Congress should keep tax comprehensible

Revamp America’s “incomprehensible” tax laws, the American Institute of Certified Public Accountants told the tax writing panel of the House of Representatives today.

Individual taxpayers and their families need simple tax laws so they can understand the rules and follow them correctly in a cost-efficient manner, Annette Nellen, chair of the AICPA Individual Income Taxation Technical Resource Panel, said at a House Ways and Means Committee hearing.

A complexity case in point: education. It takes 86 pages for an IRS publication to explain all the tax education provisions that encourage families to save for, and spend on education. 

“Few, if any, taxpayers are both aware of all the education tax incentives and fewer still can perform the analysis to determine which incentive is most advantageous,”  Nellen said.  “The requirements, eligibility rules, definitions, and income phase-outs vary from incentive to incentive.”

Taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements, according to government figures.  In addition to simplifying education tax incentives, other areas of the tax code that require simplification are the Earned Income Tax Credit, mileage rates, phase-outs, due dates on reporting requirements for foreign accounts, and the alternative minimum tax, Nellen said. 

Due to the complexity of the education tax provisions, a 2008 Government Accountability Office report found nearly one-fifth of eligible taxpayers did not claim either a tuition deduction or a tax credit that could have reduced their tax liability by an average of $219 each, Nellen said. 

Erroneous application of the Hope Credit, among other complexities, contributes to the estimated $345 billion “Tax Gap,” Nellen said.  A 2009 U.S. Treasury Inspector General report identified 203,000 taxpayers who claimed the Hope Credit for the same student for three consecutive years costing the government more than $300 million. 

The EITC is perennially challenging to taxpayers as well as the IRS, Nellen said.  The IRS estimates the EITC over-claim rates for 2005 were between $9.6 billion and $11.4 billion.  And eligible taxpayers are not claiming all the benefits to which they are entitled.  A National Taxpayer Advocate study in 2004 had indicated that after audit reconsideration, 43 percent of taxpayers received additional EITC benefits that had been initially disallowed.

The compliance burden on taxpayers could be reduced by changing the filing due dates for partnership and trust returns because many individuals who are partners and other pass-through owners and beneficiaries must wait for a Schedule K-1 in order to file their personal income tax return.  Finally, avoiding temporary provisions would reduce complexity in the tax law, Nellen said.

The House Ways and Means Committee hearing focused on the special burdens placed by the tax code on individual taxpayers and families and the need for comprehensive reform to address the problems.