National Taxpayer Advocate Urges Simplification and Federal Tax Reform

National Taxpayer Advocate Nina Olson recently released her 2016 annual report to Congress recommending that the IRS continue its improvements to becoming service-oriented and that the tax code be significantly simplified. According to data the Taxpayer Advocate Service (TAS) analyzed, taxpayers collectively spend about six billion hours per year complying with filing requirements, "the equivalent of three million full-time workers."

Despite progress, the IRS is still unable to meet basic taxpayer needs. Less than six percent of its current $11.2 billion budget is allocated to taxpayer outreach and education (43 percent is allocated for enforcement). Of the more than 100 million phone calls received each year, the IRS was able to answer only 38 percent in FY 2015 and 53 percent in FY 2016. The average hold times were 30 minutes and 18 minutes, respectively.

"In an enforcement-oriented tax agency," Olson wrote, "if taxpayers don't get the help they need to comply and they make a mistake, they are treated as if they are tax evaders. This treatment in turn breeds resentment and increases the risk that the taxpayer who was willing to comply is no longer willing to do so."

Compliance burdens weigh not only on taxpayers, but on the IRS as well. Although it enacted the Tax Reform Act of 1986 to simplify the tax code, Congress has made more than 5,900 changes to the code since 2001 alone. Olson identified several complex areas that could be simplified to reduce the burden on both sides of the equation, including:

  • The Alternative Minimum Tax;
  • Family status provisions;
  • Various tax incentives that promote savings for retirement, savings for education, and home ownership;
  • Worker classification status; and
  • Various civil penalties listed in the tax code.

Olson also identified other problems the IRS and Congress could address. For instance, although identity protection and fraud detection are useful priorities for the IRS, its filters are significantly inaccurate and cause delays and other issues for many taxpayers. In 2016, more than half of the returns flagged as bogus by the various filters and business rules used to detect false claims were, in fact, legitimate.

"To create an environment that encourages taxpayer trust and confidence," Olson noted, "the IRS must change its culture." Additionally, based on the experience of the TAS, which handles hundreds of thousands of taxpayer cases each year, Olson believes lowering tax rates in exchange for broadening the tax base would be an excellent bargain for U.S. taxpayers.

To read the Executive Summary of this report, click here.

To read Nina Olson's complete report to Congress, click here.

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