Tax Reform: Five Priorities to Remember

It seems as if tax reform has been a hot topic of discussion for years. It is fair to ask whether it will ever happen, and right now no one knows the answer. The 114th Congress faces a number of unanswered questions:

• Does Congress have the will to address the challenging policy issues that comprehensive tax reform requires?
• Can the Republican-led Congress and President Barack Obama agree on reform that is revenue-neutral or one that raises revenue?
• Will any reform be comprehensive or only include business reform?
• Will dynamic scoring make it easier or more difficult to accomplish tax reform?
• Will the new leadership of the Senate Finance Committee and the House Ways and Means Committee offer fresh approaches or use existing tax reform proposals?
• What impact will the upcoming 2016 presidential election have on the process?

These are all challenging questions, but each will need to be answered if tax reform is to move forward.

The AICPA has been at the forefront of the tax reform process since 2011, when the Tax Reform Task Force was organized. The AICPA has commented on all of the major tax reform proposals, offered many suggestions to the tax-writing committees, and had countless meetings with congressional staff to discuss issues, ideas, and the direction of tax reform. As a new Congress begins a fresh look at tax reform, the Institute intends to stay engaged in the process and advocate on issues of particular interest to CPAs.

So, as this process begins again, five areas deserve strong consideration in tax reform:

Simplicity: It would be natural to assume that a key purpose of tax reform is to simplify the Internal Revenue Code by imposing a rate structure free of surtaxes and phaseouts, but that is not the case with a current proposal. The Tax Reform Act of 2014 (proposed by former House Ways and Means Committee Chairman Rep. Dave Camp, R-Mich., who is now retired from Congress) includes a 10% surtax for high earners along with a number of phaseouts. In comments on Camp’s proposal, the AICPA suggested that Congress adopt a simplified rate structure with no surtaxes and use a consistent definition of taxable income without using phaseouts.

Surtaxes are complicated and confusing and lack transparency, similar to the alternative minimum tax (AMT) in the current system. Phaseouts that limit or eliminate the use of certain deductions and exclusions in the application of the top tax bracket unfairly create marginal tax rates higher than the statutory rate. Practitioners often have to explain to clients that their true tax rate is greater than the stated rate, due to things such as phaseouts of itemized deductions, the AMT, and the 3.8% net investment income tax. If true tax reform is to happen, the need for simplicity must be remembered and not sacrificed to accomplish political goals.

Transparency and visibility: Taxpayers should know that a tax exists and how and when it is imposed on them and others. Many of the changes in prior proposals, most notably repeal of the AMT, would make the tax system more transparent. It is important for an effective tax system and informed citizenry that taxpayers understand the tax system and how it affects them. The Code must provide clarity, so that taxpayers can understand the tax consequences of their actions. Transparency also helps improve voluntary compliance.

Administration and compliance: The AICPA has consistently supported and remains committed to tax reform that results in a simpler, more easily administered tax system. The AICPA’s Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals advocates for a tax system based on principles such as equity and fairness, certainty, economy of collection, economic growth and efficiency, and neutrality. These principles are grounded in improving the functioning of the tax system to ensure that it efficiently and effectively meets the expected levels of government services that citizens demand.

Throughout the tax reform process, the AICPA has advocated for eliminating terms in the Code that have similar meanings but lead to vastly different tax consequences. For example, the Code contains numerous definitions of “modified adjusted gross income.” Likewise, the Institute supports eliminating from the Code deadwood provisions that no longer serve any useful purpose. A tax reform process that clarifies inconsistent terms and removes deadwood provisions would make the Code more administrable.

Education reform: The Code currently contains more than a dozen education-related incentives with varying requirements, eligibility rules, definitions, and income phaseouts. The complexity of these provisions prevents thousands of taxpayers from claiming tax benefits to which they are entitled or that are advantageous to them. It can be daunting for practitioners to analyze the interplay among the three available credits (each with a different definition of qualifying expenses), the education deductions, the qualified tuition programs, and the education savings bond program to determine the best outcome for clients.

The AICPA has proposed harmonizing and simplifying these provisions by creating one credit to replace the three existing credits, making the credit “per student” rather than “per taxpayer,” making the credit available for six years of post-secondary education instead of four years, and making the credit 100% refundable. A number of bills were introduced in the last Congress to reform the Code’s education provisions, but none were enacted.

Identity theft: Everyone is aware of the impact that identity theft is having on the tax system and taxpayers. The Treasury Inspector General for Tax Administration (TIGTA) has estimated that millions of fraudulent returns go undetected by the IRS every year, resulting in the issuance of potentially billions of dollars in fraudulent tax refunds (see Detection Has Improved; However, Identity Theft Continues to Result in Billions of Dollars in Potentially Fraudulent Tax Refunds, TIGTA Rep’t No. 2013-40-122, available at www.treasury.gov). Taxpayers victimized by tax-related identity theft must wait several months to have their issues resolved and receive their proper refunds. This is frustrating for both the taxpayer and the IRS. Additionally, the IRS is devoting a significant portion of its enforcement budget to combating identity theft—money that could be much better spent on other IRS priorities.

The AICPA has consistently supported creating a single point of contact at the IRS for identity theft victims, enforcing a criminal penalty for misappropriating a taxpayer’s identity in connection with tax fraud, extending the IRS’s authority to allow truncation of Social Security numbers, expanding the use of identity protection personal identification numbers (IP PINs), and increasing the availability of real-time filing of tax returns. Including identity theft provisions in tax reform would aid taxpayers, save the federal government money by preventing the issuance of billions of dollars in fraudulent refunds, and reduce pressure on the IRS budget.

In summary, as the 114th Congress addresses the need to reform the Code, it will face competing pressures from businesses, individuals, lobbyists, and many others. Keeping its focus on creating a simpler, more transparent, and administrable tax system will be a challenge but is necessary to achieve true tax reform.