IRS Commissioner Proposes Five Steps to Simplify Taxes

In the past couple years, even IRS Commissioner Doug Shulman has repeatedly said that tax law in the United States is just too complicated.

Shulman, an attorney, weighed in again recently on this topic in remarks before the Harvard University's Kennedy School of Government on November 14, 2011.

"The 15,000 plus changes to the tax code since 1986 are anything but elegant...anything but simple...anything but clear to the average taxpayer," Shulman said. Most taxpayers want to pay what they owe and understand the benefits they are entitled to, according to Shulman. Instead, they can be tripped up by the system and face unpredictable tax bill swings from year to year. One year, you might be eligible to claim a tax credit, Shulman added. But the next year, the credit might expire or there might be a change that will "knock you out of the eligibility box." In his speech, Shulman offered five simple, common-sense observations and considerations when it comes to the tax code.

1. Have common or standardized definitions. "Perhaps nowhere else in the world do the same words have so many definitions than in the U.S. Tax Code. It would make Webster weep," proclaimed Shulman. As an example, he referred to the non-standardized definition tax code definition of a "qualifying child."
   
   There are different definitions for various tax-related benefits involving children, such as the child tax credit, the dependent care credit, the dependency exemption and the earned income credit. Shulman complained that it's both mind-numbing and exasperating. For example, a child must be under age 17 to allow you to claim the child tax credit. But for the dependency exemption, the child must be under age 19 or 24 if the child is a full-time student. And still other rules apply to the dependent care credit.
   
   
2. Eliminate multiple approaches and follow just one. The Internal Revenue Code has become much more than a system for paying tax on money you make. Over time, it has become a way for Congress to create incentives to encourage or discourage certain behavior. One prime example is promoting higher education. Shulman opined that it is certainly a worthwhile and laudable goal. But the tax code is peppered with different and overlapping credits and deductions which often promote the same agenda.
   
   IIn fact, Senate Finance Committee Chairman Max Baucus stated at a hearing this year on tax incentives that there are more than 15 tax code provisions assisting with the rising costs of higher education. The sheer number of options, and choosing between them, often overwhelms taxpayers. Shulman argued that policy makers should pick one tax benefit for any given goal, such as promoting higher education. "If down the road, you need to make modifications, modify that one benefit or create a new one and eliminate the old one," he added. "Don't create multiple benefits trying to accomplish the same thing."
   
   
3. Resist the temptation to enact short-term provisions that may expire but are then extended. This has an enormous unsettling effect on both clarity and stability. Last year, the Joint Committee on Taxation identified more than 130 tax provisions that were set to expire at the end of 2010, with another 65 due to "sunset" at the end of 2011.
   
   The most visible example of these short-term extensions is the Alternative Minimum Tax (AMT). For each year, Congress has enacted an 11th hour "patch" -- a minor, short-term adjustment that generally reflects inflation -- to prevent more middle-class taxpayers from being caught by the AMT. This causes instability and uncertainty among taxpayers who can't plan ahead.
   
   For businesses, an example of an unpredictable tax break is the Research and Experimentation (R&E) tax credit. In the past 30 years, it has been extended 14 times, many of those retroactively. "Such persistent uncertainty about the future availability of the R&E credit diminishes its incentive effect," Shulman explained because businesses don't know if they can depend on it when making decisions on future investments.
   
   
4. Set effective dates far enough ahead to allow implementation to proceed smoothly and create a real incentive. Appropriate lead time helps the IRS educate the public, establish customer service operations and implement compliance systems so taxpayers don't "game the system."
   
   In 2010, the IRS actually delayed the opening of tax filing for 6.5 million Americans, from January 14 to February 14, because of late-breaking tax law changes. That meant that 6.5 million people --- including schoolteachers who could claim deductions for classroom supplies they paid for themselves -- had to wait an extra month for their refunds.
   
   
5. See the big picture. In spite of negative perceptions, Shulman believes the tax code contains a lot of sound policy that has benefited millions of Americans. Although many taxpayers miss opportunities to claim a deduction or credit because of complexity, others are happy to have more money in their pockets because of them.
   
   "In the end, I think you could posit that a simpler system could better further policy goals by having a more involved and engaged taxpayer base that would take advantage of incentives to which they are entitled," Shulman said. The IRS Commissioner concluded his remarks by challenging our nation's leaders to meet this goal.