The tax code is a sprawling mess in desperate need of an overhaul, a government watchdog said in a report released Wednesday.
Nina Olson, the national taxpayer advocate, said in her annual report to Congress that people in the U.S. spend some 6 billion hours trying to deal with the tax code, with nine out of 10 relying on a preparer or tax software.
At 4 million words, the code is so complex, Olson said, that it offers taxpayers a range of loopholes to help lower their tax bills, and forces honest mistakes that ensnare others in IRS enforcement actions.
“To inspire confidence and trust, the tax laws should be comprehensible and the computations of tax should be transparent and relatively simple,” Olson said in the annual report. “Yet few taxpayers today can confidently say they understand the tax code or even that they have correctly computed their tax liabilities.”
Olson, an independent advocate housed within the IRS, has long pushed for reforming the tax code and ensuring adequate IRS funding levels, another issue detailed in the report.
“The fiscal-cliff drama reinforces taxpayers’ belief that government and the tax system are not helping them,” Olson wrote.
The top congressional tax writers have vowed to move forward this year with tax reform, but some officials and observers aren’t sure how much progress can be made, given the differences between the two parties.
Democrats and Republicans remain at a loggerheads over key issues such as how much revenue the government should collect and whether revenue raised from eliminating tax preferences should be used to reduce deficits or lower tax rates.
In her report, Olson acknowledged the political challenges in overhauling the tax code, not to mention that some of the tax incentives that add to the code’s complexity — the exclusion for employer-sponsored health insurance and the mortgage interest deduction, for instance — are also quite popular with taxpayers.
A “loophole,” the advocate said, “is typically used to describe tax expenditures that benefit others, while terms like ‘incentives’ or ‘sound government policy’ are used to describe tax expenditures that benefit ourselves.”
Still, Olson calls for policymakers to assume that all tax breaks would be scrapped in a reform effort, and only bring back preferences if the benefits justify putting complexity back into the code.
Educating taxpayers on the benefits of a streamlined code would also help, Olson added.
Elsewhere in the report, the taxpayer advocate urged policymakers to refrain from rolling back the IRS’s budget, calling the tax collector “significantly underfunded.”
The IRS has seen its budget pared back in recent years, and the White House and Congress have had several high-profile battles over government spending in recent years.
Olson makes the case, as IRS officials have, that cutting the agency's budget is counterproductive, because the IRS brings back far more money in revenue than it is given in the appropriations process.
With that in mind, Olson calls for the IRS to be excluded from any enacted spending ceilings and the rest of the federal budget.
“The lack of sufficient funding is the sole or significant cause of many taxpayer problems,” she wrote.
Those problems, Olson wrote, include the growing tax gap, holes in customer service and the rise in taxpayer identity theft.
But at the same time, the advocate also suggests that the IRS can do more with the resources it has, and could make a stronger case for more robust funding.
“The current budget crisis and recurring continuing resolutions exacerbate this IRS tendency,” Olson wrote.