Meet Your Tax-Fighting Hero

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It's easy to be discouraged and disillusioned by the wreckage that once was Wall Street. Between greedy bigwigs and crooks running wild, and government watchdogs who seem asleep on the job, we may begin to despair that no one is really looking out for us.

Meet Nina Olson, the Taxpayer Advocate. Surprisingly enough, our friends at the IRS have designated Ms. Olson to safeguard our rights and interests. Each year, the tax code actually requires her to detail at least 20 of the most serious problems facing taxpayers. Here's a Foolish review of some of the concerns from her latest annual report.

What's more than 70,000 pages long, containing 3.7 million words? The tax code. (A full 3,000 words were added just last year.) If you read 500 pages each day, it would take you 140 days, nearly half a year, just to get through it. 

It's estimated that taxpayers spend 7.6 billion hours and $193 billion each year, just trying to understand and comply with gobs of complicated rules. That $193 billion represents about 14% of the total income tax collected. It also tops the market capitalization of such major companies as Wal-Mart (NYSE: WMT  ) , Johnson & Johnson (NYSE: JNJ  ) , and AT&T (NYSE: T  ) . Clearly, it's time for the IRS to take Henry David Thoreau's advice: "Simplify, simplify."

Retirement complexity
Olson pointed out that there are at least 16 different retirement-savings incentives in the tax code. While that's good, it's also problematic, since each has its own set of eligibility standards, contribution limits, and other rules. Olson recommended consolidating various plans, especially those that are relatively similar.

I hope Congress heeds her immediately, but I'm not holding my breath, and neither should you. For now, we should brave the tax code and learn what we can about the retirement savings vehicles available to us. (Our Rule Your Retirement newsletter can help, with lots of clear, practical advice. Give it a whirl for free.)

If nothing else, Fools should make the most of the Roth IRA; in exchange for paying taxes on your contributions up front, you can withdraw any eventual earnings tax-free when you hit retirement age. If the Roth had been around 20 years ago, and you invested $20,000 in Campbell Soup (NYSE: CPB  ) in it, you'd have almost $175,000 for your retirement -- tax-free! In Walgreen (NYSE: WAG  ) stock, it would have grown to more than $280,000, all tax-free. Combining carefully chosen investments with the Roth's unique protections could save you tens of thousands of dollars in taxes.

A better alternative
Like us Fools, Olson has long been clamoring for an end to (or at least a major reform of) the Alternative Minimum Tax (AMT). It was meant to make it harder for wealthy people to avoid paying taxes, but its reach now encompasses more than 30 million Americans, most of whom are flagged for reasons such as having a bunch of children, incurring too many medical expenses, or living in a high-tax state. Getting rid of the AMT would make preparing our tax returns considerably simpler.

Help for those who need it
Olson pointed out that the IRS could be more compassionate toward taxpayers. Indeed, few seem to know that they have options when they're unable to pay what they owe. If you're stuck in such a situation, look into an offer in compromise.

Contact Congress!
While it is encouraging to know that someone is talking sense about the IRS and our tax predicament, it's somewhat sadder that too few people seem to be listening. Ms. Olson first recommended repealing or reworking the AMT some eight years ago, and she's brought it up regularly since. She and others have cried out for simplification, but instead the tax code keeps getting more complex.

I urge you to let your Congressional representatives know your thoughts on the matter. Urge them to consider Ms. Olson's findings and recommendations. Then imagine a world where H&R Block (NYSE: HRB  ) and Jackson Hewitt (NYSE: JTX  ) have to look for new lines of business, where it just takes you an hour or so (and perhaps $20 to $50) to prepare and file your taxes, instead of days or weeks and hundreds or even thousands of dollars.

If and when that lovely day ever arrives, do remember to send Ms. Olson a thank-you note.

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson and Wal-Mart. Johnson & Johnson is a Motley Fool Income Investor selection. Wal-Mart is a Motley Fool Inside Value recommendation. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

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  • Report this Comment On March 23, 2009, at 7:48 PM, TaxpayerOwner wrote:

    Sure Ms. Olson has talked about the IRS’s shortcomings, ruffled a few feathers, and wrote some tough reports. Unfortunately, Ms. Olson has not been able to get very much accomplished in her seven years on the job other then create a high employee turnover rate. She tried to simplify the tax code by creating a standard definition of a child. When all was said and done, she only made matters worse. So much worse, the law had to be amended.

    Ms. Olson also destroyed the very program in the IRS that was set up to assist taxpayers. Before Ms. Olson, if you needed help with a tax problem that was not dealt with satisfactorily through normal channels the IRS would transfer your case over to a group that had the experience in your particular issue and the authority to fix your problem on the spot. Ms. Olson has forsaken this logic. Now if you need help and your case is transferred over to her program it will most likely be assigned to someone that is not experienced or even properly trained to assist you. Moreover, even if the employee understands your situation they will not be able to fix it. They will have to turn around and request the IRS to fix it. Not only is this a poor way to assist taxpayers it also costs taxpayers more money.

    The Taxpayer Advocate’s office has an important role of advocating for all taxpayers. While Ms. Olson does an adequate job of this, she does not advocate very well for the individual taxpayer who comes into her office for assistance. For that reason, her employees that work with taxpayers should be reassigned back to the IRS where they will be better trained and better able to quickly assist taxpayers in their moment of need.

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