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Code has become far too complicated, official says in report to Congress

Lawmakers need to overhaul the tax code completely to reduce the "significant, even unconscionable, burden" placed on taxpayers just to file a tax return, the Internal Revenue Service's ombudsman told Congress on Wednesday.

In her legally required annual report to Congress, the national taxpayer advocate, Nina Olson, estimated individuals and businesses spend about 6.1 billion hours a year complying with tax-filing requirements. That adds up to the equivalent of more than 3 million full-time workers, or more than the number of jobs on the entire federal government's payroll.

And filing is only becoming more complicated as lawmakers haggle over new tax breaks.

Since 2001, Congress has made nearly 5,000 changes to the U.S. tax code, or more than one a day on average. Nine in 10 taxpayers now pay money, for professional preparers or often-expensive commercial tax software, to figure out how much money they owe the government.

One of the advocate's suggestions for streamlining the tax code was to repeal the alternative minimum tax, a parallel tax system intended to make sure rich Americans pay a fair amount in taxes, which is increasingly engulfing middle-class taxpayers.

Another was to reduce the number of income exclusions, deductions and credits, known collectively as "tax expenditures," that clutter up the tax code.

For the current fiscal year, the Joint Committee on Taxation has estimated these tax expenditures total about $1.1 trillion, whereas individual income tax revenue will be about $1.4 trillion.

The national taxpayer advocate, an independent position with the IRS that Congress created to assist taxpayers in resolving problems, also criticized Congress' recent budget cuts to the IRS.

On a budget of $11.8 billion in the 2012 fiscal year, the IRS collected $2.52 trillion, meaning it brought in $214 for every dollar it spent. On the margin, the IRS is estimated to bring in about $7 for every additional dollar it spends or, put another way, it costs the federal government $7 for every dollar that is cut from the IRS' budget. The IRS will receive even less money if Congress allows across-the-board spending cuts to materialize in March as currently scheduled.

"It is ironic and counterproductive that concerns about the deficit are leading to cuts in the IRS budget, when those cuts are making the deficit larger," Olson wrote. "No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors."


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