More On Tax Planningfrom The Advisor's Professional Library
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
- Taxation of Real Estate Real estate may be used to shelter income and may offer certain tax benefits. However, the type of real estate investment may result in different tax treatment. Learn how to use these investments to help your clients.
Last week, as the ink was still drying on the newly signed fiscal cliff bill and politicians began staking positions over a federal government shutdown, the debt ceiling and sequestration spending cuts, a sweeping proposal for tax reform that might help avoid some of this nastiness went mostly unheralded.
If Congress were to eliminate all tax expenditures, it could cut individual income tax rates by about 44% and still generate about the same amount of revenue, the IRS' taxpayer advocate said in a report that went mostly unnoticed.
Overburdened taxpayers may be surprised to learn they have an advocate at the IRS—indeed, they’re paying for her extensive efforts, and politicians might do well to heed the report she is law-bound to produce at the start of each year.
As head of the Office of the Taxpayer Advocate, Nina Olson is authorized to make legislative proposals to Congress. Her proposals are independent of the administration and not vetted by the Office of Management and Budget before their delivery to the people’s representatives.
Olson is required by law to report on at least 20 of the “most serious” problems taxpayers encounter, and she identified 23 for the tax year 2012.
The first one discussed (though she says the 23 are not ranked in priority terms) is the complexity of the tax code, and Olson’s report does not mince words. Indeed, she views the need for tax reform as entirely independent of our current fiscal troubles:
“The existing tax code inflicts significant, even unconscionable, burden on taxpayers, and Congress could alleviate much of that burden by vastly simplifying the tax code,” she writes. “Thus, our advocacy for tax reform is longstanding and wholly unrelated to deficit reduction.”
What Olson finds “unconscionable” and, elsewhere “profoundly disturbing,” is a low rate of public trust, as evidenced by a survey the Taxpayer Advocate commissioned, based on a representative survey of 3,300 taxpayers, finding that just 16% believe U.S. tax laws are fair.
Contributing to this view are the difficulty of compliance, with individuals and businesses devoting 6.1 billion hours a year to tax filing; the monetary costs involved, with individuals and businesses forking over $168 billion annually on return preparation; the incomprehensibility of the code—“leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay;” and the tax avoidance and outright fraud that the system’s complexity facilitates, among other problems the report identifies.
To these problems, Olson offers solutions that are nothing but radical in Washington’s political culture, which just passed a fiscal cliff bill loaded with tax breaks for enviromentalists, Hollywood moguls and NASCAR track owners, while restoring payroll taxes for ordinary Americans.
“To alleviate taxpayer burden and enhance public confidence in the integrity of the tax system, the National Taxpayer Advocate urges Congress to vastly simplify the tax code. In general, this means paring back the number of income exclusions, exemptions, deductions and credits (generally known as “tax expenditures”)… If Congress were to eliminate all tax expenditures, it could cut individual income tax rates by about 44% and still generate about the same amount of revenue.”
Olson’s advice to Congress is surprisingly outside of the Beltway and is based on zero-based budgeting concepts:
“Congress should look at each provision in the code and ask questions like: ‘Does this government incentive make sense?’; ‘If it does, is it better administered through the tax code or as a direct spending program?’; ‘However well intentioned, is it doing what it was intended to do?’; and ‘If yes, can it be administered without imposing unreasonable burdens on taxpayers or the IRS?’ A tax benefit should be retained only if Congress determines that the public policy benefits of keeping it outweigh the complexity burden it imposes.”