Thursday, September 2, 2010


One of the three major focuses of The President's Economic Recovery Advisory Board (PERAB) REPORT ON TAX REFORM OPTIONS was on Compliance, with an eye toward closing the “Tax Gap”.

The report began this topic by telling us –

Most taxpayers report and pay their taxes voluntarily and on time. Overall, the federal tax system achieves a high level of voluntary compliance with taxpayers paying about 83.7% of all taxes due in a timely manner.”

In discussing “General Approaches to Improve Voluntary Compliance and Reduce the Tax Gap” the report points out what many tax bloggers, myself included, have been saying for years –

One theme we heard repeatedly was that voluntary compliance would be increased by having a simpler, more transparent and more easily understood tax system, and from stable and consistent tax law. The complexity of the current tax code results directly in involuntary errors and facilitates intentional evasion.”

The need to annually or semi-annually extend expiring tax benefits is a major contributor to confusion and non-compliance.

The more certainty taxpayers have about the law and the more predictable the law is from year to year, the easier it is for taxpayers to comply with the law and the less likely it is for taxpayers to make unintentional errors. . . .In addition, temporary provisions are increasingly used for things like education credits, stimulus rebates, disaster area relief, loss carrybacks, or the first-time homebuyer credit. These changes are confusing to taxpayers and to tax professionals. Additionally, each year taxpayers must await reauthorization of expiring tax provisions like the Research and Experimentation credit, AMT relief, or the sales tax deduction. . . Expiring and temporary provisions and other changes to tax law increase the cost of compliance and create unpredictability for individuals, resulting in more confusion and mistakes.”

Just like the options listed for simplification, those for compliance, with one exception, are nothing new –

*Dedicate more resources to enforcement and enhance enforcement tools.

* Clarify the definition of an independent contractor.

*Increase information reporting and source withholding (mostly more third-party 1099s).

* Increase voluntary disclosure programs.

*Require all partners, LLC members, and S corporation shareholders who materially participate in the entity’s business to pay self-employment tax on business distributions.

There is one option that is new to me – Small Business Bank Account Reporting.

In conjunction with a simplified tax accounting for small businesses that permits cash accounting, (described in the section on tax simplification) a small business would be required to use a designated bank account for all business receipts and expenditures that is segregated from any personal bank account {take note, June Walker – rdf}. The bank would be required to report the receipts and expenditures within the designated account annually.”

While I agree with the conventional wisdom that a business, no matter how small, should maintain a separate checking account, I am against having banks report specific activity in all business accounts directly to the IRS. Besides the privacy and related issues involved, this would also create a huge burden on banks - resulting in higher fees for business accounts. And its true benefit would be minimal, as crooks not wanting to report all income would easily find ways to hide money elsewhere.

Another option included in this section is to extend the holding period for the exclusion of gain on the sale of a personal residence from the current 2 out of 5 years to 3 out of 6 or 4 out of 7 and to increase the information reporting of principal residence sales (currently a Form 1099 is generally not issued if the gross proceeds is below the $250,000 and $500,000 limits). The hardship exemption (for death, divorce, job-change, etc) would remain.

The “Report on Tax Reform Options” issued by the President’s Economic Recovery Advisory Board did an excellent job of identifying the problems with our current Tax Code and system and the ways it has been perverted by Congress and the various Administrations. However, due to the ridiculous restrictions placed upon the Board by BO, it’s recommendations are merely a rehashing of previous suggestions and offer nothing new of real value.

One of the very few things that W did right during his eight years was to give his tax reform panel pretty much unrestricted carte blanche to investigate and review all tax reform options and scenarios, although once the report was published it was totally ignored.

The only value of this report will be if its existence is used as a starting point for serious discussion of tax reform by Congress and the Administration, and it is not buried away in some archive like the report of George W’s panel.


No comments: