Thursday, May 13, 2004
Guest Blogger Linda Beale (Illinois) reports on National Taxpayer Advocate Nina Olson’s speech at the Individual Taxation Committee’s session at the ABA Tax Section May Meeting in Washington, D.C.:
While in the past the annual report has focused on a number of areas of concern, Olson made clear that her next report will target one single issue as the one most needful of legislative attention—simplification of the tax code. Whether she felt constrained by time limits or assumed that everyone at the session would agree wholeheartedly, she made little effort to draw the subtle distinctions necessary for a substantive discussion of simplification. She merely rode the current wave of ending complexity as we know it (a theme of many other sessions, including Dick Shaw’s annual report to the plenary session).
In this blogger’s views, the National Taxpayer Advocate should be careful not to provide ammunition for those would argue for reducing taxes in the name of simplification. The problem with an overly simplistic view of the role of complexity in the tax system is that it turns a blind eye to the distinction that really matters—that between the ordinary and the sophisticated taxpayer. The millions of ordinary taxpayers who pay their tax through payroll withholding and take the standard deduction are the only ones worthy of protection from complexity. Much should be done to ensure that they can determine their tax liabilities themselves or find inexpensive help through tax return preparers or tax return software. And, yes, that means that tax items such as the earned income tax credit can and should be simplified and made more readily available to low-income wage earners—after all, that credit is intended to help struggling individuals or families doing their best to earn a living, and they should not have to pay tax return preparers or buy tax return software just to claim the credit.
On the other hand, the high-income, high-wealth sophisticated taxpayer merits little sympathy. Many of the complications and uncertainties in the tax system belong there—from income phaseouts for tax preferences to various limitations and disallowances on interest deductions, from anti-abuse rules to the roundly criticized alternative minimum tax (assuming that it is amended to do what it was intended to do—target the rich and force them to share the costs of the many benefits they receive from government). Much of this complexity (and accompanying uncertainty) is necessary to prevent abuse of the tax system; in all likelihood, anti-abuse provisions will always be needed to target the schemes that highly paid accountants, lawyers and investment bankers can think up to get the rich out of paying their fair share of taxes. Much of the rest of the complexity is necessary to delineate incentive provisions built into the tax system. Once we accept the use of tax as a purported economic development tool, we have no business expecting simplicity, since each incentive requires definition and scope. Regrettably, even while larding the system with one subsidy after another, this administration (supported by an accommodating Congress) has still used complexity as a key word for its tax-cutting agenda—a stepwise movement towards a flatter rate, consumption tax system that lets investment capital off the hook. The tax bar’s general acquiescence in un-nuanced discussions of simplicity and certainty advances that agenda without the kind of in-depth analysis that is called for.
Interestingly, a related point was Olson’s concern that the current visible enforcement efforts against a few unscrupulous taxpayers and promoters might discourage other taxpayers’ voluntary compliance. She urged increased emphasis on the work of the National Taxpayer Advocate and the availability of the office to assist taxpayers in working with the IRS. Her point here was not entirely clear—it appeared that she thought extra effort is needed to project the image of the IRS as a friendly taxpayer-helping institution, just to be sure that no one gets too discouraged by seeing the enforcement arm of the government going after KPMG and big tax avoiders, such as Henry Camferdam and others that used the FLIP/OPIS tax shelter schemes promoted to them. Mutterers in the back were heard to comment that the ordinary taxpayer has little opportunity not to comply, since federal income taxes are withheld from wage checks (along with the regressive payroll taxes for Medicare and Social Security). In fact, it could be argued that holding little regard for the voluntary compliance honor system is a problem primarily for wealthy taxpayers who set up offshore credit card schemes, offshore trusts and other gambits to avoid paying their fair share of federal taxes. A sounder premise might be that vigorous IRS enforcement of high-income tax cheaters who have made use of sophisticated and costly tax avoidance assistance will help to encourage greater compliance by all because such enforcement convinces us ordinary taxpayers that the big cheats are not getting away with it while we small fry are forced to pay through wage withholding.
Finally, Olson focused on the Taxpayer Advocate Service’s advocacy portfolio. In particular, she noted a push to influence the offers-in-compromise process. Her goal is to help taxpayers (in a rough paraphrase) “feel good about being taxpayers in a system that recognizes the hazards caused by the slings and arrows of fate.” This means not treating offers in compromise as an “inventory management problem” but rather as a way to use discretion to alleviate burdens on worthy taxpayers. Olson claimed that the IRS is too mechanistic with offers in compromise, describing the process as use of a formula (the “full pay screen” that looks at whether taxpayers can pay within the “10 plus 5” years permitted by statute) to mechanically determine which taxpayers might be offered a compromise, followed by consideration of special circumstances and economic hardships to determine whether some dispensation should be allowed. Olson asserted that while the IRS has considerable discretion to reduce tax liabilities at this point, it systematically adheres too rigidly to guidelines and thus rejects taxpayer offers that it should accept. When one participant asked how it would be possible for her office (which sees only the worst cases) to determine that these are indeed systemic problems, Olson reiterated her view that the cases that come to her attention, coupled with the vivid complaints of tax practitioners, provide a reliable system perspective.
By the way, Olson’s primary anecdotal example of a taxpayer whose offer to compromise a tax liability should be accepted was a 75-year old whose income and assets are sufficient to permit payment in full over 15 years but who might die before the full fifteen year payment period has passed. Again, mutterers in the back could be heard to ask why failure to compromise with the 75-year-old is a clear indication of unsympathetic IRS behavior. The 75-year-old may well suffer less if the same liability is extended over 15 years than if the full liability is collapsed into 4 years. There is likely less need to sell house and home, as he or she might have to if the liability were reduced but immediate payment required. Maybe a reverse mortgage can work here, so that current cash is available for living expenses and tax payments. If there is still a tax due at death, the estate should pay it, a method which is admirably unhurtful to the 75-year-old and in fact furthers our concept of fairness by not letting someone off the hook just to benefit their heirs. So what’s the problem?
