The complexity of the tax code, the widening tax gap and private debt collection sit atop National Taxpayer Advocate Nina E. Olson's list of the most serious problems facing taxpayers.The recently released report also cited the oversight of unenrolled return preparers, correspondence delays, concerns about the Office of Appeals, and lengthy processing times for injured spouse relief.
The Internal Revenue Code requires the National Taxpayer Advocate to describe at least 20 of the most serious problems encountered by taxpayers. In the first of this year's two required reports to Congress, Olson went further than the law requires and detailed a list of 21.
Olson cited the alternative minimum tax as the "poster child" for tax law complexity. The AMT was designated the most serious problem in the report both in its own right and as a symbol of the broader problem of tax complexity.
The tax gap - the difference between the amount of taxes collected and the amount of taxes owed, which currently is hovering at $290 billion - remains a high priority because noncompliance by some taxpayers requires every compliant taxpayer to pay, on average, more than $2,200 in extra tax each year to subsidize the noncompliance.
"With a new Congress convening, I am pleased to see these issues have been identified as priorities by the leadership of the House and Senate tax-writing committees," said Olson. "Simplifying the tax code, particularly by repealing the AMT and reducing the inequities caused by the tax gap, will go a long way to helping taxpayers."
Olson noted that while the AMT was originally designed to prevent wealthy taxpayers from escaping tax liability through the use of tax-avoidance transactions, today it is "left to punish taxpayers for engaging in such 'classic tax avoidance behavior' as having children or living in a high-tax state." Meanwhile, most of the significant loopholes that enabled taxpayers to escape tax at the time the AMT was written have long since been closed.
Olson recommended the elimination or simplification of phase-outs to reduce tax code complexity, because they "add needless complexity."
"This seems a bit out of step with the NTA's general favoring of simplicity for lower-income taxpayers," observed George Jones, managing editor of CCH's Washington office. "It ignores Congress' need to keep revenue costs of tax benefits as low as possible; having it give up this tool seems highly unlikely."
The primary theme of this year's report is transparency and the role that it plays in tax administration and compliance. Although Olson credited the Internal Revenue Service with improving its compliance with Freedom of Information Act requirements, she believes improvements are necessary. "We believe FOIA represents a floor on transparency, not a ceiling," she said. "Transparency benefits taxpayers because they are entitled to know what legal standards and procedures the IRS is applying, and it benefits the IRS because we can improve our procedures when we receive meaningful feedback."
To close the tax gap, Olson recommended fundamental tax simplification with an emphasis on making economic transactions more transparent; expanded third-party information reporting and, in certain situations, withholding on non-wage income; and improved IRS compliance initiatives that appropriately balance taxpayer service and enforcement.
After two years of monitoring the implementation of the IRS Private Debt Collection initiative, which went into effect in September 2006, Olson recommended that Congress repeal the IRS's authority to enter into contracts with private-collection agencies.
"The IRS now acknowledges that it can collect these delinquent accounts more efficiently than PCAs," she said. "The IRS has a nearly $2 billion collection budget with thousands of collection employees. In contrast, PCAs at this stage of the initiative are using 75 employees to collect on these accounts, and the IRS is using 65 employees to monitor them."
Colleen M. Kelley, president of the National Treasury Employees Union, agreed with the report, noting that "estimates show that IRS employees could perform the work far more efficiently, with a return on investment of approximately 13:1."
Seven of the most serious problems identified in the report relate to IRS collection policies. "Rather than intervening early and making personal contact with taxpayers, the IRS often waits until taxpayers' debts become so large that they warrant the intervention of much more expensive IRS field collection personnel," Olson said.
In fiscal 2006, the IRS reported more delinquent tax dollars as "currently not collectible" than it actually collected on active balance-due accounts, installment agreement accounts and offers in compromise combined, according to the report.
"Once accounts are designated with CNC status, IRS data for the preceding six years show the agency collected less than 2 percent of the amounts due," the report said.
Olson faulted the IRS for failing to make adequate use of collection alternatives: "The government generally collects far more from offers than it would collect if the accounts were placed into CNC status, and equally important, the taxpayer is required to remain in compliance for the succeeding five years ... . About 80 percent of taxpayers with accepted offers remain in full compliance during this five-year period."
EYE ON PREPARERS
Once again, Olson recommended the oversight of unenrolled return preparers.
"Taxpayers are harmed by the absence of a comprehensive federal program to regulate unenrolled return preparers (i.e., those who are not CPAs, attorneys, enrolled agents or enrolled actuaries)," she explained. "The National Taxpayer Advocate has repeatedly raised concerns about the lack of IRS oversight of unenrolled return preparers. However, the IRS has declined to support such a system."
Roger Harris, president of Padgett Business Systems and chair of the government relations committee of the National Association of Enrolled Agents, agreed. "It's hard to justify something that important being open to anyone," he said. "The devil is in the details - it has to be enforceable. If you're going to make me get a license to do something, you have to make sure that those that don't get the license don't continue to do it."
The American Institute of CPAs also supports it, said vice president for taxation Tom Ochsenschlager. "Unenrolled preparers are not subject to the discipline of the IRS nor to the ethical standards of CPAs, attorneys or EAs," he said.
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