On the subject of taxpayer advocacy, the National Taxpayer Advocate delivered it’s annual report to Congress last week. Which actually turns out to be quite an eye-opener for a number of reasons.

The report’s number one recommendation was the need for tax reform in tax administration.

Additionally, the lack of resources for the IRS was raised in terms of the agency’s inability to both serve taxpayers and effectively collect revenue to the detriment of the fisc. The extent of the inadequacy was termed to be chronic by the Advocate Nina E Olsen.

Significant in the report was the complexity of the Internal Revenue Code and the report urges Congress to simplify it.

“The existing tax code makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns… it obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay; it facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities …” Ms Olson cited in the report.

The citation voices many dynamics going on in United States taxation including the fiscal cliff, FATCA and the GFC.

Some interesting stats came out of the report including the following:

  • almost 5,000 changes to the tax code since 2001
  • almost 60% of taxpayers hire paid preparers
  • another 30% rely on commercial software
  • individuals and businesses spend about 6.1 billion hours a year complying with filing requirements
  • tax rates could be cut by 44% if the system were simplified by the removal of deductions, credits, exemptions (tax expenditures).

Other key issues addressed in the report include failure to compensate taxpayers who fall victim to preparer fraud, a high audit rate of taxpayers claiming the adoption tax credit, and…

the voluntary disclosure programs and the IRS’ failure to distinguish between tax evasion and inadvertent failure to file.

The report refers to ‘bad actors’ and ‘benign actors’.

Now, this is quite fascinating personally to read as I had always thought that was the case!

The OVDI and OVDP programs never distinguished or had separate provisions to encourage taxpayers who inadvertently failed to file to come forward under the program. All were tarred with the same brush as far as penalties and interest go, up to 75% of the value of undisclosed financial accounts.

The report refers to undue burden and fear among taxpayers who had reasonable cause for not filing the FBAR, Form TD F 90-22.1.

There have been three rounds of voluntary disclosure since 2009 under different programs.

Further information is available on the Annual Report.