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Taxpayer Advocate Sees US Tax Code Complexity As Greatest Problem

by Mike Godfrey, Tax-News.com, Washington

11 January 2013


The National Taxpayer Advocate Nina E. Olson has issued her 2012 Annual Report to the United States Congress, in which she identifies the need for tax reform to simplify the tax code as the overriding priority in tax administration.

“The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns,” Olson has written. “It obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay.”

“It also facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud,” she adds, “and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply.”

The report states that the tax code imposes a “significant, even unconscionable, burden on taxpayers.” Since 2001, Congress has made nearly 5,000 changes to the tax code, an average of more than one a day, and the number of words in the code appears to have reached nearly four million.

In particular, Olson points out that it takes US taxpayers (both individuals and businesses) more than 6.1bn hours to complete tax filings; it was estimated that it cost individual and corporate taxpayers USD168bn to comply with the tax code in 2010; and around nine out of ten Americans rely on paid professionals or commercial software to prepare their tax returns (nearly 60% of taxpayers hire paid preparers; another 30% use software).

Olson considers that: “If tax compliance were an industry, it would be one of the largest in the US.” As the House of Representatives Ways and Means Chairman Dave Camp (R - Michigan) has often said of the tax code: “It is ten times the size of the Bible with none of the Good News.”

Therefore, to reduce taxpayer burdens and enhance public confidence in the integrity of the tax system, the report urges Congress to greatly simplify the tax code. In general, this would mean that Congress should reassess the need for existing income exclusions, exemptions, deductions, and credits. “If Congress were to eliminate all tax expenditures,” the report calculates, “straight math indicates it could cut individual income tax rates by 44% and still generate the same amount of revenue it collects under current rules.”

In addition, in 2000 (the most recent tax year for which the Taxpayer Advocate found data), taxpayers spent about 18m hours completing and filling out Alternative Minimum Tax (AMT) tax forms to determine whether they owed the tax, leading Olson to suggest its repeal.

Olson also expresses concern that the Internal Revenue Service (IRS) is not adequately funded to serve taxpayers and collect tax, and identified ways in which this chronic underfunding harms taxpayers and revenue.

She points to the reduction to the IRS budget in each of the last two fiscal years, with further cuts likely in coming years. Although these cuts reflect across-the-board reductions in federal discretionary spending, Olson says that underfunding the IRS makes no sense – “each dollar appropriated for the IRS generates substantially more than one dollar in additional revenue. It is therefore ironic and counterproductive that concerns about the deficit are leading to cuts in the IRS budget, when those cuts are making the deficit larger.”

The report recommends that Congress should consider revising the budget rules so that the IRS is “fenced off” from otherwise applicable spending ceilings and is funded at a level designed to maximize tax compliance, particularly voluntary compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden.

Olson also found that the IRS is not doing enough to assist victims of tax-related identity theft, the incidence of which has increased substantially in recent years.

Within the Taxpayer Advocate Service (TAS), identity theft case receipts have increased by more than 650% from 2008 to 2012. At the end of 2012, the IRS had almost 650,000 identity-theft cases in its inventory. The impact on victims is said to be significant - more than 75% of taxpayers filing returns are due refunds, which average some USD3,000 and are not paid until the IRS fully resolves a case.

The report confirms that the IRS has created numerous task forces and other teams in recent years in an attempt to improve its identity theft processes, but the IRS is still instructing its employees to advise identity theft victims that it will take 180 days to resolve their cases, while complicated cases inevitably take longer.

“Taxpayers need ‘one-stop shopping’ – a single point of contact they can work with to resolve all issues in their cases – and the IRS needs a ‘traffic cop’ to make sure that all units complete their actions,” Olson concludes. “And six months is an unacceptable period of time to expect taxpayer-victims to wait. The IRS must do more to provide the prompt and seamless assistance to identity theft victims that Commissioner Shulman promised.”

TAGS: individuals | compliance | tax | business | tax compliance | tax avoidance | corporation tax | Internal Revenue Service (IRS) | tax authority | professionals | United States | tax reform | individual income tax

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