Report: Tax code complexity places heavy burden on IRS

A convoluted and confusing tax code contributes to an ever-growing workload at the Internal Revenue Service, according to a new report from the national taxpayer advocate.

"Complexity drives inadvertent error and fraud, which drive increased enforcement or new legislation, which drives additional complexity," said advocate Nina Olson in a letter presenting the report. "This cycle can only be broken by true tax simplification, followed by ongoing legislative and administrative discipline to avoid subsequent 'complexity creep.' "

The tax code should be "simple enough so that IRS telephone assistors can fully and accurately answer taxpayers' questions," Olson said. She also suggested laws that allow individual filers to compute their tax liability on a single form.

Refundable tax credits, if included in a simplified tax code, should be "administrable," the report stated. Procedures for direct deposits of income tax refunds should be changed so that the IRS is more involved in resolving deposit errors, the advocate said.

Her call for tax reform accompanied an assessment of the most serious problems facing taxpayers. An IRS shift from focusing on services to concentrating on investigation and enforcement topped the list.

The report, submitted to Congress on Tuesday, cited an IRS effort to move increasing numbers of taxpayers from human to electronic services, in part to reduce service expenditures and devote more resources toward growing enforcement needs.

But noting the link between service and compliance, the report called on the IRS to assess the types of assistance most useful to taxpayers and to identify groups that would lose out in a shift to electronic platforms.

The National Treasury Employees Union commended the report. The union has campaigned vigorously over the last year against service cuts, including a reduction in the hours and scope of assistance available through toll-free lines, as well as a proposed consolidation of walk-in services that would have resulted in the closure of 68 taxpayer assistance centers.

"It has long been clear to NTEU and many others that most taxpayers want to comply with the tax code, but they need help to do that," said Colleen Kelley, NTEU's president, in a statement. "Cutting off that help will not increase compliance."

Olson's report noted some areas in which the IRS has tried to make taxpayers' obligations more clear. The Earned Income Tax Credit, for instance, is claimed on only 17 percent of individual tax returns, but is a factor in 48 percent of the IRS' individual examinations and is among the most litigated tax issues.

But Olson commended the EITC program office and examination staff for "working hard to improve the program by analyzing and redesigning its procedures, learning about the characteristics and limitations of the EITC's target population and applying that learning to its processes."