More On Tax Planningfrom The Advisor's Professional Library
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
During a hearing on the complexity of the tax code on Tuesday, the Senate Finance Committee, chaired by Sen. Max Baucus (D-Mont.) heard testimony from the Government Accountability Office (GAO), the IRS taxpayer advocate, and two small business owners that reinforced the message that the tax code is too complex and unfair, while heavy-handed enforcement makes taxpayers reluctant to do the right thing.
Michael Brostek, director, tax policy and administration, strategic issues at the GAO, pointed out, among other things, that the cost of compliance in tax reporting and payment was high, as were the man-hours devoted to the effort. Not only that, but GAO found that the error rate in reporting was actually higher among paid preparers (56%), than among taxpayers (47%).
Nina E. Olson, the national taxpayer advocate at the IRS, said that a significant amount of noncompliance resulted not from attempts to evade or underreport, but from errors due to the complexity of the tax code. While only about 3% of the taxes collected are due to enforcement actions, according to her testimony, the IRS’ own statistics show that 67% of noncompliance was due to inadvertent mistakes.
Complexity, rules perceived as unfair, and automated rules and procedures all contributed as well to the alienation of the taxpayer, rather than giving people struggling to comply with a difficult tax code the benefit of the doubt. Taxpayer advocate testimony that ran to 48 pages detailed burdens or flaws within the tax code that contributed to an inefficient system and was instrumental in encouraging noncompliance or error.
David Kirkham, president of Kirkham Motor Sport in Provo, Utah, testified that his business spent money hiring “a bookkeeper, an accountant, and a professional accounting firm that has both lawyers and accountants. If the tax code were simpler, we would be able to hire more workers with the money we currently use to pay lawyers and accountants.”
He also criticized ever-changing laws that dictated equipment purchases one year, because of tax advantages, or employee hires in another, again because it is more advantageous. “Our business decisions should be made based on what will cause our business to grow and create a better world for everyone and not on some tax law that has recently been changed.”
Kris Carpenter, founder and CEO of Sanctuary Spa and Salon in Billings, Mont., said service businesses other than restaurants should be covered by the same regulations as the restaurant industry, since, she explained, it would increase both compliance and tax revenue, as well as making it easier on nonrestaurant businesses in which tips were involved because of tip tax laws.