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.