Congress should rewrite the U.S. tax code to remove special-interest breaks and make them easier to obey, and detail how the government spends taxpayers’ money, the annual report by the IRS’s Taxpayer Advocate says.
National Taxpayer Advocate Nina Olson said the tax code, littered with narrow tax breaks that require a foot-tall stack of regulations to interpret, is the biggest problem facing U.S. taxpayers.
“Our number one most serious problem and number one legislative recommendation is to go into the data in detail and provide a good sense of what tax complexity does to each and every one of our lives,” Olson wrote in her 10th annual report to Congress, released today by the Internal Revenue Service. “It is not good.”
“In our view, the existing tax system perpetuates the sense of distance that many taxpayers feel from their government, and tax compliance rates suffer,” Olson wrote.
In addition to simplifying the tax code, she said, “We also believe that providing taxpayers with a ‘taxpayer receipt’ showing how their tax dollars are being spent could help bridge the disconnect by allowing taxpayers to see concretely what benefits they are receiving in exchange for their tax dollars.”
Olson cited dozens of statistics to illustrate the recordkeeping and compliance burden she said the tax code places on businesses and individuals. For instance, she noted that a single publication containing interpretive guidance and judicial decisions pertinent to the code comprises 25 volumes and takes up nine feet of shelf space.
The report singled out six special-interest provisions that Olson said don’t benefit typical taxpayers, including a deduction for buyers of a $100,000 electric Tesla sports car. Olson also cited a railroad track maintenance credit, which she described as a provision that “provides a special credit for taxpayers who happen to own a railroad.”
“We acknowledge that tax incentives are enacted for legitimate reasons, including to encourage certain types of behavior or to provide benefits in certain circumstances,” Olson said. “Nevertheless, when every interest group gets its own tax break, taxpayers worry that others are getting a better deal. Additionally, some taxpayers who could benefit from tax breaks fail to claim them because they do not know they exist.”
Olson operates as an autonomous figure within the IRS, working on behalf of taxpayers to resolve conflicts with the tax agency. Her report is prepared independently and submitted to Congress under a 1998 law that expanded taxpayers’ rights when dealing with the agency.
The idea of giving taxpayers an itemized receipt to show how their tax dollars are used was first proposed in the 1990s by Senator Charles Schumer, a New York Democrat who was then a member of the House of Representatives.
The idea was elaborated on last year by David Kendall and former Schumer aide Jim Kessler, policy analysts at Third Way, a Washington research group. Its board of honorary leaders is comprised of Democrats including Senators Mark Udall of Colorado, Claire McCaskill of Missouri, and Mark Pryor of Arkansas.
Olson also said the IRS has been “slow” to address the “adverse” effect that filing liens is having during the economic downturn. Her office cited that issue as the second biggest problem facing taxpayers in last year’s report.
Olson’s report today said the agency increased lien filings by about 14 percent compared with last year and about 550 percent since fiscal 1999, “despite scant evidence that liens generate commensurate tax revenue.”
While the IRS organized a task force to study the issue, the agency “has not altered its lien filing policies,” Olson wrote. Many liens are filed automatically, with no consideration for the potential effect on a taxpayer’s financial condition. Such policies circumvent taxpayer protections ordered by Congress in 1998, she wrote.
Michelle Eldridge, an IRS spokeswoman, today said the agency “recognizes that many taxpayers are struggling financially” and that “the IRS has taken numerous steps to help taxpayers facing tough times in the past two years.”
Those steps include giving taxpayers more flexibility to reach settlements under a so-called “offer in compromise” program and by allowing balances to be paid in installments.
IRS lien procedures can exacerbate financial problems for taxpayers who often owe other creditors, Olson said. Once a tax debt is paid the IRS usually releases the lien, which leaves it on a person’s credit record for seven years, she said. That can hurt credit scores for people struggling to pay debts, she said.
The agency could withdraw the lien, which would delete references to it in credit reports, the taxpayer advocate said. As many as 5 million people in recent years have had their credit histories damaged as a result of IRS liens, she said.
Eldridge said the agency is studying “the utility of liens and will begin piloting new procedures in the near future.” New procedures for withdrawing liens are being implemented, she said.
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