Simplify the tax code to solve the IRS mess


JThe deadline for filing federal income taxes this year is April 18. Hopefully your return is simple and you won’t need help from the Internal Revenue Service. The tax agency has been plagued by appalling phone service, stacks of unopened mail, backlog processing and an increasing number of taxpayer disputes, as described in a recent report by the Taxpayer Advocate.

The Government Accountability Office has released a new report highlighting the IRS’ problems during last year’s filing season:

  • More than 10 million declarations had still not been processed by the end of the year. [p. 11]
  • The number of returns withheld for error soared to 35 million, 86% more than normal. [p. 12] Most of the errors came from reliefs and grants, including child credits, clawback credits, and earned income credits. [p. 13]
  • The IRS incurs skyrocketing interest charges due to its late processing. [p. 21]
  • Phone calls to the IRS soared to 195 million from 39 million in 2019. [p. 27]
  • The IRS only answered 15% of taxpayers’ phone calls. [p. 27]. An incredible 160 million people called but couldn’t get through. [p. 28]
  • The inventory of unanswered written taxpayer requests exploded. [p. 27]
  • Finally, “taxpayers experienced a whirlwind of confusion when they asked for help with their delayed refunds.” [p. 54]

The pandemic can be blamed for some of that, and the IRS blamed for mismanagement and outdated computer systems. But the main culprit is Congress, as I’ve explained here. It keeps passing tax breaks and subsidies that are difficult to administer and generate millions of errors. Recent provisions such as the expanded child tax credit come on top of existing reliefs such as the EITC, which has an abusive payment rate of 24%. The Taxpayer Advocate states that “the main cause of the irregular payment rate of the EITC is the complexity of the rules”.

The serious administrative problems associated with these breaks and the current IRS mess should signal to policymakers that the tax complexity is spiraling out of control. But President Biden’s Build Back Better (BBB) ​​proposal included dozens of new and expanded breaks – for low-income housing, new markets, economic activity of possessions, electricity generated from renewable resources , solar installations, alternative fuels, electrical transmission property, carbon sequestration, nuclear power generation, aviation fuel, clean hydrogen, non-commercial energy property, energy efficient residential property, energy efficient commercial buildings, energy efficient homes, conservation, wildfire mitigation, plug-in electric vehicles, commercial electric vehicles, fuel cell vehicles, alternative fuel refueling property, electric bicycles, advanced energy projects, insulation installation, manufacturing investment, manufacturing production advanced, justice environmental protection, clean electricity generation, clean electricity investment, clean electricity investment for low-income communities, clean fuel production, public university research infrastructure, and compensation for local journalists.

These are just a few of the tax breaks offered by Biden. Each provision would require regulations on eligibility, rates, limits, and other specifications. Each would generate errors and disputes between the IRS and taxpayers. Each would spawn new ways to defraud the government. The IRS and accounting firms should invest resources in learning more about e-bikes, wildfire mitigation, and more.

In addition to the BBB’s proposals, the president proposed a 120-page series of convoluted tax hikes as part of his recent budget. Overall, Biden’s fiscal policy is a crazy mix of inconsistent hikes and narrow breaks. The proposed business tax hikes would jeopardize investment in the same activities targeted by the new cuts, such as renewable energy. The proposed hike in the corporate tax rate would offshore jobs just as the president is proposing a new “tax credit for moving jobs to the United States.”

Republicans can be counted on to resist Democrats’ tax increases, but they should also push for a major simplification of the tax code. GOP members are generally seen as critics and opponents of the IRS, but a simplification would make the job of the IRS tax administration much easier.

This piece was originally published by the CATO Institute. It is republished with the kind permission of CATO.


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