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“Abolish The IRS” Distracts From Needed Reforms



Annette Nellen8

Republican presidential candidates Senators Ted Cruz and Mike Huckabee would like to abolish the IRS. They are not saying they want to abolish taxes, just the agency that collects them. Even if either is able to simplify taxes to the point that no taxpayers have questions or need guidance, we still need a tax collector, as well as an auditor to ensure compliance.

A call to abolish the IRS is a distraction. That’s too bad because there are significant improvements needed to our federal tax system – a system that includes not only the income tax, but also employment, excise and estate and gift taxes. Tax reform must be the focal point, not termination of the entity that collects revenues to fund schools and roads, provide national defense, and much more.

The IRS is an easy scapegoat for complaints about our tax laws. But those laws come from Congress. Yes, the bills must be signed by the President to become law. But if no tax bill arrives at the President’s desk, no statutory change is possible. For reform, let’s first look to where Senator Cruz resides – Congress.

Reforms are needed. Here are just three examples to illustrate problems in our federal tax system. Resolving these types of problems can enable our tax system to be simpler, more equitable and better promote economic growth.

First, our federal tax system is too complex resulting in excessive compliance costs and errors. According to the IRS National Taxpayer Advocate, businesses and individuals devote over 6 billion hours annually to tax compliance – the equivalent of over 3 million full-time jobs. Examples of this complexity include a 43-page instruction book for Form 1040-EZ and over eight rules for tax benefits for college costs, explained in a 96-page publication from the IRS (Pub. 970).

Second, our tax system is inequitable. For example, for decades, employees have been allowed to exclude the value of employer-paid health insurance from their income, thereby lowering their income and employment taxes. Employees get this exclusion regardless of income level (and employers deduct what they pay for the health coverage). Starting in 2014, the Affordable Care Act (“Obamacare”) provides a refundable tax credit to individuals without employer-provided health coverage who buy insurance on the exchange (such as Covered California). However, these individuals lose that subsidy if their income exceeds 400% of the federal poverty line ($45,960 for a single person for 2014).

Take for example, Jane and Sara, each 50 years old, single and having $100,000 of taxable income for 2014. Jane obtains health coverage from work with her employer covering the entire cost of $6,000. Jane is allowed to omit this $6,000 benefit from her taxable income. Sara obtained her insurance from Covered California at a cost of $6,000, paid out of her own pocket. Because Sara’s income exceeds $45,960, she obtains no tax subsidy. Meanwhile, Jane gets a tax subsidy of $1,680 (based on a marginal tax rate of 28%). Sara is out-of-pocket $6,000 while Jane gets a $1,680 subsidy (and has no out-of-pocket costs for health insurance). Why does this inequity exist? This is just one of many tax system inequities where some individuals receive tax reductions while others at similar, or even lower income levels, do not.

Finally, our tax system has not kept up with technology and new business models. Today, most countries only tax businesses on income earned within their borders rather than the U.S. approach of taxing worldwide income. Corporate tax rates in other countries are lower while also supporting R&D on a permanent basis rather than the temporary approach used in the U.S. since 1981. Also, today, any size business likely has international operations yet tax rules can be as complex for small ventures as they are for large companies. And, technology should be used to make tax compliance for most people as easy as ordering goods online.

We need to improve our tax system, focusing on all federal taxes, not just the income tax. Our tax system can be simpler, more equitable and better support today’s ways of living and doing business. Let’s focus on these important issues and not be distracted by absurd rhetoric about abolishing the tax collector.

More to come – “abolish the IRS” is not the only odd tax reform coming from candidates.

What do you think?

Original Post By:  Annette Nellen

 

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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2 comments

  1. JC Double Taxed says:

    The Taxpayer Advocate is currently holding an international conference in DC on Taxpayer Rights

    I reference the US Taxpayer Bill of Rights. listed here: http://isaacbrocksociety.ca/2015/10/30/international-conference-on-taxpayer-rights-washington-dc-november-18-19-2015/

    The IRS Tax Payer Bill of Rights is missing substantial areas.

    These two should be added:

    11) The Right to a Simple and Easily Understood Tax System
    12) The Right to Reasonable Compliance Costs

    The IRS Tax Payer “Advocate” should pursue these additions and lobby Congress on these regards.

    As we may see with FATCA the US Treasury and Congress had arguably no regard for compliance costs of banks of the world and US persons living overseas. This is wrong.

    Every year there are more taxes and forms and compliance costs go up. For US persons living overseas expected to sort through the overlay of the 74,000+ tax code on top of the tax codes of their countries of residence, the regulations and compliance becomes unfathomable. This is wrong.

    Reading through the explanation for tax payer bill of rights #10 – The Right to a Fair and Just Tax System – that it is only about the fair and just administration of the tax laws, and with apparent assumption that the tax laws themselves are fair and just. This is wrong. Anyone reading the list of rights would, IMO, tend to think that the Right to a Fair and Just Tax System is about the taxes and compliance required themselves. Thus it may be said that #10 is substantially misleading and may even be labeled a “faux” right or Orwellian “doublespeak.” Explanation should be amended so that the right means what it says: Right to a Fair and Just Tax System.

    The Tax Payer Advocate should take Congress/Senate Finance to task on the application of tax treaties for US persons overseas. Instead of comparing the overall tax liability of one nation one is resident in and comparing it to the entire US tax liability, the application of the treaty is to do it tax by tax without any credit flowing from one type of tax to another. For example if the income tax rate is way higher than the US rate (Australia, Canada, UK, etc.), no credits for those taxes paid way higher than US rates may be rolled over to US taxes that one’s country of residence does not have. Plus the US may just call the same tax by a different name, or add a new one such as Obamacare NIIT, and then it flows on top as double taxation. It is wrong.

    The Tax Treaties/US tax laws treat US persons living overseas as living in the US. It is wrong. Overseas pensions on money earned overseas should not be double taxed by the US with designation of “unqualified pension fund” as if the person lives in the US and has a choice between qualified and unqualified options. It is wrong. The US tax code penalizes and proscribes extra tax for “foreign income and assets” with viewpoint of US resident having an overseas account, it is all wrong when US persons live overseas and all their income, assets and local bank accounts in their country of residence get the US “foreign” tax and compliance penalty treatment.

    The justification of tax is services in exchange for oneself or those in one’s community. Americans living overseas do not get any US government services as US residents do. Therefore, for US persons overseas the US tax and compliance laws are neither fair nor just, and out of step with all other OECD countries. It is wrong.

    “Representation” is ineffective as these 8.7 million US persons living overseas would never have approved of it all. Double Taxation Without Representation = unAmerican. IMO, America has forgotten its founding principles in regards to the tax and compliance laws required of US persons living overseas. IMO the IRS Tax Payer Advocate should point these inequities and injustices out to Congress.

  2. Scott says:

    The IRS as an agency has been known to manipulate and interpret the Tax Code once the laws are written.
    Look at what just happened with the Lois Lerner debacle and she ends up taking the 5th amendment.
    That is what Cruz, Huckabee, Paul, Carson, Fiorina, etc are talking about.
    Trump recently posted a picture of the income tax filings for all his companies and the stack of papers went to the ceiling.
    Bush published his tax returns on his website for the last 30 years and each year his filings got more and more complicated and insane.
    The tax code itself is written in generalities and maybe’s.
    The answer to many tax questions is “it depends”.
    Tax Court is filled with cases of the IRS going up against its citizens.
    There are so many loopholes written into the Code that nobody actually understands it.
    You can take the same set of income circumstances to different accountants and you will get different tax outcomes.
    It is an extremely inefficient way to collect money to fund a government.
    And lo and behold, the country is 19 trillion dollars in debt after one hundred years of the income tax.
    If you turn on the radio, there is a whole industry advertising its services to help people handle their income tax debts.
    CPA’s and Tax Professors like yourself make huge sums of money off of this disgraceful income tax system and its collection arm called the IRS.
    So it is understandable that you would support such a failed system and write an article in an attempt to handle a few income tax “inequities”.
    The whole income tax system has proven itself not to work and needs to be ended for the sake and survival of this country.
    Huckabee has the best plan of what to replace it with.

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