Relatively few people have heard of Nina Olson, but she's been busy working for American taxpayers for many years, as our National Taxpayer Advocate. Part of her job is regularly issuing reports to Congress, detailing problems she has observed in our tax code and our tax-paying processes -- along with solutions she recommends. Olson recently released her 2016 report to Congress, and one of her chief issues was with the complexity of the tax code.
Olson's report featured a list of the "most serious problems," which included:
- Insufficient Taxpayer Bill of Rights education for IRS employees.
- Inaccurate fraud detection filters that cause significant headaches and refund delays.
- Concerns over the private debt collection program implementation -- "that is arguably inconsistent with the law and that unnecessarily burdens taxpayers, especially those experiencing economic hardship."
It also offered 10 key recommendations to Congress. Let's look at two of them.
"Simplify the Internal Revenue Code now"
Olson has repeatedly called for simplifying the tax code, in order to make it easier, faster, and cheaper for taxpayers to use and also easier for the IRS to administer. This was her top recommendation, as she noted that Congress has made more than 5,900 changes to the code since the Tax Reform Act of 1986. She pointed out that, "A [Taxpayer Advocate Service] analysis of recent IRS data shows that taxpayers and businesses spend about six billion hours a year complying with tax-filing requirements. To place this in context, it would require three million full-time employees to work 6 billion hours, making 'tax compliance' one of the largest industries in the United States."
Indeed, folks at The Tax Foundation have noted that as of 2015, the federal tax code and regulations totaled more than 10 million words -- that's more than nine times the length of the entire 7-book Harry Potter series.
How does she propose simplifying the tax code? Well, by reducing the number of tax credits and tax deductions significantly, for one thing. That might sound scary, because it would seem to result in our paying higher taxes. But as Olson explains, "...the additional revenue would be used to substantially reduce tax rates, leaving the average taxpayer with about the same tax bill he or she has now — but with the ability to compute it much more simply and accurately."
If Olson's suggestions were ever acted on, the result might be glorious. She paints a picture of a better tax world, like this: "The tax laws should be simple enough so that most taxpayers can prepare their own returns without professional help, simple enough so that taxpayers can compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can fully and accurately answer taxpayers' questions. The tax laws should anticipate the largest areas of noncompliance and minimize the opportunities for such noncompliance."
Here are a few specific suggestions she offers:
- Repeal the Alternative Minimum Tax for individuals.
- Consolidate the incentives to encourage savings for education (there are now at least 12 separate incentives).
- Consolidate the incentives to encourage savings for retirement (there are now at least 15 separate incentives).
- Simplify the worker classification rules to reduce disputes over employee-versus-independent contractor status.
- Reduce procedural incentives to use tax sunsets (more than 70 provisions in the tax code are temporary and thus require periodic renewal).
- Reduce income phase-outs, which affect roughly half of all returns each year and add considerable complexity to tax computations.
- Streamline the penalty regime for tax violations (there are now more than 170 penalty provisions, up from 14 in 1955).
Clearly, there are many ways to simplify the code, and it's a cause that many (except the significant tax-prep industry) can support.
"Restructure the Earned Income Tax Credit and related family status provisions to improve compliance and minimize taxpayer burden"
Olson noted that there are about six different family status provisions in the tax code, such as filing status, personal and dependent exemptions, and various tax credits. This complexity can make it hard for the IRS to verify statuses. She also notes that American families are increasingly not fitting the traditional model of two married parents and biological children and that when "family" is defined narrowly, many people are unable to claim tax relief, and when it's defined broadly, it makes the IRS's job more onerous.
To combat this issue, Olson offers a bunch of recommendations, such as consolidating the various family status provisions into just two: a refundable "Family Credit," which would address those maintaining households and raising families, and the refundable Earned Income Tax Credit (EITC), which would address low-income workers, providing an incentive to work as well as a subsidy -- per individual worker. (Note that "refundable" tax credits are better than ordinary, non-refundable credits. With an ordinary credit, if your tax due is $2,000 and your credit is for $2,500, it will wipe out your tax bill. If it were refundable, it would wipe out your tax bill and pay you the difference -- the $500 -- as a refund.)
As the tax deadline approaches and you get discouraged about how complicated and time-consuming the tax-preparation process is, know that there's hope. Someone in Washington has been focused on fixing our tax code for many years and has lots of great ideas. Of course, Congress has to put them in motion. If you feel strongly about any tax changes, let your representatives in Congress know.
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