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This Is the Worst Kind of Tax Cut

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Most of us go about our days unaware that we have an advocate at the IRS, fighting for us. She's Nina Olson, and she recently delivered her "Fiscal Year 2012 Objectives" report to Congress, laying out her goals for the coming year. Her team's thoughts and suggestions make a lot of sense -- especially her worry about proposed budget cuts for the IRS.

Among the issues she plans to tackle for us this year, Olson wants Congress to protect taxpayers in the event of a government shutdown, so that tax documents and refunds don't stop being processed. She will keep fighting to simplify our incredibly complex tax code -- which now stands at close to 4 million words and more than 11,000 pages. (Even accountants and IRS employees have trouble keeping up with it!) She will keep working with the IRS to improve efforts to fight tax-related identity theft. And she will work to extend relief for innocent spouses who often end up with joint tax liabilities, as well as for taxpayers who are victims of domestic violence and abuse.

One of Olson's biggest concerns this year, though, is a possible reduction in funding for the IRS in general and her office in particular.

A stupid tax cut
Congress is thinking about cutting the money it allocates to the IRS. Olson, predictably, doesn't like this, and has suggested in the past that the IRS be exempt from budget wrangling. When you consider that about $345 billion is owed to the IRS each year and not collected, reducing our nation's ability to go after that money seems rather … stupid.

The situation is a little like charity solicitations we often receive in the mail. You might be irked to get several mailings per year from an organization, thinking of how many thousands it must send out and what it all costs, but if the organization is collecting $4 for every dollar it spends on fundraising, it can be well worth it.

The IRS budget is about $12 billion, and it collects more than $2.3 trillion annually, or close to $200 for every dollar it costs to run the IRS. With $345 billion still uncollected, it would actually make sense to give the IRS more resources to go after that money. Olson is also concerned about possible cuts to the Taxpayer Advocate Service, as it has been handling more and more cases, having resolved problems for close to 300,000 taxpayers in 2010. Cutbacks would leave more of us in the lurch.

IRS Commissioner Douglas Shulman, meanwhile, warns that cuts to the IRS budget would only reduce tax-law enforcement and would increase our budget deficit.

Automation limits
Some defend cuts to the IRS budget by pointing to the cost-saving potential of automation. Automation can indeed make quite a difference, but it's not always the perfect solution. Olson pointed to the first-time-homebuyer credit, which essentially offered certain taxpayers an interest-free 15-year loan. Well, problems with the IRS's computer programming and guidance to taxpayers led to a "massive breakdown" that delayed refunds to taxpayers.

Olson also notes that taxpayers have myriad personal situations and that it doesn't serve them all to try fitting them into an automated process, unless it's designed in a way that's friendly to them and lets them review and participate in it. She explains:

At its heart, though, the IRS's discomfort with exercising judgment and discretion is not about budgets. I believe it reflects a failure on the IRS's part to view taxpayers as human beings and to recognize that as a tax agency we deal with taxpayers as we find them, with all the vagaries of human existence, i.e., "life in all its fullness." Think about it -- there are few more intimate acts that a person has with his government than to tell it about one's family, income, expenses, losses, gains, educational activities, purchasing activities, retirement saving activities, and so on. Tax returns are not mere pieces of paper. Tax returns are reflections of people's lives -- who they are and what they did -- and to an astounding extent, they are voluntarily sharing this information with their government.

The world of taxation in the United States is a dynamic, ever-changing one, and we'd do well to keep up with it. Consider following and supporting your advocate in Washington, and perhaps let your Congressional representatives know your feelings on possible tax cuts to the IRS.

Visit the following sites for many more tips on how to be tax-savvy:

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Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Check out her holdings and a short bio. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2011, at 10:52 AM, RonWinkler wrote:

    I agree with Nina, the Taxpayer's Advocate does work for the tax payers. I once had a client that was audited, and never her previous tax preparer never went to the audit as he said he would. When I asked the auditor to reopen the case he said no. His reason was he didn't have to. His supervisor agreed. I contacted the Advocate who not only got the audit reopened, found that the auditor violated my taxpayers rights by not giving them their appeal rights. A costly mistake for the IRS as they had to refund all the money the taxpayer had paid on installment, taken from thier bank accounts, and refunds, with interest, but pay my fees as well.

    The Advocate is something that the taxpayers of this country should campaign for. Call your congressman, and Senator and say NO CUTS to the TAXPAYER's ADVOCATE!!! They really do fight for the taxpayer's rights!

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