September 23, 2021

I.R.S.’s Taxpayer Advocate Calls for a Tax Code Overhaul

Lawmakers need to overhaul the tax code completely to reduce the “significant, even unconscionable, burden” placed on taxpayers just to file a tax return, the Internal Revenue Service’s ombudsman told Congress on Wednesday.

In her legally required annual report to Congress, the national taxpayer advocate, Nina E. Olson, estimated that individuals and businesses spend about 6.1 billion hours a year complying with tax-filing requirements. That adds up to the equivalent of more than three million full-time workers, or more than the number of jobs on the entire federal government’s payroll.

And filing is only becoming more complicated as lawmakers haggle over new tax breaks.

Since 2001, Congress has made nearly 5,000 changes to the United States tax code, or more than one a day on average. Nine in 10 taxpayers now pay money, for professional preparers or often-expensive commercial tax software, to figure out how much money they owe the government.

One of the advocate’s suggestions for streamlining the tax code was to repeal the alternative minimum tax, a parallel tax system intended to make sure rich Americans pay a fair amount in taxes, which is increasingly engulfing middle-class taxpayers. Another was to reduce the number of income exclusions, deductions and credits, known collectively as “tax expenditures,” that clutter up the tax code.

For the current fiscal year, the Joint Committee on Taxation has estimated that these tax expenditures total about $1.1 trillion, whereas individual income tax revenue will be about $1.4 trillion.

The national taxpayer advocate, an independent position with the I.R.S. that Congress created to assist taxpayers in resolving problems, also criticized Congress’s recent budget cuts to the I.R.S.

On a budget of $11.8 billion in the 2012 fiscal year, the I.R.S. collected $2.52 trillion, meaning it brought in $214 for every dollar it spent. On the margin, the I.R.S. is estimated to bring in about $7 for every additional dollar it spends or, put another way, it costs the federal government $7 for every dollar that is cut from the I.R.S.’s budget. The I.R.S. will receive even less money if Congress allows across-the-board spending cuts to materialize in March as currently scheduled.

“It is ironic and counterproductive that concerns about the deficit are leading to cuts in the I.R.S. budget, when those cuts are making the deficit larger,” Ms. Olson wrote in the report. “No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors.”

The I.R.S. already lacks money sufficient to meet taxpayer needs, the report said. In the last fiscal year, the I.R.S. answered just two-thirds of calls from taxpayers, and the average person who got through had to first spend 17 minutes on hold.

Among the more serious problems for which taxpayers need assistance is tax-related identity theft. This occurs when criminals steal Social Security numbers and then use them to claim other people’s tax refunds, which average $3,000. Stolen Social Security numbers are also used to gain employment under false pretenses.

Tax-related identity theft has risen 650 percent over the last four years, and the I.R.S. had almost 650,000 identity theft cases in its inventory as of Sept. 30, 2012. I.R.S. employees are currently advising identity theft victims that it will take 180 days to resolve their cases.

“The I.R.S. has established numerous task forces and Lean Six Sigma teams focused on improving identity theft processes,” Ms. Olson wrote in her report, which attacked the I.R.S.’s decision to decentralize its identity theft investigation efforts. “Despite all of this attention, victims who need their tax accounts corrected quickly and effectively still face many of the same issues they did five years ago — a labyrinth of procedures and drawn-out time frames for resolution.”

The report criticized other I.R.S. practices, including its failure to provide tax refunds to many people whose preparers initially stole their refunds, and its high audit rate for taxpayers who claim the adoption tax credit.

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Bucks: Last-Minute Tax Tips for Procrastinators

If you haven’t filed your taxes yet, you have plenty of company: The Internal Revenue Service says as many as 25 percent of filers do so in the final two weeks before the deadline.

Bob Meighan, vice president of consumer advocacy at TurboTax, spoke with me recently and offered some tips on making the most of the time left. The good news for procrastinators is that they have an extra three days to get the job done because the I.R.S. moved the deadline to April 18 from the traditional April 15, due to a holiday in the District of Columbia.

First, he says, start with the (obvious) basics: Gather records you need, like W-2 forms and interest statements — whether in electronic or paper form — so you’re not scrambling at the last minute.

Next, not surprisingly for a tax software executive, Mr. Meighan recommends preparing and filing your return electronically, since you can file at the last minute without going to the post office to get proof that you mailed it. Even if you hit the “submit” button just before midnight on April 18 and the I.R.S. rejects your return for some reason, the agency gives you several days to resubmit it and still be on time.

You might not even have to shell out cash for tax-preparation software. and other online tax preparers offer free federal return preparation and filing for those using simple forms like 1040EZ (though there’s often a charge for filing an accompanying state return, if you need one). And those with incomes of less than $58,000 may be able to use the I.R.S.’s Free File option, in which taxpayers use online software donated by TurboTax and others, like TaxAct and TaxSlayer, to prepare their returns.

Keep in mind, though, as Mr. Meighan notes, that if you are taking the homebuyer credit for a house purchased in 2010, you can’t file electronically because you have to submit your closing statement as documentation.

Some other tax credit-related issues have caused some confusion this year, Mr. Meighan adds. The I.R.S. was late in updating its computer systems, so many filers who had claimed the first-time homebuyer credit in 2008, and are beginning to pay it back, experienced delays in receiving their refunds.

(The I.R.S. offers some tips for those who haven’t filed yet, and who will begin repaying the homebuyer credit, to help things go smoothly.)

Some filers also have been confused about the Making Work Pay credit, which totals $400 for individuals and $800 for couples. Most workers have received the credit in the form of lower paycheck withholdings during 2010, but they must account for it by filing Form M. Tax preparation software walks filers through the form, Mr. Meighan notes.

If you think you can’t get your taxes done by April 18, you can get a six-month extension by filing Form 4868. The catch is that while the extension gives you more time to file, you are not allowed any additional time to pay any taxes you owe.

So if you think you’ll have to write Uncle Sam a check, you still have to pay by April 18 — or risk penalties and interest on the amount you owe. To get an estimate of what you owe, you generally have to do a dry run of your tax return—which probably means you will have almost everything you need to file anyway. “If they’re 90 percent done, it’s really in their best interests to just get it done and file,” by April 18, Mr. Meighan advises.

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