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 E. Olson, estimated that 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 three 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 United States 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 that 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 I.R.S. that Congress created to assist taxpayers in resolving problems, also criticized Congress’s recent budget cuts to the I.R.S.
On a budget of $11.8 billion in the 2012 fiscal year, the I.R.S. collected $2.52 trillion, meaning it brought in $214 for every dollar it spent. On the margin, the I.R.S. 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 I.R.S.’s budget. The I.R.S. 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 I.R.S. budget, when those cuts are making the deficit larger,” Ms. Olson wrote in the report. “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.”
The I.R.S. already lacks money sufficient to meet taxpayer needs, the report said. In the last fiscal year, the I.R.S. answered just two-thirds of calls from taxpayers, and the average person who got through had to first spend 17 minutes on hold.
Among the more serious problems for which taxpayers need assistance is tax-related identity theft. This occurs when criminals steal Social Security numbers and then use them to claim other people’s tax refunds, which average $3,000. Stolen Social Security numbers are also used to gain employment under false pretenses.
Tax-related identity theft has risen 650 percent over the last four years, and the I.R.S. had almost 650,000 identity theft cases in its inventory as of Sept. 30, 2012. I.R.S. employees are currently advising identity theft victims that it will take 180 days to resolve their cases.
“The I.R.S. has established numerous task forces and Lean Six Sigma teams focused on improving identity theft processes,” Ms. Olson wrote in her report, which attacked the I.R.S.’s decision to decentralize its identity theft investigation efforts. “Despite all of this attention, victims who need their tax accounts corrected quickly and effectively still face many of the same issues they did five years ago — a labyrinth of procedures and drawn-out time frames for resolution.”
The report criticized other I.R.S. practices, including its failure to provide tax refunds to many people whose preparers initially stole their refunds, and its high audit rate for taxpayers who claim the adoption tax credit.