National Taxpayer Advocate, the IRS Watchdog, Issues 2004 Report

The National Taxpayer Advocate is an independent organization within the Internal Revenue Service that reports directly to Congress on issues that impact the lives of every taxpayer. Nina Olson, head of the Taxpayer Advocate Service, urged Congress to implement massive tax reform as the only way to solve longstanding tax compliance problems.

Olson's chief concerns are those parts of the tax system that are unduly complicated. Olson says, "Without a doubt, the largest source of compliance burdens for taxpayers and the IRS alike is the overwhelming complexity of the tax code, and without a doubt, the only meaningful way to reduce these compliance burdens is to simplify the tax code enormously."

The most complicated aspects of the tax system, according to Olson, are the alternative minimum tax, the earned income credit, and the array of tax benefits for retirement and education. Year after year, Olson targets the alternative minimum tax (AMT) as the number one problem facing the IRS. The AMT is a second tax system on top of the regular income tax designed to eliminate excessive tax deductions for the wealthy. The only problem is that the wealthy can find thousands of ways to reduce their taxes without triggering the alternative minimum tax, and moreover the AMT adds an immense layer of complexity to an already complex tax system. "The need for AMT relief looms like the proverbial elephant in the room, and for that reason we once again, for the third year, recommend its repea," says Olson.

The Earned Income Credit (EIC) is another complicated tax issue. Because the EIC is essentially a reverse tax meant to help lower-income families, this is an area where the IRS is especially vigilant for fraud, waste, and abuse. Accordingly, the IRS spends a lot of time weeding out EIC fraud. But IRS processes and procedures for handling EIC audits are confusing. A study by the Taxpayer Advocate showed that EIC taxpayers respond better to phone calls than written letters, which are often confusing and hard to read.

Various tax benefits for education and retirement aren't bad, because they do encourage saving for retirement and spending on college education, which are good things. The problem comes from adding to the complexity of the tax code. "The large number of provisions designed to encourage taxpayers to save for education and for retirement as key illustrations of the problems of complexity wrought by the 1.4 million-plus word tax code," according to the National Taxpayer Advocate press release. For example, there are at least eight key tax benefits relating to college education expenses. Moreover, there are at least ten different ways to save for retirement in a tax-deferred account.

Olson's call for massive tax reform comes from in-depth study of IRS processes, speaking directly to taxpayers facing IRS problems, and realizing the confusing and often conflicting demands of the tax code. One can only hope that the President's tax reform committee is reading Olson's report.

Resources:

• National Taxpayer Advocate's 2004 Annual Report to Congress (press release and summary)
• Archive of National Taxpayer Advocate Annual Reports to Congress
• National Taxpayer Advocate's 2004 Annual Report to Congress (Volume One, 630 pages, PDF file)
• Taxpayer Advocate Service Web Site