giving them an opportunity to present evidence supporting their positions.
In FY 2004, more than 28,000 taxpayers whose refunds had been frozen sought assistance from the Taxpayer Advocate Service (TAS). The TAS research function studied a statistically representative sample of these cases and found that, with TAS assistance, taxpayers ultimately received the full amount of the refund they had claimed in 66 percent of the frozen-refund cases and a portion of the refund they had claimed in an additional 14 percent of the cases.
Olson urged the IRS to implement procedures to notify taxpayers promptly that their refunds have been frozen, provide taxpayers with an opportunity to submit supporting documentation, and bring cases to a quicker resolution.
Among other problems the report identifies are the need for IRS to develop a comprehensive strategy to address noncompliance in the “cash economy,” the adequacy of training for private debt collection employees as the IRS rolls out its Private Debt Collection (PDC) initiative in 2006, and delays and related problems in examining returns that claim the earned income tax credit (EITC).
The Taxpayer Advocate Service is an independent organization within the IRS, led by the National Taxpayer Advocate. Each state has at least one Local Taxpayer Advocate, who is independent of the local IRS office and reports directly to the National Taxpayer Advocate.
The full text of the US National Taxpayer Advocate's 2005 Report can be accessed via the Tax News Resources section.
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