Each year, the National Taxpayer Advocate releases their Annual Report to Congress. The Report is required to identify at least 20 of the most serious problems encountered by taxpayers. The 2012 report, filed by Nina Olson on December 31, focuses on the complexity of the U.S.’ four-million-word tax code, the Alternative Minimum Tax, and unstable and declining IRS funding. The report also looked at the havoc and mistrust caused by last-minute tax law changes.
Complexity: The report estimates that taxpayers spend 6.1 billion hours fulfilling their annual tax-filing obligations, and nearly 60 percent of taxpayers hire a professional to help them. Just under one-third use tax-filing software.
Certainly, these costs are substantial and real. However, as the report points out, the more pernicious impact is the effect this complexity has on taxpayers’ ability and willingness to comply with the tax laws. A survey of sole proprietors, also by the Taxpayer Advocate and contained in Volume Two of the report, found that respondents who had less trust in the tax system were also less likely to comply fully with the tax laws. While that connection seems like a no-brainer, it’s important to point out the survey also found that taxpayers who were less likely to comply also were more likely to believe that the IRS detects and penalizes noncompliance; non-compliers appear to be motivated more by distrust in the system than by the belief that they won’t be caught.
And, like complexity, “budget brinksmanship” and last-minute tax law changes foster distrust in and cynicism about the tax system and the government in general, the Report notes. They “confirm taxpayers’ suspicions that the tax laws are designed to entrap them and obscure what is and is not being taxed.”
The upshot? Reducing complexity would not only make taxpayers’ obligations easier, but it also would enhance both the real and perceived fairness of the tax system. In turn, that should also boost taxpayer compliance.
The AMT: It’s not achieving its intended purpose – ensuring that the wealthiest taxpayers pay at least some tax each year – the Report states. Instead, many middle- and upper-middle class taxpayers are caught by the AMT, while the wealthy remain outside its grasp.
That’s not all. The AMT adds to the complexity of the tax code, forcing millions of taxpayers to calculate their tax obligations under both the regular and AMT rules.
Given the failure of the AMT to achieve its goals, and because of the cost and complexity it adds to the tax code, the Report recommends its repeal.
IRS Funding: Given the fact that almost no one wants to pay taxes, it’s hard to find many people who support spending money on the entity required to collect tax dollars. However, starving the IRS of funds often means that taxpayers trying to do the right thing, but with questions about their returns wait longer for answers (if they get them at all), and that those determined to skirt the tax laws are less likely to be discovered.
The IRS budget of $11.8 billion isn’t chump change. However, it collected $2.52 trillion (both numbers are from the report) in tax payments – or about $214 for every dollar spent.
The IRS needs a stable funding mechanism, the Report concludes, advocating that the IRS’ budget be fenced off from the rest of the government’s budget. That way, it wouldn’t compete for funds against other federal agencies. “The plain truth is that the IRS’s mission trumps all other agencies’ missions — because without an effective revenue collector you can’t fund those other agencies,” the Report states.
To be sure, it’s hard to imagine this proposal getting very far within Congress, given how toxic almost any issue around taxes has become. However, the Report makes a persuasive case that starving the IRS of funds ultimately hurts honest taxpayers, who spend great amounts of time and money to comply with the regulations, and also end up covering for those who don’t and are able to get away with it.