Tax Reform Simplification to Ease Filing Burdens

The House Ways and Means Oversight Subcommittee held a hearing yesterday about taxpayers’ experiences dealing with the Internal Revenue Service. Many of the problems discussed included poor taxpayer services, such as long hold times on phone calls, fewer taxpayer assistance centers, and distressing ordeals with audits and dispute resolutions. Sadly, these are not new phenomena. National Taxpayers Union and NTU Foundation have tracked the IRS’s taxpayer service woes since the 1990s. Simplification of tax laws through the Tax Cuts and Jobs Act (TCJA) will bring relief for millions of taxpayers.

The primary challenge facing taxpayers—as well as the IRS—is our convoluted and overly complex tax code. Filers often find it hard to make sense of the forms and schedules, let along keep up with the changes flowing from administrative regulations and judicial rulings that interpret or clarify provisions of the tax law. This also presents problems for the administrators and enforcers of the system. To minimize abatement costs for dispensing inaccurate information, the IRS now limits the type of advice it provides to taxpayers. Entire areas of tax law have been declared “out of scope” via telephone assistance and in the assistance centers. This helps explain why 90 percent of filers use a paid service to do their taxes.

TCJA will make it much easier for millions of Americans to file their taxes by nearly doubling the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. Currently 30 percent of filers itemize their taxes. With the higher standard deduction the number of filers itemizers will drop to less than 8 percent, meaning over 30 million taxpayers will save time that was previously spent organizing receipts and records. Moreover, the higher standard deduction, combined with the new brackets, means that many more low-income filers will see their income tax bill reduced or, for many, wiped out.

The bill also targets the Alternative Minimum Tax, which forces many filers with complex returns to calculate their taxes a second time under a separate system of rules and deductions. The House-passed bill eliminated it. The Senate version kept it, though raised the threshold so that fewer taxpayers would be impacted by the double-filing system. According to reports on the conference bill, the AMT is preserved, but the thresholds are increased to exclude all but the very top income earners.

Additionally, the reform will bring compliance relief from the estate tax. Currently, the number of estates that are assessed the estate tax is relatively small: 12,411 estate tax returns were filed in 2016. But because of the resources in time and money devoted to planning avoid or minimize the estate tax, just 58 percent of those 2016 returns were taxable. Family-run business owners reported that they “incurred an average of $74,940 in insurance for estate taxes, [and] an average of $170,800 in other estate tax planning costs.” While the House voted to eliminate the estate tax, the new conference agreement follows the Senate’s approach to preserve it and increase the threshold so that it will impact fewer taxpayers.

Final passage of the TCJA will cap off a monumental effort to reform the tax code. But this won’t be the end of the process. The IRS will be presented with new challenges implementing tax reform legislation once it is passed. There will be congressional oversight as this progresses, building on the series of hearings held over the past few years related to IRS reform. This will also present the opportunity to address other lingering problems at the agency, such as its antiquated technology systems built on technology from the 1950s. Its record systems are also often fragmented, which can make it difficult to get in touch with the personnel at the IRS who have proper access to the files of a taxpayer calling in with a problem.

There are also problems of tax laws that couldn’t be addressed in the TCJA due to the Senate’s Byrd Rule constraints, including reforms to or repeal of the Foreign Account Tax Compliance Act, which imposes onerous reporting requirements on Americans living overseas. Congress should also follow up this historic effort on the TCJA by considering the reforms in proposals like H.R. 3320, the Preserving Taxpayers' Rights Act, to protect taxpayers who are trying to resolve disputes with the IRS.

Lawmakers should also look at ways to secure taxpayer rights by setting up a permanent process to regularly review the tax code … so that taxpayers won’t have to wait another thirty years before the next comprehensive overhaul of the tax code.