The National Taxpayer Advocate, Nina Olson, delivered the Taxpayer Advocate’s 2012 Annual Report to Congress emphasizing the need for lawmakers need to overhaul the tax code completely in order to reduce the “significant, even unconscionable, burden” placed on taxpayers just to file a tax return.
The report estimated that businesses and individuals spend roughly 6.1 billion hours a year complying with tax-filing requirements. These hours adds up to the equivalent of more than three million full-time workers, or more than the number of jobs on the entire federal government’s payroll.
Tax law complexity imposes monetary costs on taxpayers as well. About 59 percent of individual taxpayers pay practitioners to prepare their returns, and another 30 percent use tax software to assist them, with leading software packages costing $50 or more.
Perhaps most troubling, tax law complexity leads to perverse results. 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. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.
One of Ms. Olson’s suggestions for streamlining the tax code is to repeal the alternative minimum tax (AMT), a parallel tax system intended to ensure that high earning Americans pay a fair amount in taxes, which is increasingly affecting middle-class taxpayers. She also suggested reducing the number of income exclusions, deductions and credits, known collectively as “tax expenditures,” that complicate the tax code.
The AMT is difficult to repeal because it is projected to raise a large amount of revenue. However, AMT patches have always prevented the AMT from raising these projected amounts. In other words, we have a law that grants popular tax benefits (the regular tax code), another law (the AMT) that eliminates the benefits, and then another law that undoes the elimination of benefits (the patches), usually at the last minute – a legislative Rube Goldberg contraption of unnecessary complexity. In addition, the AMT reduces the transparency of the tax reform debate. For example, any revenue estimate for the proposal must be compared to the illusory revenue supposedly generated by expiration of the AMT patch under current law. Thus, the AMT corrodes the both the tax system and the democratic process.
Ms. Olson also reported that the number of tax-related identity theft incidents has been growing rapidly and that the number of cases in the IRS’s inventory numbered over 650,000 at the end of 2012. Most of these cases take six months or more to resolve.
The report makes several recommendations in order so that victims do not remain exposed for the subsequent filing season.
The National Taxpayer Advocate recommends that the IRS make identity theft victims eligible for IP PINs as soon as it verifies their identities and addresses; retain the existing Identity Protection Specialized Unit (IPSU) as the single point of contact with victims throughout the duration of their cases; move the IPSU out of the Accounts Management function; expand the IPSU’s role to include initial and final global account reviews; implement agreements between the IPSU and various other IRS functions to set acceptable timeframes for completing cases; improve service on the dedicated toll-free line for victims; insert into every IRS agreement with state and local agencies an explicit clause that says that return information of an identity thief may not be redisclosed to third parties; seek modification of the consent judgment requiring the release of personal identifying information of decedents; and include TAS at all levels of identity theft program and procedural planning.
