All of us here with Citizens for Tax Complexity would like to commend the IRS, or as we like to think of it the Benevolent Bureaucracy, for extraordinary success in the face of difficult times. The total penalties collected by the IRS in 1999 were $7.5 billion. In 2011, just twelve years later, that figure zoomed to $19.9 billion. This is an incredible rate of growth given that the country suffered through two recessions, two wars and a stock market meltdown that rivaled the worst in our nations history. The IRS is to be congratulated for staying true to its priorities during such challenging times.
If you were compliant enough to avoid being penalized by the Benevolent Bureaucracy, you owe a debt of gratitude to the IRS for increasing civil penalties on other taxpayers. These penalties enlarged the nation's coffers by $12.4 billion more in 2011 than in 1999 without relying on any tax increase, just increased penalties. This alternative source of revenue offset what we, as taxpayers, had to pay in 2011. How is that for Benevolent?
The penalties assessed by the IRS have increased in value and importance over time. Washington does not leave them to chance. To assure that tax complexity would thrive during the first decade of the 21st millennium countless changes have been made to the four key publications used by our government to explain your tax obligations:
- The Internal Revenue Code (IRC), sometimes called Title 26, as authored by Congress,
- Treasury Regulations authored by the U.S. Treasury Department to interpret the IRC and provide procedural guidelines
- Revenue Rulings which are the IRS's interpretation of the IRC in certain situations and
- IRS Publications, summaries of the IRC authored by the IRS to provide simplified explanations of the code, but unfortunately they are not recognized as tax law and may not hold up in court for your defense
There are many disparate estimates of the size of the federal tax code. According to CCH Standard Federal Federal Tax Reporter it has grown since 1913 from 400 to 73,954 pages. The federal code has been described as seven to ten times larger than the Bible and four times the size of War and Peace. Regardless of the measure, you may rest assured that it is big and it is growing because complexity leads to confusion and confusion leads to mistakes and mistakes lead to penalties and penalties lead to increased revenue for the federal government.
As Albert Einstein said, "The hardest thing in the world to understand is the income tax." While he may not have said so at the time, I suppose Mr. Einstein intended to conclude his comment with, "...as God intended."
Nina E. Olson, National Taxpayer Advocate, probably would not agree that God intended taxes to be complex and to increase in complexity over time. In her 2010 Annual Report to Congress, Ms. Olson said, "The most serious problem facing taxpayers – and the IRS – is the complexity of the
Internal Revenue Code." She literally ranked complexity as the most serious problem of the twenty problems that she was required to report that year. Her entire 2010 report is available for your review..
As the National Taxpayer Advocate, Ms. Olson heads the Taxpayer Advocate Service (TAS), an agency within the IRS tasked with helping taxpayers who can't get satisfaction with their tax issues through normal IRS channels. She is required by law to make an annual report to Congress and in it to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.
In her 2010 report Ms. Olson went on to describe tax complexity in terms of labor required to comply with tax filing requirements. She reported:
A TAS analysis of IRS data shows that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements. To place this in context, it would require more than three million full-time employees to work 6.1 billion hours, making “tax compliance” one of the largest industries in the United States. Tax law complexity imposes monetary costs on taxpayers as well. About 60 percent of individual taxpayers pay practitioners to prepare their returns, and another 29 percent use tax software to assist them.
Ms. Olson's observations about the complexity of the tax code were not news to Congress. Congress had painstakingly created every word of tax law over two centuries. It stands as a masterpiece. A tribute to our form of government... of the people, for the people, by the people.
In 2010 Ms. Olson presented her tenth annual report. She had mentioned the complexity of the tax code every year on her list of top twenty problems. She also had the temerity to suggest ways to fix the problem of complexity. It is this kind of rebellious thinking that makes one wonder how she was ever appointed to a government post. Can't she see that we have the best tax system that money can buy?
Of course complexity is increasing. Congress knows this. Of course this causes confusion for taxpayers, professional tax preparers, tax attorneys and employees of the IRS. Congress knows this. Confusion causes errors. Congress knows this. Errors can be penalized. Congress knows this. The Benevolent Bureaucracy collects additional revenue in the form of penalties without increasing tax rates. Congress loves this!
Why doesn't Ms. Olson get it? Complexity is how we all win; citizens, politicians and bureaucrats. Our country is built on federal tax complexity. Even in her own words Ms. Olson said, “...tax compliance is one of the largest industries in the United States." Does she think it would be that big without the benefit of complexity? Would she have us close down one of our largest industries? COMPLEXITY IS GOOD! (As long as we are not among the unfortunate souls who must pay the penalties.)
In conclusion, I believe that we have reasonably verified that the Internal Revenue Service (IRS):
- deliberately increases civil penalties assessed to some U.S. taxpayers
- makes the tax code more complex as a means to accomplish point #1
- is competent at its task of increasing revenues despite difficult economic times
- has built one of the largest industries in the country
- is truly a Benevolent Bureaucracy for taxpayers who avoid penalties
Thank you for your attention,
Citizens for Tax Complexity