Court Sentences Kroupa; NTA On Appeals’ Changes; Tax Reform Still Percolating

NTA Blogs on Appeals’ Changes

I am a keen reader of what the National Taxpayer Advocate writes; her take on tax administration often offers both an insider and outsider perspective. Her recent blog post on Appeals’ changes in bringing in Compliance and Counsel to Appeals conferences does just that; she appreciates what motivated Appeals to make the changes, and then discusses and reflects on why practitioners, such as the ABA Tax Section, have raised concerns. I recommend a full read of this post but this snapshot shows some of the issues she has with the new procedures:

The new approaches being put into place by Appeals make it appear as though Appeals no longer trusts its own Hearing Officers and that these Hearing Officers require the guidance and oversight of Counsel and Compliance to reach the correct determinations. As a former practitioner, I would think long and hard before bringing a case to Appeals under these new rules.

Tax Reform on the Horizon (and Some Thoughts on Tax Administration)

There is lots of talk this week on the Senate’s proposed health care legislation. On a separate legislative track is deeper tax reform for business and individual taxpayers. On Procedurally Taxing we steer clear from most of the big macro policy issues underlying the tax reform policy choices. We have, however, noted that many reform proposals do implicate key issues of tax administration. For example, last year Keith discussed the House Blueprint for tax reform and its proposal to add a new small claims court to hear tax cases.

The other day Speaker Ryan offered his tax reform pitch and assurance that reform will happen in 2017 as part of a talk he gave to the National Association of Manufacturers. Now, I have scratched my head thinking about border adjustability and contemplated the possible ways that service providers may try to shift income into pass through entities in light of some of the specific proposals that many are kicking around. But my ears perked up when I heard the Speaker justify, at least in part, individual tax reform on the difficulties Americans face when they file their tax returns:

Look at what happens during tax season. I could describe the complexity of the code all day, but what really defines our tax code is that sense of dread that you feel. You know that feeling?

You have to navigate long, complicated forms to file your returns. You need to wade through a seemingly endless amount of deductions and credits, each with its own rules and eligibility requirements.

And then, after you tally up those deductions, you are placed in up to seven different federal tax brackets based on your income level.

And at the end you hope—I mean really hope—that you do not owe a bunch this year. You hope, because you do not really know ahead of time. How could you? This whole system is too confusing, and just too darn expensive.

The solution, according to Ryan is to “start over.”

First, we will eliminate harmful, burdensome taxes including the death tax and Alternative Minimum Tax.

Next, we will clear out special interest carve outs and excessive deductions, and focus on keeping those that make the most sense: home ownership, charitable giving, and retirement savings.

We will consolidate the existing seven brackets into three, double the standard deduction, and simplify things to the point that you can do your taxes on a form the size of a postcard. Wouldn’t that be nice?

And finally—and most importantly—we will use the savings from eliminating these loopholes to lower tax rates.

Let me say that again: We are going to cut taxes

I am intrigued by the Speaker’s reference to the way that Americans meet their annual tax return obligations. A brief article  from Bloomberg earlier this year estimates that only 5 million out of the 165 million or so individual returns are done manually.The overwhelming majority of Americans today do not wade through IRS forms. Instead, they answer user friendly prompts generated by increasingly freely provided software; those that do not use a DIY product either pay a preparer or use free preparers at VITA or TCE sites.

The Speaker is thinking about taxpayer burden using a 20^th century model; fewer and fewer taxpayers actually work with an actual IRS form. The bigger point the Speaker makes though I think is that despite the decreasing mental burden on Americans in actually filing their tax returns, many Americans are clueless going into filing season when it comes to understanding their individual and family tax situation. Many Americans, especially lower and moderate income Americans, do not grasp the hodgepodge of credits and deductions that Congress has put in the Code for one reason or another.

If thinking about tax administration when it comes time to pass reform, Congress should simplify our tax system so the average American can understand what their return reflects and how their actions may in fact align with tax law. When thinking about tax reform, Congress should strongly consider paring back the myriad credits and deductions that leave most Americans befuddled. In addition, while Congress may choose (and have good reason) to use the IRS to administer social policy provisions, including some credits, actually aligning the substantive provisions with the reality of Americans’ lives would contribute to a tax system that the IRS could administer and the public could understand.