Congress should simplify the tax code to ease the burden on filers, as well as take a hard look at the myriad tax breaks that cost nearly as much revenue as the government generates from individual income taxes, according to the Internal Revenue Service’s ombudsman.
National Taxpayer Advocate Nina E. Olson said in her annual report to Congress on Wednesday that the existing four-million word code imposes a “significant, even unconscionable” burden of compliance on taxypayers.
The analysis noted that Congress has made an average of more than one change to the code each day since 2001 and that taxpayers, 90 percent of whom pay experts to determine what they owe, spend a combined six billion hours a year trying to conform to the rules.
Olson also identified lack of funding for the agency and identity theft as other serious issues facing the IRS, but she described the need for tax reform as an “overriding priority.”
The report urged Congress to approach tax reform in a manner similar to zero-based budgeting, reassessing each tax break with the starting assumption that all would be eliminated. Only those codes with great public benefit would be kept on the books.
Congress’s nonpartisan Joint Committee on Taxation, which assists both political parties with legislation, has estimated that tax subsidies will total about $1.1 trillion for fiscal year 2013, compared with about $1.4 trillion in revenue from individual income taxes during the same period.
Congress could lower individual rates across the board by 44 percent and come up with the same amount of revenue if it eliminated all tax breaks, the report said.
William G. Gale, a tax-policy expert with the Brookings Institution, agreed with that assessment but questioned whether Congress could withstand the pressure interest groups would apply to protect their subsidies.
“It would be better policy to move in that direction, but everyone thinks their tax break should be sacrosanct,” he said. “Everyone who is losing a tax break would want to make sure that they ended up getting a better deal and not a worse deal.”
Gale said Congress is unlikely to overhaul the tax code in the manner Olson recommended.
“I don’t see how we get from here to there in the current situation,” he said. “They just raised rates, so I have a hard time seeing Congress and the administration saying, ‘Let’s lower them again.’ ”
Recent history shows that Republicans are likely to oppose any plan to generate new revenue and that Democrats would probably contest the lower rates, Gale added.
Olson heads the Taxpayer Advocate Service, working within the IRS as an ombudsman for the nation’s 140 million taxpayers.
Olson’s report warned against underfunding the IRS, noting that lawmakers froze the agency’s budget at $12.1 billion for 2011 and reduced it to $11.8 billion for 2012.
“The plain truth is that the IRS’s mission trumps all other agencies’ missions, because without an effective revenue collector, you can’t fund those agencies,” Olson said.
The report concludes that each dollar Congress appropriates for the IRS generates substantially more than one dollar in additional revenue.
Trimming the deficit with cuts to the IRS is “ironic and counterproductive,” because those reductions “are making the deficit larger,” Olson said.
Last year, the IRS collected about $2.5 trillion on a budget of $11.8 billion, which translates to a return of $241 for every dollar invested, according to the report.
Olson also concluded that budget reductions have hindered taxpayer services from the IRS in recent years. The agency answered only 68 percent of its calls during the last fiscal cycle, compared with 87 percent in 2004, a peak year for taxpayer service levels, the report said.
Likewise, the IRS failed to answer 48 percent of all taxpayer letters within the agency’s established time frame in 2012, representing a significant increase above the rate of 12 percent in 2004.
Olson said taxpayers have “a right to expect that their government will do a better job of taking their telephone calls and answering their letters.”
National Treasury Employees Union President Colleen M. Kelley agreed with the taxpayer advocate’s assessment, saying the IRS’s service problems are largely due to reduced staffing levels.
“Staffing has done nothing but go down in recent years, and returns have done nothing but go up,” she said. “They’re working against each other. It impacts [the agency’s] service to the public year-round, but it’s especially important this time of year, when people are looking for help filing or they need a quick refund.”
Olson’s report recommended that Congress revise budget rules to keep IRS funding “fenced off” from the rest of the federal budget so the agency isn’t restricted by the spending caps associated with the appropriations process.
“Determine what level of revenue the IRS needs to collect for the government to do what we want it to do, and then determine what the IRS needs to collect that revenue,” the report said.
Olson also criticized the IRS for decentralizing its victim-assistance program for casualties of identity theft.
Numbers from the Taxpayer Advocacy Service show a 650 percent increase in identity theft cases between 2008 and 2012. The IRS takes more than six months on average to resolve the problems, according to the group’s report.