TAX EXPENDITURES AND TAX REFORM

The US Tax Code says “everything is taxable, except” and “nothing is deductible, except”.  It is the “excepts” that make the current code such a confusing and convoluted mucking fess.

 

The “excepts” are known as “tax expenditures” – deductions, credits, and exclusions from taxable income - and, according to the recent 2016 Annual Report to Congress by IRS Taxpayer Advocate Nina Olson, they cost the Treasury $1.42 Trillion in FY 2016.   

 

“Tax expenditures” include -

 

·   The distribution of federal social program benefits – such as welfare via the Earned Income Credit and refundable Child Tax Credit, student financial aid via the multiple education tax credits and deductions, assistance in paying for health insurance premiums and excessive medical expenses via the Premium Tax Credit and the deduction for medical expenses in excess of 10% of AGI, and rebates for energy-efficient purchases via the energy credits.  These are expenses of the federal government that are not paid directly from the budget and properly recorded by category, but “washed” through the Tax Code and distributed via the 1040 or 1040A, resulting in reduced gross income.  This does not belong in the Tax Code!

 

·   Incentives to encourage certain behavior – such as savings and investment, home ownership, and charitable giving. 

 

·   Allowance for the costs of generating taxable income – such as the itemized deductions for investment interest, employee business expenses and investment expenses.

The National Taxpayer Advocate is required by law to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance.  In the report just issued the Taxpayer Advocate has identified as the #1 legislative recommendation for Congress “TAX REFORM: Simplify the Internal Revenue Code Now” -
 
 “It has now been more than 30 years since Congress enacted the Tax Reform Act of 1986 to substantially simplify the tax code, and since that time, the code has grown more complex by the year, as evidenced by the fact that Congress has made more than 5,900 changes to the code — an average of more than one a day — just since 2001. The compliance burdens the tax code imposes on taxpayers and the IRS alike are overwhelming, and we urge Congress to act this year to vastly simplify it.”

 

Nina believes the current US Tax Code –

 

“Undermines trust and confidence in the tax system, as many taxpayers do not understand how their taxes are computed or even what rate of tax they pay.”

 

And –

 

“Leads to lower levels of tax compliance, as taxpayers make high rates of both inadvertent and deliberate errors, and the complexity of tax returns limits the IRS’s ability to detect noncompliance through audits or other means.”

 

As pointed out in a recent blog post by Ashlea Ebeling at FORBES.COM, she has recommended, as I have been recommending for years now –

 

“. . . that Congress start with a tax code without any tax expenditures, and then add a provision back in only if lawmakers decide that the public policy benefits of running the provision through the tax code outweigh the tax complexity burden the provision creates for taxpayers and the IRS.”

 

Nina has been calling for tax simplification and reform in her reports to Congress for years now, as I have in my posts here and editorials elsewhere.  She also correctly continues to call for, as I do, the repeal of the dreaded Alternative Minimum Tax.

 

I have identified my “Principles of Tax Reform” at my website A TAX PROFESSIONAL FOR TAX REFORM.  I also explain there why federal social welfare program benefits should not be distributed via the tax return.

 

For the first time in years everything is in place for substantive federal tax reform.  I expect tax reform legislation to be enacted relatively early in the year.  While I am almost certain that the idiots in Congress will not completely “get it right” – I can certainly hope.

 

TTFN

 

 

 

 

 

 

 

 

 

 

NINA OLSEN ON THE DREADED AMT

Here are excerpts from Nina Olsen’s 2012 Annual Report to Congress concerning the dreaded Alternative Minimum Tax (AMT).  I wholeheartedly agree with her recommendation!

“The Alternative Minimum Tax Corrodes Both the Tax System and the Democratic Process -

Problem

The individual Alternative Minimum Tax (AMT) was originally enacted to ensure wealthy persons paid at least some tax. Because the AMT is not indexed for inflation {it now is – rdf}, limited to high income taxpayers, or focused on tax loopholes, however, it increasingly penalizes middle income taxpayers for having children, getting married, or paying state and local taxes while allowing thousands of millionaires to pay no tax at all. The AMT is complicated and burdensome, even for those who are not subject to it. Many taxpayers must fill out the lengthy AMT form only to find they owe little or no AMT after all.

Analysis

The AMT requires taxpayers to compute their taxes twice — once under the regular tax rules and again under the AMT rules. If the ‘tentative’ AMT liability exceeds the regular tax liability, the taxpayer pays the difference as AMT. Thus, the AMT reduces the transparency of the tax system, making it more difficult for nearly everyone one to predict what they will owe.  

The AMT is difficult to repeal because it is projected to raise a large amount of revenue. However, AMT patches have always prevented the AMT from raising these projected amounts. In other words, we have a law that grants popular tax benefits (the regular tax code), another law (the AMT) that eliminates the benefits, and then another law that undoes the elimination of benefits (the patches), usually at the last minute — a legislative Rube Goldberg contraption of unnecessary complexity. In addition, the AMT reduces the transparency of the tax reform debate. For example, any revenue estimate for the proposal must be compared to the illusory revenue supposedly generated by expiration of the AMT patch under current law. Thus, the AMT corrodes the both the tax system and the democratic process.

Recommendation

Permanently repeal the AMT.”

TTFN

 

TAXPAYER ADVOCATE DELIVERS ANNUAL REPORT TO CONGRESS

National Taxpayer Advocate Nina E. Olson has released her 2012 annual report to the idiots in Congress.

Here is some of what Nina discussed, from the IRS press release (highlights are mine) - identifying the need for tax reform as the overriding priority in tax administration.

“The National Taxpayer Advocate’s annual report designates the complexity of the tax code as the #1 most serious problem facing taxpayers and recommends that Congress take significant steps to simplify it. ‘The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns,’ Olson wrote. ‘It obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and provides criminals with opportunities to commit tax fraud; and it undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply.’

The report states that the tax code imposes a ‘significant, even unconscionable, burden on taxpayers.’ Since 2001, Congress has made nearly 5,000 changes to the tax code, an average of more than one a day, and the number of words in the code appears to have reached nearly four million.

To reduce taxpayer burden and enhance public confidence in the integrity of the tax system, the report urges Congress to greatly simplify the tax code. In general, this means Congress should reassess the need for existing income exclusions, exemptions, deductions and credits (generally known as tax expenditures). For fiscal year (FY) 2013, the Joint Committee on Taxation has projected that tax expenditures will come to about $1.09 trillion, while individual income tax revenue is projected to be about $1.36 trillion. To put these numbers in perspective, if Congress were to eliminate all tax expenditures, straight math indicates it could cut individual income tax rates by 44 percent and still generate the same amount of revenue it collects under current rules.

The report recommends that Congress approach tax reform in a manner similar to zero-based budgeting. The starting assumption would be that all tax expenditures would be eliminated. A tax break would be retained only if a compelling case can be made that the benefits of that break outweigh the complexity burden it creates. ‘In performing this analysis,’ Olson said in releasing the report, ‘we should look at each provision in the code and ask questions like: Does this government incentive make sense?; If it does, is it better administered through the tax code or as a direct spending program?; However well intentioned, is it doing what it was intended to do?; and If yes, can it be administered without imposing unreasonable burdens on taxpayers or the IRS?. At the same time, Congress can separately consider how much revenue it wants to raise, and it can then marry up our optimally designed tax system with our revenue needs by setting tax rates accordingly.’”

Nina's report also expressed concern that the IRS is not adequately funded and that the IRS is not doing enough to assist victims of tax-related identity theft and return preparer fraud.

Click here to download the Executive Summary of Nina’s report.

This is not the first time that Nina has cited the complexity of the Tax Code as a serious problem.  She hits the nail on the head this year by putting it on the top of her list.

Her starting assumption for tax reform is what I have been saying for the past few years now, and her questions to be asked before adding a tax expenditure to the Code are spot on – especially “is it better administered through the tax code or as a direct spending program?”.  Also as I have been saying for years, when applied to a majority of the current tax expenditures the answer would be a definite “it is better administered as a direct spending program”!

Right on, Nina!    

TTFN

NATIONAL TAXPAYER ADVOCATE ANNUAL REPORT TO CONGRESS

National Taxpayer Advocate Nina Olsen has issued her annual report to Congress.

In the report Nina tells us –

“The most serious problem facing U.S. taxpayers is the combination of the IRS’s expanding workload and the limited resources available to the IRS to handle it.”

The idiots in Congress continue to make the Tax Code more complicated, but do not provide the Service with the funds to deal with the mucking fess they create.

Her Legislative Recommendations include the usual (included each year) - Repeal the Alternative Minimum Tax for Individuals and Simplify the Tax Code.

Under Simplify the Tax Code she says -

“The Bipartisan Tax Fairness and Simplification Act of 2011 {S. 727, 112th Cong. (2011)} generally incorporates many of these recommendations. The bill would combine current education-related tax credits and deductions into a single tax credit for all education expenses, including tuition, fees, and student loan interest. It would consolidate retirement savings plans into one category.  It would eliminate many sunsets created by the Economic Growth and Tax Relief Reconciliation Act of 2001 by permanently repealing phase-out provisions for the EITC, the dependent care credit, the child tax credit, personal exemptions, and limitations on itemized deductions. It would further simplify the tax code by reducing the number of tax preferences. In addition to general simplification provisions, the bill would make the return filing process easier for taxpayers by providing any taxpayer, upon request, with a simplified pre-prepared tax return based on the information the IRS has received from third parties. Taxpayers also would receive a one-page summary showing how the most recently available fiscal year’s revenue was spent.”

This is the first I have heard about this proposed Act.  Here is what I found about it on the website of bill sponsor Democratic Senator Ron Wyden of Oregon -

“For individuals: Wyden-Coats reduces the number of individual tax brackets from the current six to three: 15 percent, 25 percent, and 35 percent and eliminates the Alternative Minimum Tax completely.  Middle-class and low-income taxpayers will benefit from Wyden-Coats’ near tripling of the standard tax deduction, which will not only reduce tax bills but relieve Americans of the stress and responsibility of maintaining the records and receipts needed to document itemized deductions. These simplifications alone will make it possible for most taxpayers to file a simple one-page 1040 form that most Americans will be able to fill out in less than an hour.  Moreover, by eliminating tax breaks and loopholes that allow some Americans to pay less than others, Wyden-Coats is able to hold down rates for everyone.  According to the Tax Policy Center, most families making up to $200,000 a year will pay the same or less in taxes under Wyden-Coats than they do today.”

Click here for more information on the bill.

Don’t expect the idiots in Congress to act on this report any time soon.

TTFN

THE TAXPAYER ADVOCATE SERVICE WANTS TO HEAR FROM YOU

National Taxpayer Advocate Nina Olsen believes the time for tax reform is now! (see my post on her recent report to Congress – click here). She is encouraging a serious dialog on the issue.

To help this dialogue along, the Taxpayer Advocate Service has established a vehicle to receive taxpayers’ suggestions about tax reform. You can go to the TAS website and provide your recommendations for tax reform.

“We ask that you approach this with the frame of mind that everything – even the tax breaks that benefit you or your businesses personally – should be on the table. What would you be willing to give up if you knew that others are giving up their breaks and the end result would be a much simpler system? What particular provisions of the existing tax system are especially burdensome or seem particularly unfair? So, let us know. We promise to track these suggestions and post them periodically, thereby helping to further the cause of tax reform and tax simplification.”

To submit your comments on this issue click here. Or you can submit your suggestions via email to taxpayeradvocate@irs.gov.

I will be preparing my comments and submitting them sometime in the next week, and will publish them here as well.

BTW – Here is the dedication from Nina’s recent Report to Congress -

“This year’s report is dedicated to the hardy souls who have worked actively over the years for tax reform and tax simplification, and to the busy majority of U.S. taxpayers who are cheering for them to succeed.”

NATIONAL TAXPAYER ADVOCATE’S REPORT TO CONGRESS

Yesterday (January 5th) National Taxpayer Advocate Nina E. Olson released her 10th annual report to Congress (click here), identifying the need for tax reform as the number one priority in tax administration.

Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress that identifies at least 20 of the most serious problems encountered by taxpayers and makes administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 21 problems, provides updates on four previously identified issues, makes dozens of recommendations for administrative change, proposes 11 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts

Nina adds her voice to that of many others lately, myself included, by stating –

“The most serious problem facing taxpayers – and the IRS – is the complexity of the Internal Revenue Code.”

She goes on to explain –

“Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. Taxpayers have developed a sense of cynicism about the tax system, and compliance takes a hit.”

Nina suggests –

“The most prominent approach would involve reducing tax preferences (often referred to as “broadening the tax base”) in exchange for lower rates.”

And warns –

“If tax preferences are to be eliminated in order to reduce tax rates, we cannot pretend that broadening the tax base means eliminating someone else’s tax break while preserving our own. Everything must be put on the table, and we must understand that, in exchange for lower rates, some tax breaks will be eliminated immediately and others will be phased out. If tax reform proceeds on a revenue neutral basis, however, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.”

The bottom line –

“The National Taxpayer Advocate recommends that Congress substantially reform and simply the Internal Revenue Code.”

The #2 problem presented by Nina concerns the Service’s “Increasing Responsibilities for Administering Social Benefit Programs” like the Earned Income Credit.

In discussing this situation Nina says -

“Running social programs through the tax system is beneficial in several respects {FYI, I do not at all agree – rdf}. These benefits include the potential ability to reduce the burden of the application process (via return filing), direct access by the administrator to eligibility data relating to income, and the relative efficiency of the IRS as a payment processor. The benefits also come with a cost to both the IRS and taxpayers. As discussed in detail below, Code-based social programs can undermine the IRS’s ability to perform its core function of collecting taxes. Further, the current enforcement culture of the the IRS may not be optimal for the administration of social benefits.”

She does make the observation –

“The administration of social programs diverts IRS resources away from the agency’s core revenue collection function and can diminish taxpayer service.”

Some of Nina’s legislative recommendations (in addition to simplifying the Tax Code) that “promote taxpayers’ rights” include –

• Repeal or index the dreaded Alternative Minimum Tax (read my lips – repeal, repeal, repeal),

• allow self-employed taxpayers to deduct health insurance premiums for purposes of self-employment tax (as was permitted for 2010 only), and

• improve the accessibility of the Offer in Compromise program.

How will the idiots in Congress respond to the report? Let us hope they listen carefully to Nina and take some of the actions she is recommending.

TTFN

NEW REPORT FROM THE NATIONAL TAXPAYER ADVOCATE

National Taxpayer Advocate Nina E. Olson released a report to Congress yesterday that identifies the priority issues the Taxpayer Advocate Service will address during the coming fiscal year. The report expresses concern about the adequacy of IRS taxpayer service, particularly as the IRS begins to implement health care reform, about new information reporting burdens facing small businesses and others, and about certain IRS collection practices.

Here are some pertinent quotes from the IRS press release on the TAX report (any highlight is mine):

Taxpayer Services-

* “Spending for IRS taxpayer service programs has been declining in recent years. At the same time, more taxpayers have been contacting the IRS for assistance as the IRS has been tasked with administering an increasing number of social benefit programs, including Economic Stimulus Payments, Making Work Pay credits, and First-Time Homebuyer credits. The report says that as a result of the imbalance between taxpayer demand and IRS resources, the IRS has fallen short of providing adequate taxpayer service in important areas.”

* “There appears to be an implicit assumption built into existing budget procedures and projections that raising tax compliance requires ramping up enforcement and that taxpayer service is less important – perhaps even unimportant – for compliance. We think this implicit assumption is wrong.

The report states that many noncompliant taxpayers are baffled by complex rules and states that additional taxpayer service, particularly outreach and education, could improve tax compliance.”

* “Second, with respect to the IRS’s ability to deliver social programs, the report expresses concern that the IRS currently is neither structured nor funded to do the job effectively. ‘I have no doubt the IRS is capable of administering social programs, including health care,’ Ms. Olson said. ‘But Congress must provide sufficient funding and the IRS itself must recognize that the skills and training required to administer social benefit programs are very different from the skills and training that employees of an enforcement agency typically possess. While some enforcement measures are required to prevent inappropriate claims, the overriding objective of agencies that administer social benefit programs is to help as many eligible persons qualify for the benefits as possible. That requires outreach and working one-on-one with potentially eligible individuals. If the IRS continues to ramp up enforcement while reducing taxpayer service programs, I would be concerned about its ability to administer the new health care credits and penalty taxes in a fair and compassionate way.’

Ms. Olson suggests that the IRS mission statement be revised to explicitly acknowledge the agency’s dual role as part tax collector and part benefits administrator. Such a revision would require the IRS to develop a strategic plan that gives sufficient attention to both roles and would underscore that the IRS requires sufficient funding to perform both functions effectively.”

I do not believe the IRS should have any role as a benefits administrator. The IRS should not be administering social programs, including health care, whether they are capable of doing so or not. I have said time and again that providing social benefits should not be done through the Tax Code.

New Business and Tax-Exempt Organization Reporting Requirements -

“TAS has not yet reached any conclusions regarding the benefits and burdens of the requirement, but the report expresses concern that the burdens ‘may turn out to be disproportionate as compared with any resulting improvement in tax compliance.’ During FY 2011, TAS will study the impact of the new reporting requirement more closely and, depending on what its study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals, including a TAS proposal to require reporting of non-interest bearing bank accounts, to replace it.”

To download the National Taxpayer Advocate’s FY 2011 Objectives Report to Congress click here.

TTFN

IF ONLY WHAT NINA WANTS, NINA GETS

National Taxpayer Advocate Nina E Olsen delivered one of her required semi-annual reports to Congress on June 30th that identified the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year.

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Among the key areas of focus will be working with the IRS to improve taxpayer services, enhancing oversight of federal tax return preparers, improving accessibility of the offer in compromise program, and working with the IRS to improve its ability to administer refundable tax credits effectively.

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Click here to read the IRS press release or here to download the complete report.

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Two ares are of special interest to me.

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First, her continued call for "oversight" of tax return preparers. I have posted extensively here at TWTP in support of the registration and licensing of "unenrolled tax preparers" (click here for a detailed listing of the blog debate).

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In discussing the issue Nina points out that -

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"However, 'shopping visits' conducted by the Government Accountability Office, the Treasury Inspector General for Tax Administration, and others suggest that a high percentage of preparers prepare inaccurate returns, fail to perform sufficient due diligence, and even take positions that they know are not supportable."

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Nina refers to 2 specific "undercover stings" in her statement.

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(1) In 2006 the GAO conducted an operation that resulted in a report to Congress titled "Paid Return Preparers: In A Limited Study Chain Preparers Made Serious Errors" (the emphasis is mine). The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 "fast-food" commercial tax chains, you know who I mean, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

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This study was limited to the offices of Henry and Richard and their "ilk". The undercover agents did not visit office of independent "unenrolled" preparers. It came as no surprise to me that the employees of Henry and Richard and other chains were incompetent.

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(2) A few years later TIGTA issued a report "Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors" based on a similar undercover operation. According to a memo to the IRS that appeared at the beginning of the report -

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"In February and March 2008, TIGTA auditors posed as taxpayers in a large metropolitan area and paid to have 28 tax returns prepared at 12 commercial chains and 16 small, independently owned tax return preparation offices. Auditors paid commercial chains approximately $2,800, averaging $234 per return, and independently owned offices approximately $2,100, averaging $132 per return.

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The preparers were unlicensed and unenrolled. That is, they were not practitioners (attorneys, certified public accountants, enrolled agents, or enrolled actuaries). Preparers made substantial errors when completing tax returns and correctly prepared only 11 (30 percent) of the 28 tax returns (i.e. the tax returns showed the correct amount of taxes owed or refunds due)."

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I could not find any information that identified how the errors were allocated between the two types of preparers tested - commercial chains and independently owned offices. But I have no doubt that the H+R types made more of the errors than the independent preparers.

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I would have been interested if, as a control, the study had also included CPAs and maybe other "enrolled" types in the mix. Doing so would not only help support my opinion that the average CPA is not a tax expert, but also help to indicate whether the real problem is that preparers are incompetent or that the tax law is such a mecking fuss that even the informed and educated can make errors.

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As an aside, it did not surprise me at all that the "fast-food" chain preparers charged on average $100 more than the independents. Henry and Richard and their colleagues need the money to pay for their many multi-million dollar lawsuits.

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Clearly the major "offenders" among the unenrolled preparer "community" are those who work for the commercial chains. Certainly independent preparers do make errors, as do all preparers. Hey, even I make errors (ha! ha!), as I am sure those with combined CPA/lawyer credentials do also. Tax preparers are only human. And, actually, when preparers use software additional errors can occur. But I firmly believe that the level of errors, and certainly the intent of the errors, made by the independent unenrolled preparer is small when compared to chain preparers.

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Unfortunately the category of unenrolled preparer lumps qualified, competent, and ethical independent preparers in with the chain hacks, the scam artists, and the uneducated amateurs. Anyone who charges a fee to prepare a return who is not an Enrolled Agent, a CPA, a lawyer, or an Enrolled Actuary is considered an "unenrolled" preparer.

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In calling for oversight Nina says -

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"The use of PTINs would provide data concerning the number of return preparers, shield the Social Security numbers or return preparers from identity theft, and make it easier for the IRS to identify return preparers who submit unreasonably high numbers of inaccurate returns."

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I would suspect that most serious tax preparers already have a PTIN for identity theft prevention purposes. I have said in my postings that this PTIN registry would be the start of the tax professional registration process.

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The second area that interested me was Nina's concerns about "refundable" credits. She points out -

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"The American Recovery and Reinvestment Act of 2009 temporarily increased the Earned Income Tax Credit (EITC) and the child tax credit and authorized several new refundable credits, including the 'Make Work Pay' credit, the 'American Opportunity' education credit (40 percent is refundable), the first-time home buyer credit (up to $8,000), and a credit for certain federal and state pensioners."

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Nina correctly states that ". . . refundable credits may present an increased risk of fraud". The TAS "intends to study this and other issues the IRS will have to address in order to administer refundable tax credits effectively and without undermining its ability to perform its core tax-collection function."

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I have been saying for years now that refundable credits = increased tax fraud. I am also against such credits as they are in most cases a federal welfare program forced to be administered by tax preparers and the IRS. I am not against Aid to Families With Dependent Children, or other forms of encouraging those who are "on the tit" to work - but I am strongly against doing it with the Tax Code. I also vehemently oppose using the tax return to redistribute wealth.

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So what do you think?

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TTFN

TAXPAYER ADVOCATE ISSUES REPORT TO CONGRESS

National Taxpayer Advocate Nina E. Olson released her annual report to Congress yesterday, stating that the complexity of the Tax Code is the most serious problem facing taxpayers.

Last January’s report listed “the frequency and magnitude of late-year changes to the tax code” – i.e the irresponsibility of Congress - as the most serious problem facing taxpayers.

In discussing tax complexity the report estimates that U.S. taxpayers spend $193 billion a year complying with income tax requirements, an amount that equals 14 percent of the total amount of income taxes collected. One count shows the number of words in the Tax Code has reached 3.7 million, and over the past eight years, changes to the tax code have been made at a rate of more than one a day – including more than 500 changes in 2008 alone. Individual taxpayers now find the tax rules so overwhelming that about 62% pay a preparer to do the job and another 22% purchase tax software.

Here is one example cited in the report of how complex the current tax system is. The Tax Code provides tax breaks to encourage taxpayers to save for education and retirement. However, the number of such tax incentives has grown to at least 27 and the eligibility requirements, definitions of common terms, income-level thresholds, phase-out ranges and inflation adjustments vary among the provisions. This complexity undermines the intent of the incentives, as taxpayers can only respond to incentives if they know they exist and understand them.

The report includes a series of legislative recommendations #1 of which is to repeal the dreaded Alternative Minimum Tax (AMT). Other recommendations include streamlining education and retirement savings tax incentives, simplifying the family status provisions of the tax code, simplifying the rules under which workers are classified as employees or independent contractors, reducing sunset and phase-out provisions, and revising the overall penalty structure

Nina also wants to “place self-employed taxpayers on an equal footing with their wage-earning counterparts” by allowing the Self-Employed Health Insurance Deduction to reduce net earnings from self-employment - and therefore reduce self-employment tax, and to allow the mileage deduction for charitable travel to be adjusted annually by the IRS, as is currently the case with the standard mileage allowance for business, medical and moving travel. As it now stands Congress sets the charitable standard mileage allowance, and has not raised it in several years (current rate = 14 cents per mile).

She continues to call for Congress to regulate “unenrolled” tax. The report notes that 62 percent of taxpayers use preparers, yet anyone can now be a “preparer” – with no training, no licensing and no oversight required.

I wholeheartedly agree with all of the above listed legislative recommendations. I also support registration of unenrolled tax preparers - I am just against requiring all unenrolled tax preparers - regardless of years of experience - to take a test to be registered, as is called for in current pending legislation.

Do you think Congress will listen?

TAXPAYER ADVOCATE ISSUES REPORT TO CONGRESS

It seems a lot was abuzz yesterday as I was counting the doctor’s money and visiting the folks in Ocean Grove!

For one, National Taxpayer Advocate Nina E. Olson released her annual report to Congress. Nina’s report discusses 29 problems facing taxpayers, makes dozens of recommendations for administrative change, proposes 11 recommendations for legislative change, and discusses the 10 tax issues most frequently litigated in the federal courts during the preceding fiscal year.

According to Nina, the most serious problem facing taxpayers is “the frequency and magnitude of late-year changes to the tax code” – i.e the irresponsibility of Congress. In each of the last two years, Congress has acted in December to provide tax benefits with retroactive effect for the full year. Nina estimates that more than a million taxpayers may not have claimed tax deductions to which they were entitled for 2006 simply because they did not know about them, and predicts that low income taxpayers may experience serious financial hardship because their 2007 refunds are delayed.

The report updates prior National Taxpayer Advocate reports on the private debt collection program, stating that the program is falling far short of revenue projections. To date, the costs of the program have exceeded the revenue the program has generated, and the IRS cannot project when the program will break even.

Nina expressed particular concern about “the lack of transparency in the program” –

“IRS collection procedures are publicly available and subject to review by taxpayers and Members of Congress. By contrast, the private collection agencies have designated comparable information – including calling scripts and training materials – as proprietary, and the IRS to date has declined to insist on a contractual term to make them publicly available. As a consequence, the Advocate is prohibited from describing them in her reports to Congress, and the materials are not subject to public scrutiny. Olson reiterated her prior call for repeal of the program.”

The report urged Congress to -

· enact a Taxpayer Bill of Rights,

· authorize symbolic “apology payments” in egregious cases where taxpayers suffer significant harm as a result of IRS errors,

· eliminate Tax Strategy patents,

· identify new approaches to reduce the tax gap without imposing undue compliance burdens or undermining taxpayer rights, and

· create an optional “standard home office deduction” (I will be discussing this topic in detail in a THE FLACH REPORT posting).

The report contains a second volume that describes the results of six research studies. The findings of the studies include the fact that low income taxpayers fare much better in IRS Earned Income Tax Credit audits when they are represented by practitioners, and most taxpayers do not have the resources to submit the newly required 20 percent deposit when applying for an Offer in Compromise.

Go here to download the full report, the Executive Summary and prior reports.

Kay Bell of DON’T MESS WITH TAXES has written a post on this subject. I like her thoughts on how to fix Nina’s #1 problem –

“I suggest that all taxpayers jam our Representatives' and Senators' phone lines demanding that they do their job in a timely manner. If we are expected to meet tax filing deadlines or face penalties, then they should complete their legislative duties in a timely manner or face penalties, too.

Let your lawmakers know you'll remember how poorly they did their jobs when it comes time to decide whether they should keep those offices on Capitol Hill.”