I recently read this year's report to Congress by the National Taxpayer Advocate, the independent, government-paid watchdog for us average taxpayers. I can only hope members of Congress also read it.
The National Taxpayer Advocate, Nina Olson, offers numerous examples of how our tax system is failing — and how that could lead to a devastating loss of trust.
“This is no way to run a tax system,” Olson wrote.
For example, the Internal Revenue Service last month gambled that Congress would patch the Alternative Minimum Tax and programmed its computers based on that “risk-based” assumption. Had Congress failed to act on the Alternative Minimum Tax, the start of the filing season would have been delayed until at least late March, the report said.
“That would have brought about the most chaotic filing season in memory,” Olson wrote.
Olson's biggest complaint — again — was the bewildering complexity of our tax code, which leaves ordinary taxpayers perplexed about how their taxes are computed or even what their tax rate is.
At the same time, sophisticated taxpayers game the system to avoid taxation, the report said. The nearly 4 million-word tax code is changed, on average, once a day, the report said.
Meanwhile, the IRS estimates it is failing to collect about $400 billion a year that is owed, the report said.
So, it's not surprising that only 16 percent of business people surveyed last year by the Taxpayer Advocate's office believe the nation's tax system is fair; just 12 percent think taxpayers pay their fair share.
Such a lack of trust in the system we use to fund our government was “profoundly disturbing,” Olson wrote.
As she has for more than a decade, Olson called for repeal of the Alternative Minimum Tax, created years ago to ensure that wealthy people paid at least some tax. The AMT, repeatedly patched and altered by policymakers, has boosted the taxes of many middle-class and upper middle-class taxpayers, while most wealthy taxpayers avoid it, and thousands of millionaires pay no taxes whatsoever, the report said.
The report notes that cutting funding for a revenue center — in this case, the IRS — is shortsighted. The IRS, which produces $7 for every $1 spent, has experienced budget cuts along with other agencies, the report said. But the IRS commissioner estimated that cuts in IRS funding will ripple through the government, producing fewer dollars for defense, infrastructure, intelligence, medical research and more.
The agency already appears to be nearly overwhelmed by its task. More than 30 percent of taxpayer phone calls to the IRS go unanswered, and callers lucky enough to reach someone waited an average of 17 minutes. Next year, the agency has set a goal of answering 63 percent of taxpayer calls — a decrease from the previous year's lackluster performance.
There are more examples in the lengthy report:
The IRS spent $57.9 million on wasted printing and postage in 2009 because 10 percent of the mail it sends to taxpayers is returned as undeliverable. Meanwhile, the clock on many taxpayer rights and limits starts running when the IRS mails its letter — whether or not the letter reaches its intended recipient.
Taxpayers who adopt a special-needs child who is a member of an American Indian tribe cannot claim a $10,000 special needs adoption credit. The credit requires certification from a state that the adopted child has special needs, but tribes, which have exclusive jurisdiction regarding tribal children, do not fulfill that requirement under current tax law.
The difficulty and confusion among international taxpayers about what, if anything, they owe contributed to a sixfold increase in the number of people who voluntarily surrendered their U.S. citizenship between 2008 and 2011.
The report, couched in the jargon of bureaucracy, is no page-turner. But it will keep you awake at night.
To read the National Taxpayer Advocate's report to Congress, go to taxpayer