National Taxpayer Advocate Nina Olson has told Congress that the time for comprehensive tax reform is now. Olson delivered her annual report to Congress and also testified before the House Ways and Means Committee in January. Olson used both occasions to urge Congress to simplify the Tax Code.
Complexity and its consequences
Every year, Olson reports to Congress on some of the problems taxpayers of all types are facing. This year, Olson said that the most serious problem facing taxpayers – and the IRS – is the complexity of the Tax Code.
According to Olson, individuals and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Tax Code. Over the past 10 years, there have been more than 4,000 changes to the Tax Code, including an estimated 579 changes in 2010 alone. Olson also noted that IRS regulations, if printed out, stand about a foot tall.
“The complexity of the Tax Code leads to perverse results,” Olson cautioned. “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.”
Olson gave Congress a broad outline of tax reform, deferring to lawmakers to provide specifics. To start, Olson recommended that Congress look at every tax incentive and compare the benefits of the incentive against complexity of the incentive.
Olson also recommended six core principles for reform:
1. The tax system should not “entrap” taxpayers.
2. The tax laws should be simple enough so that most taxpayers can prepare their own returns without professional help, simple enough so that taxpayers can compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can fully and accurately answer taxpayers’ questions.
3. The tax laws should anticipate the largest areas of noncompliance and minimize the opportunities for such noncompliance.
4. The tax laws should provide some choices, but not too many.
5. Where the tax laws provide for refundable credits, they should be designed in a way that the IRS can effectively administer the refundable credits.
6. The tax system should incorporate a periodic review of the Tax Code.
Lawmakers from both parties at the Ways and Means committee hearing supported simplification of the Tax Code but were far apart on which incentives to keep and which to jettison. The individual income tax deduction for home mortgage interest is one incentive that repeatedly comes up for repeal but never moves beyond discussion stage. Other popular tax incentives, especially in the education and energy areas, enjoy broad support in Congress.
Tax reform is likely to remain on Congress’s agenda in 2011. It is unclear at this time how far along Congress will get in drafting and enacting tax reform legislation. Our office will keep you posted of developments.