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Tax Advocate wants tax simplification and IRS culture of service over enforcement

IR 2017-2

The National Tax Advocate’s “Annual Report to Congress 2016—Executive Summary: Preface, Special Focus and Highlights” (Jan. 10, 2017)

In her 2016 annual report to Congress, National Taxpayer Advocate (NTA) Nina Olson urged Congress to emphasize simplification when it considers tax reform later this year and recommended that IRS revamp its “Future State” plan to adopt a taxpayer-centric focus.

Background. The NTA is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The Taxpayer Advocate Service (TAS) is an independent organization within IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

The second of these reports is submitted at the end of the year and is required to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.

The NTA’s annual report to Congress creates a dialogue within IRS and the highest levels of government to address taxpayers’ problems, protect taxpayers’ rights, and ease taxpayers’ burden. The NTA delivers its report directly to the tax-writing committees in Congress (the House Committee on Ways and Means and the Senate Committee on Finance), with no prior review by the IRS Commissioner, the Secretary of the Treasury, or the Office of Management and Budget.

Simplification of the Code. The TAS analyzed IRS data and determined that individuals and businesses spend about six billion hours a year complying with the code’s filing requirements – not including the millions of additional hours spent responding to IRS audits or notices. “If tax compliance were an industry, it would be one of the largest in the United States,” the report says. “To consume six billion hours, the ‘tax industry’ requires the equivalent of three million full-time workers.”

The Code contains more than 200 tax deductions, credits, exclusions, and similar tax breaks, known collectively as “tax expenditures.” In combination, the Treasury Department has estimated that tax expenditures in FY 2016 came to $1.42 trillion – more than Congress appropriated to fund the entire federal government.

The report acknowledges that the most costly tax expenditures benefit large numbers of taxpayers, and simplifying the Code requires difficult policy trade-offs. The elimination of these benefits could have undesirable effects – less health insurance, less retirement savings, smaller charitable contributions, and less home ownership, the report says.

Despite the popularity of many tax expenditures, the report urges comprehensive tax simplification. “If tax reform is enacted on a revenue-neutral basis, the average taxpayer’s bill will not go up, and taxpayers will be much happier to have a simpler and more transparent system.”

The report recommends that Congress aim to simplify the Code significantly and use a “zero-based budgeting” approach. The starting point for discussion would be a Code without any exclusions or reductions in income or tax. A tax break or IRS-administered social program would be added back only if lawmakers decide, on balance, that the public policy benefits of running the provision or program through the Code outweigh the tax complexity burden the provision creates for taxpayers and IRS. At the end of the exercise, tax rates can be set at whatever level is required to raise the amount of revenue that Congress determines is appropriate.

The report highlights several areas of complexity that it recommends Congress address, either as part of comprehensive tax simplification or on a stand-alone basis. They include repealing the Alternative Minimum Tax for individuals, consolidating the family status provisions in the Code, consolidating at least 12 incentives to save or spend for education, consolidating at least 15 incentives to save for retirement, simplifying worker classification determinations to minimize employee-versus-independent-contract disputes, eliminating or reducing procedural incentives to enact tax provisions that expire and require periodic renewal (sunsets), eliminating or reducing the gradual phase-out of tax benefits as income rises, and streamlining the more than 170 civil penalties contained in the Code.

Taxpayer-centric focus. In the NTA’s 2015 report, Ms. Olson raised concerns about IRS’s development of a comprehensive Future State plan describing how the agency will operate and interact with taxpayers in five years and beyond. In particular, the report criticized IRS for developing the plan without public consultations and for placing heavy emphasis on transitioning taxpayers from telephone to online services without considering significant evidence that taxpayers often need or prefer to speak with an IRS employee.

In her new 2016 report, Ms. Olson says IRS has been responsive to her concerns. It has made considerable information about its Future State plan available on, it has discussed details of the plan with stakeholder groups, and the Commissioner has personally provided public assurances that IRS will continue to provide telephone and face-to-face services to taxpayers who prefer to interact with IRS in those ways. In addition, IRS has said the Future State is more an evolving approach than a static plan and will be modified over time.

While the NTA says that she is pleased with the steps IRS has taken, she recommends IRS adopt a fundamentally different approach to tax administration. Ms. Olson presents a series of proposals to improve tax administration, placing particular emphasis on changing the culture of IRS. “To create an environment that encourages taxpayer trust and confidence, IRS must change its culture from one that is enforcement-oriented to one that is service-oriented.”

The report reasoned that, if IRS views its primary mission as enforcing the tax laws, it will design its procedures and apply its resources to “hunt down” taxpayers whom it views as noncompliant. This treatment in turn breeds resentment and increases the risk that the taxpayer who was willing to comply is no longer willing to do so. In this way, the underlying assumption by the tax agency that taxpayers will evade tax becomes a self-fulfilling proposition. The agency ends up converting a compliant taxpayer into a noncompliant one.

The report says that significant cuts to the IRS budget since FY 2010 have limited IRS’s ability to meet taxpayers’ needs and improve its technology systems. It recommends that Congress provide IRS with additional funding and conduct more rigorous oversight so it can be assured the funding is well spent.

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