IRS National Taxpayer Advocate issues strong call for reform of U.S. Tax Codes

Okay, sorry, this post is not about reprographics. But, it is a matter important to all U.S. Taxpayers, so I'm going to do a post about this issue ....

In a report issued to Congress on January 5^th, 2011, IRS National “Taxpayer Advocate”, Nina E. Olson, says that the reform of tax laws should be the number one priority in tax administration.

“There has been near universal agreement for years that the tax code is broken and needs to be fixed,” Olson said in releasing the report. “Yet no broad-based attempt to reform the tax code has been made.”

You can read the full report at this Internet address:

http://www.irs.gov/pub/irs-utl/2010arcmsp1_taxreform.pdf

Blog-author’s comment: Our tax code, regulations, procedures, forms, etc. have grown so onerous that most U.S. taxpayers, who have even a minor amount of non-W2 income activity, cannot complete tax returns on their own. Preparing one’s taxes has become so complex that the situation has grown to be absolutely absurd. Unfortunately, while I applaud Ms. Olson’s efforts to bring this problem to our legislators, I have little (read, “no”) confidence that congress will take any action, anytime soon, to resolve this horrible problem.

Here’s just a portion of the report Ms. Olson issued to Congress on Jan 5, 2011:

DEFINITION OF THE PROBLEM

The most serious problem facing taxpayers – and the IRS – is the complexity of the Internal Revenue code.

1. The Current Tax Code Imposes Huge Compliance Burdens on Individual Taxpayers and Businesses.

Consider the following:

■ according to an analysis of IRS data, U.S. taxpayers and businesses spend about 6.1 billion hours a year complying with the filing requirements of the internal revenue code. And that figure does not include the millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits.

■ if tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the “tax industry” requires the equivalent of more than three million full-time workers.

■ compliance costs are huge both in absolute terms and relative to the amount of tax revenue collected. Based on Bureau of labor Statistics data on the hourly cost of an employee, it is estimated that the costs of complying with the individual and corporate income tax requirements for 2008 amounted to $163 billion – or a staggering 11 percent of aggregate income tax receipts.

■ according to a tally compiled by a leading publisher of tax information, there have been approximately 4,428 changes to the tax code over the past 10 years, an average of more than one a day, including an estimated 579 changes in 2010 alone.

■ the tax code has grown so long that it has become challenging even to figure out how long it is. A search of the code conducted for this report turned up 3.8 million words. A 2001 study published by the Joint committee on taxation put the number of words in the code at that time at 1,395,000. A 2005 report by a tax research organization put the number of words at 2.1 million, and notably, found that the number had almost tripled since 1975.

■ the income tax regulations issued by the treasury department to provide guidance on the meaning of the internal revenue code now stand about a foot tall. The CCH Standard Federal tax reporter, a leading publication for tax professionals that summarizes administrative guidance and judicial decisions issued under each section of the code, now comprises 25 volumes and takes up nine feet of shelf space. Two companies publish newsletters daily that report on new developments in the field of taxation; the print editions often run 50-100 pages and the electronic databases contain substantially more detailed information.

■ the complexity of the code 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.

■ individual taxpayers find return preparation so overwhelming that about 60 percent now pay preparers to do it for them. Among unincorporated business taxpayers, the figure rises to about 71 percent. An additional 29 percent of individual taxpayers use tax software to help them prepare their returns,13 with leading software packages costing $50 or more. IRS researchers estimate the monetary compliance burden of the median individual taxpayer (as measured by income) rose from $220 in 2000 to $258 in 2007, an increase of 17 percent.

[Blog-author’s comment: These were the additional points (problems) listed in the report. If you want to read the details that emphasize each point, then you will need to go to the Internet address where the full report is located.]

2. The Tax Code Is Rife with Complexity and Special Tax Breaks, Helping Taxpayers Who Can Afford Expensive Tax Advice and Discriminating Against Those Who Cannot.

3. Complexity Obscures Understanding and Creates a Sense of Distance Between Taxpayers and the Government, Resulting in Lower Rates of Voluntary Tax Compliance.

4. The Tax Code Is So Complex That the IRS Has Difficulty Administering It.