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Outlook: The Opportunities within Tax Reform

May 5, 2017

The White House recently released a widely anticipated tax reform outline.

The proposal was light on details, though not inconsistent with individual and corporate tax reform promises from the campaign.

On the individual side, three income tax brackets would replace the current seven while the 3.8 percent net investment income tax (an Affordable Care Act pay-for that applies only to investment income of those earning over $200,000 per year), the alternative minimum tax (AMT), and the estate tax would be no more. Standard deductions would increase dramatically and only two itemized deductions (charitable deductions and home mortgage interest) would remain.

On the business side, the proposal decreases the corporate rate, reducing it to 15 percent for businesses of all sizes (including partnerships and pass-throughs).

The proposed outline raises two high-level observations. The first one is obvious—tax reform is going to be a heavy lift, and legislators will need a committed partner at the other end of Pennsylvania Avenue.

The less obvious observation is that the White House proposal provides an opportunity to ask what issues should be part of the tax reform conversation. We suggest examining these three areas:

  1. Taxpayer burden—today’s tax code is undeniably complicated and the burden to comply is borne by taxpayers. The burden is pervasive (for instance, multiple definitions of a child, education incentives, and retirement incentives; corporate and individual AMT; and foreign account reporting requirements) and not trivial.
  • IRS National Taxpayer Advocate Nina Olson in her 2016 Annual Report to Congress stated that since the last tax code overhaul in 1986, “the code has grown more complex by the year, as evidenced by the fact that Congress has made more than 5,900 changes to the code—an average of more than one a day—just since 2001.” She continues, “The compliance burdens the tax code imposes on taxpayers and the IRS alike are overwhelming.”
  • Taxpayers have the burden of proof (they must show their return is correct rather than the IRS proving it is wrong), which is unbelievably stressful for the overwhelming majority of taxpayers who want to prepare an accurate return. The fact that the current tax code includes some 170 penalty provisions, many of which are rarely assessed, doesn’t help matters.
  1. IRS reform—taxpayers and tax professionals alike rely on the agency to help inform, educate, and assist us and to maintain a fair, credible enforcement presence. The agency sits on a treasure trove of tax information that it must keep secure and is asked every filing season to prevent billions of dollars of fraudulent refund requests. While demands on the agency increase, levels of service and performance degrade. Taxpayers—and tax professionals—expect and deserve an agency set up to succeed and that is committed to upholding taxpayer rights.
  1. Minimum standards—more than half of all individual income tax returns are filed by paid preparers, yet the tax code does not explicitly provide minimum return preparer standards. Taxpayers rely on paid professionals yet cannot be reasonably assured that the person preparing their returns knows what he/she is doing. That’s why it’s critical for taxpayers to understand the overall competency of their preparer.

Where we land when this shakes out is up to Congress and the administration; however, the need to reduce taxpayer burden, refocus the IRS, and protect taxpayers from the incompetent and unscrupulous is real and pressing. Our CEO has said this before, and we will continue to echo this throughout the coming tax reform debate.

 

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