Tax Simplification Proposals

Concerns over the complexity of the IRC.
BY NICHOLAS FIORE

or many years, the AICPA has found the IRC’s increasing complexity to cause problems affecting taxpayers’ compliance with the tax laws. While it is accepted that in some instances the tax system never can be truly simple, the Institute (among others) has believed some areas are unduly complicated and can be streamlined to enable taxpayers to fulfill their reporting, withholding and payment responsibilities.

The AICPA recently joined forces with the American Bar Association and the Tax Executives Institute to urge that Congress make simplification a continuing priority. In addition, at Congress’s request, these organizations developed a package of simplification recommendations that address many of the complex areas of tax law they believe are in need of reform.

SIMPLIFYING THE TAX CODE

Among the areas highlighted by the group as those in need of simplification:

  • Alternative minimum tax (AMT). While originally designed to ensure that individuals with significant investments in tax shelters do not escape taxation, in its present form the individual AMT keeps millions of middle-class taxpayers from taking advantage of the credits and deductions intended to benefit them. Also, it is extremely complex, requiring many taxpayers to go through the time and expense of performing calculations simply to determine they are not subject to the AMT.
  • Education tax incentives. The code includes at least eight separate education incentives with varying eligibility criteria. These incentives could be streamlined by simplifying the various eligibility criteria or by replacing them with a single education credit or deduction.
  • Capital gains tax. To fine-tune the system of taxing capital gains, the many changes in recent years have caused this area to be extremely complicated, making what seems like a simple determination a very complex one (and one that requires difficult and significant recordkeeping burdens). A good solution would be to establish a single long-term holding period and a single rate for capital assets.
  • Definition of “family.” Eligibility for several tax breaks depends on a taxpayer’s family status. Unfortunately, many provisions governing these breaks define families in different ways. In addition, the area is further complicated by the increasing number of nontraditional family and living arrangements. These definitions should be harmonized or the eligibility requirements should be simplified.
  • Phase-outs. Currently, many tax breaks (exclusions, exemptions, deductions or credits) targeted at lower- or middle-income taxpayers are “phased out” for individuals or families at certain income levels. These phase-outs should be eliminated or made uniform so benefits phase out at similar income levels and work in similar ways.
  • Independent contractors. Businesses must apply a 20-question test to decide whether workers are employees or independent contractors. This determination can have serious tax and pension implications. There should be an objective test for worker classification, or the differences in the tax treatment of employees and independent contractors should be reduced.
  • Capitalization vs. expensing. The tax treatment of some business expenditures depends on whether they are classified as business expenses (in which case they are currently deductible) or capitalized (in which case they are either deducted as the asset depreciates or when the asset is sold); the question is whether the expenditure produces a “future benefit.” This determination is rarely obvious or easy; indeed, according to the U.S. national taxpayer advocate, it is the most litigated issue of business taxpayers. An objective, more easily administered test should be created.

For further discussion of the group’s simplification efforts, see the DC Currents column in the May 2000 issue of The Tax Adviser.

—Nicholas Fiore, editor
The Tax Adviser

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