National Taxpayer Advocate Nina E. Olson urged Congress to simplify the U.S. Tax Code and recommended measures to reduce the burden on taxpayers who are struggling to pay their bills.In the first of this year's two required reports to Congress, she designated the complexity of the Tax Code as the most serious problem facing taxpayers. According to data compiled by her office, U.S. taxpayers and businesses spend about 7.6 billion hours a year complying with tax-filing requirements. "If tax compliance were an industry, it would be one of the largest in the United States," she said in her report. "To consume 7.6 billion hours, the tax industry requires the equivalent of 3.8 million full-time workers."
Olson advanced a simplification plan organized around six core principles:
1. The tax system should not entrap taxpayers.
2. The tax laws should be simple enough to allow most taxpayers to prepare their own returns without help, permit taxpayers to compute their tax liabilities on a single form, and let IRS telephone assistors fully and accurately answer taxpayer 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. Refundable credits provided by the law should be easier to administer.
6. The tax system should incorporate a periodic review of the Tax Code, which Olson calls a "sanity check."
"It's not the first time she has called for Tax Code simplification," observed Cindy Hockenberry, research coordinator at the National Association of Tax Professionals. "It shows that very little is being done to simplify the code. Otherwise, she would not have to keep bringing it up. Every time they add something to the code or change the rules, it results in more complexity."
Olson cited the Alternative Minimum Tax as one example of complexity. "Although it was originally conceived to prevent wealthy taxpayers from escaping tax liability through the use of tax-avoidance transactions, 77 percent of the additional income subject to tax under the AMT today is attributable to the disallowance of deductions otherwise allowed for state and local taxes and personal and dependency exemptions," she declared.
"Few people think of having children or living in a high-tax state as a tax-avoidance maneuver, but under the unique logic of the AMT, that is essentially how those actions are treated," she noted.
"Certainly, simplification has been on the agenda for some time, and it's entirely appropriate," echoed Rick Rodenbeck, tax practice leader in the Kansas City, Mo.-based office of cbiz. "Very few people actually understand the Alternative Minimum Tax. Even when using software, there are so many things you need to know to get the right answer."
In her other example, Olson observed that the Tax Code provides tax breaks to encourage taxpayers to save for education and retirement. However, the number of such tax incentives has grown to at least 27 and the eligibility requirements, definitions of common terms, income-level thresholds, phase-out ranges and inflation adjustments vary among the provisions.
"This complexity undermines the intent of the incentives, as taxpayers can only respond to incentives if they know they exist and understand them," she said.
REMEMBER, TIMES ARE TOUGH
Olson noted the serious financial difficulties facing many taxpayers in light of the ongoing economic downturn. "It's imperative for the IRS to consider the circumstances of taxpayers facing economic hardship before initiating enforcement actions," she said.
When the IRS contemplates taking an enforced collection action such as a levy, a lien or an asset seizure, both the Tax Code and IRS procedures require that IRS personnel consider whether the collection action will impose an economic hardship on the taxpayer. Despite these requirements, "Current guidance provides little direction to help IRS employees identify taxpayers who are experiencing economic hardship and prevent undue economic burden," Olson wrote.
At the same time that Olson released the NTA report, the IRS announced its own plan to help financially distressed taxpayers who owe back taxes.
"We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," said Commissioner Doug Shulman. "We want to go the extra mile to help taxpayers, especially those who've done the right thing in the past and are facing unusual hardships."
Depending on the circumstances, taxpayers in hardship situations may be able to adjust payments for back taxes, avoid defaulting on payment agreements or defer collection action.
"Now, when someone tells you, 'I'm from the IRS and I'm here to help you,' they might actually mean it," the NATP's Hockenberry quipped.
"They're on the same page with the Taxpayer Advocate," she observed. "The impression is that the IRS is reaching out to do what they can to help taxpayers, while maintaining the position that, 'Yes, you do have to pay your taxes.'"
Larry Novick, a Holliston, Mass.-based tax preparer, agreed. "There's got to be something to protect financially distressed taxpayers. Plus, the IRS is smart enough to realize that the value of real estate in many cases is below the outstanding mortgages, so they won't get anything by foreclosing anyway. Bringing the problem to the forefront means they've probably run into these problems, and they're trying to signal Congress that something needs to be done."
Specifically, the IRS said that its employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay; they will allow more flexibility for previously compliant individuals in existing installment agreements who have difficulty making payments because of a job loss or other financial hardship; they will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons; and they will encourage those who are unable to meet the periodic payment terms of an accepted offer in compromise to contact the IRS office handling the offer for options to help them avoid default.
In addition, the IRS said that for offers in compromise, where the accuracy of local real-estate valuation is in question or other unusual hardships exist, they are creating a new second review of information.
"The IRS has a superior lien with respect to getting paid over other creditors," noted Rodenbeck, "but in today's economy people just don't have the money to work something out. The proposal came out without too much detail, so we'll have to wait to see how they work out."
"The proof will be in the pudding when these policies are implemented," he continued. "If they actually do change policies and procedures, it will be helpful for many taxpayers. But if it takes a long time to trickle down it won't have much effect."
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