Editor: John L. Miller, CPA
In the second of a two-part piece, this item outlines the recommendations of Nina Olson, the national taxpayer advocate, for legislative reforms to the Code as presented in her annual report to Congress. Part I, in the July issue, recapped Olson’s recommended changes within the IRS.
The main message of the national taxpayer advocate’s legislative recommendations is “Simplify.” Olson requested the repeal of the alternative minimum tax (77% of the additional income subject to the AMT stems from the disallowance of dependency deductions and state and local taxes) and the elimination or reduction of sunset provisions and phaseouts that hinder tax planning, including the misestimation of interim tax payment requirements. These simplifications could be offset with higher marginal tax rates.
She then recommended that Congress simplify existing portions of the Internal Revenue Code in which several disjointed tax treatment choices are available to individuals. For example, the numerous family status provisions could be simplified by consolidating them into two categories: (1) a refundable family credit to reflect the costs of maintaining a household and raising a family and (2) a refundable worker credit as an incentive for low-income individuals to work. The 11 education tax incentives could be simplified by uniformly defining common terms, income-level thresholds, phaseout ranges, and inflation retirement tax incentives could be streamlined by uniformly establishing eligibility rules, contribution limits, taxation of contributions and distributions, withdrawals, loan availability, and portability. The numerous pension plan provisions could be consolidated into a single retirement plan for each of three categories: individual taxpayers, plans offered by small businesses, and plans offered by large businesses. (Plans for government agencies would conform to either the second or third category, depending upon their size.)
In addition, Congress could simplify the treatment of cancellation of debt. Financially distressed individuals are often unaware that cancellation of debt income (CODI) can increase their tax liability. While exceptions exist, reporting under an exception is complex and requires filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with the tax return (a form with which many tax preparers are unfamiliar). Hence, some taxpayers unnecessarily include canceled debt in gross income, and others who fail to include excepted income face unnecessary exams and assessments. Olson’s main recommendation in this area is to change the law to provide that CODI is not includible in gross income unless the total amount of CODI attributable to the taxpayer from all sources exceeds a certain threshold for the tax year.
The problem in distinguishing between independent contractor and employee status also needs to be addressed. Olson recommends:
- Replacing Section 530 with a provision applicable to both employment and income taxes with corresponding industry guidance;
- Developing an electronic tool that employers could rely on to determine worker classification;
- Allowing both employers and employees to request classification redetermination; and
- Additional IRS outreach campaigns to increase awareness of the rules.
Two additional law changes are recommended: (1) allowing self-employed health insurance premiums to be a deduction for AGI on Schedule C, which reduces self-employment taxes and is consistent with the treatment of insured wage-earning taxpayers, and (2) allowing the amount of charitable mileage deduction to be set by the IRS rather than by the Code, consistent with the setting of the standard mileage allotment for business expenses.
Olson recommends 11 common-sense penalty reforms as a starting point for simplifying the 130+ civil tax penalties, and she emphasizes a legislative need to temper Sec. 6707A, which requires that a penalty must be imposed where a taxpayer fails to make disclosures of listed transactions. This stiff penalty is particularly a problem in cases in which the taxpayer derives no tax savings from the transaction or is unaware the transaction is listed, or the transaction was initially not listed and the initial return was properly filed before the transaction was subsequently retroactively listed. Olson requests that Congress modify the tax law to allow the IRS to (partially) abate this $100,000 (or more) penalty to be proportional to the amount of tax savings realized, lest the penalty, in itself, bankrupt some middle-class families. (In July 2009, Commissioner Douglas Shulman notified Congress that the IRS was suspending collection enforcement activities in cases where benefits from a listed transaction are less than $100,000 for individuals or $200,000 for other taxpayers in order to give Congress time to enact legislation modifying the penalty. However, this suspension was scheduled to run only through September 30.)
Olson strongly recommends that Congress provide an exception to Rev. Rul. 2007-51, whereby the IRS may reduce refunds and credit carryback adjustments to satisfy unassessed tax liabilities. Allowing this ruling to remain intact allows collection prior to assessment, at least from corporations, which would appear to undermine the taxpayer’s right under Sec. 6212 to challenge a proposed deficiency prior to assessment.
Olson also recommends several legislative proposals that would change the way the IRS interacts with taxpayers and their representatives. These proposals include:
- Enabling more flexible tax refund delivery options, including the use of stored value cards for taxpayers without bank accounts;
- Forbidding pressure from the IRS on taxpayers to waive their levy rights as a condition of accepting a taxpayer’s offer in compromise or installment agreement; and
- Allowing the mailing of duplicate notices to credible alternate addresses in cases in which taxpayers have moved but have not yet notified the federal government or the U.S. postal service.
The problems in our tax system for which the national taxpayer advocate recommends legislative action range from severe and possibly constitutional in nature to common sense. Some additional recommendations, such as the termination of private debt collection practices, have already been announced and implemented as of this writing. In addition, Olson recommended several substantive changes within the IRS organization outlined in the last Tax Practice and Procedures column, on p. 483 of the July 2009 issue. The full text of the national taxpayer advocate’s report is available at www.irs.gov/advocate/article/0,,id=202276,00.html.
10 Most Litigated Issues
- Disputes over whether payments must be included in gross income, especially damage awards and foreign earned income
- Appeals of collection due process, especially lien and levy actions
- Contest of IRS summons of books and records
- Trade or business expenses
- Accuracy-related penalty
- Civil damages for unauthorized collection actions
- Failure-to-file penalty and estimated tax penalty
- Relief from joint and several liability for spouses due to procedural issues, taxpayer knowledge, and, in declining numbers, jurisdictional issues
- Frivolous issues penalty
- Family status issues
Note: Ten tax issues most litigated in federal court, as identified by the National Taxpayer Advocate in her 2008 Annual Report to Congress.
John Miller is a faculty instructor at Metropolitan Community College in Omaha, NE. Valrie Chambers is a professor of accounting at Texas A&M University in Corpus Christi, TX. Mr. Miller and Ms. Chambers are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For further information about this column, contact Mr. Miller at email@example.com.