4 Million Word Tax Code Tops Problem List, Report Says

The U.S. tax system’s most serious problem is the 4-million-word code’s excessive complexity that makes it tough for taxpayers to comply with and difficult for the government to administer, National Taxpayer Advocate Nina Olson wrote in an annual report to Congress.

The tax code cost taxpayers and businesses $168 billion in compliance in 2010, or about 15 percent of income-tax receipts, the report said.

“Lowering rates in exchange for broadening the tax base would be an excellent bargain,” says the report, released today in Washington. “We are confident that in the end, public support for a simpler code will be strong and deep.”

The report calls for an overhaul of the U.S. tax code that would streamline incentives for education and retirement, discourage temporary tax breaks and simplify or end income-based phase-outs of tax provisions.

Among the other problems Olson identifies in the report are the complexity of the alternative minimum tax, the underfunding of the Internal Revenue Service and the IRS’s difficulty in helping victims of tax-related identity theft and return preparer fraud.

Olson’s office is an independent organization within the IRS that acts as an advocate for taxpayers.

The IRS, which Olson compares to the accounts receivable department of a company, should be fenced off from more budget cuts by Congress, she writes in the report.

Needed ‘Resources’

“If the chief executive officer of a Fortune 500 company were told that each dollar allocated to his company’s accounts receivable department would generate seven dollars in return,” the report said, “it is difficult to see how the CEO would keep his job if he chose not to provide the department with the resources it needed.”

On identity theft, Olson writes that the IRS takes too long to resolve tax-fraud victims’ accounts. The cases, largely involving those in which criminals falsely claim refunds with a legitimate taxpayer’s name, have increased.

Olson’s office handled almost 55,000 cases in fiscal year 2012, up from about 7,100 four years earlier. That includes only the cases that reach her office, which usually happens when taxpayers are unsatisfied with the IRS’s response.

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