News Flash: Taxes are Complicated

It’s that time of year again! No, not just tax season opening (that officially happens next week). It’s the time of the year when the National Taxpayer Advocate (NTA), Nina Olson, releases her annual report to Congress. The report, which can be found here, is required under section 7803(c)(2)(B)(ii) of the Internal Revenue Code: each year, the NTA must identify and report at least 20 of the most serious problems facing taxpayers and make recommendations about how to solve those problems.

Making the top of the list this year was – no surprise – a call for tax reform. The NTA has identified tax reform as a priority for several years running.

To kick off the discussion, the NTA pointed to a study that estimated that taxpayers 6.1 billion hours every year complying with tax law. Billion. Olson said, about that figure:

If you hired workers to do all the work of complying with the tax code, it would require more than 3 million full-time workers, making ‘tax compliance’ one of the largest industries in the U.S.

How much of an industry? 60% of individual taxpayers pay a professional to do their taxes and 29% buy software in order to do their taxes. What the remaining 11% are doing is a mystery… you can’t convince me that over 10 million taxpayers still struggle with pen and paper to do their taxes, no matter what my father-in-law does.

The complexity doesn’t end at the taxpayer level: it trickles up to the IRS. Last year, the IRS received more than 110 million calls from individuals with tax questions. They were so overwhelmed that they could only answer about 70% of the calls, leaving millions of taxpayers in the dark.

So what’s the answer? Tax reform. And Olson goes so far as to suggest that the reform be revenue neutral, meaning that the total amount collected shouldn’t be affected by the reform. Of course, what has to happen to make that a reality is that deductions and credits would disappear – and who’s going to agree to that? I’ve often said that we’ve created our own monster in the Tax Code. We all say that we want a simpler system but nobody really wants to give up their energy credits, their home mortgage interest deduction or their dependent care credit. We all love our tax goodies. Just look at the latest tax deal.

Of course, Olson takes a swipe at the recent tax deal (and numerous ones before that) by suggesting that the IRS should not be doling out social and welfare benefits. The IRS is increasingly responsible for shaping social policy through tax breaks for certain behaviors (buying a house, becoming more energy efficient, having more children) and playing to political whims in the shape of stimulus checks and the Making Work Pay Credit. Next, Congress is forcing IRS to implement pieces of the health care reform law. Olson notes that to continue to keep up with these mandates, the IRS “will have to shift from being an enforcement agency that primarily says, in effect, “you owe us” into an agency that places much greater emphasis on hiring and training caseworkers to help eligible taxpayers receive benefits and work one-on-one with taxpayers to resolve legitimate disagreements.” In other words, the IRS is going to have to change.

The NTA and her office, the Taxpayer Advocate Service, is serious about reform. And to prove it, they’ve opened up their web site to your suggestions for tax reform. You can post your suggestions for tax reform at the new “suggestion box” set up on their web site here. Of course, I’d love to hear them, too, so be sure and post your ideas in the comments below!

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Comments

  1. Edward Adamsky

    I’m willing to give up some tax breaks (i.e. home mortgage deduction) for simplification. This would be especially true if my tax bill didn’t increase (or at least not too much) without the complex deductions. The whole system needs to be reduced to something that ordinary people can understand and feel comfortable about. It’s the complexity and the feeling that one is getting cheated (or others are cheating) that makes people hate paying taxes and which leads to tax cheating. When the system doesn’t feel fair, then cheating doesn’t really feel wrong. That’s no way to run a country. Obeying the law should feel good and right. Bad laws make for disrespect for the law and lead to the downfall of society.

  2. Joe

    For the past three years (I have 3-year-old twins,) my effective tax rate has been roughly -5%. Would I voluntarily give up my free tax money just because I didn’t earn it? No. Would I support a tax reform that eliminates negative effective tax rates, but is fair? Whole heartedly. I like free money as much as the next guy, but I also prefer a government that’s not broken. Sure nobody wants to give up their credits, but maybe something like replacing the credits with higher bracket cutoffs for the lower tax brackets would be more agreeable. (Especially if you remind people that EVERYONE pays 10% of the first $8,375 of taxable income, regardless of what marginal tax rate you fall in.)

  3. Al

    One great start would be simplifying corporate taxation. The difference between book and tax income, and the headaches that it creates is ludicrous. The differences between book/tax/states creates the need for complete tax departments.

    Especially on audited financial statements. It is complete waste of energy to determine a new “tax” income that means nothing, other than a number that determines how much you pay.

  4. Al

    Crap – I change my mind. Let’s make it more complex. I forgot that I charge people to do their taxes ;-D

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  6. Bill

    You left out the best part… she feels that every individual in the US receives tax breaks. On average over $8,000.

    Her reasoning? That we get deductions and credits.

    Doesn’t sound like an advocate to me. She doesn’t know her history to know that deductions were always a part of the income tax, and are not a ‘break’.

    Scary our advocate thinks we’re all getting such a large break. Doesn’t sound like an advocate to me.

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