AICPA, united with others, urges Congress to simplify Code.

The AICPA recently joined forces with the American Bar Association (ABA) Section of Taxation and Tax Executives Institute (TEI) to urge that major simplification of the tax laws be an urgent and continuing priority of Congress. The three organizations held a joint press conference on Feb. 25, 2000, in Washington, DC, to release a package of recommendations that, if enacted, would bring about meaningful tax law simplification.

David A. Lifson, chair of the AICPA Tax Executive Committee, explained, "The impetus for this first-time joint effort of the three organizations came from an April 15, 1999 hearing of the Senate Finance Committee. The AICPA testified with both the ABA Tax Section and TEI. Our respective testimony highlighted many of the same complex areas of law in need of reform. Senator Roth challenged the three organizations to work together and develop an agreed-upon package of simplification recommendations to address these and other complex areas of law."

Mr. Lifson stated, "We are particularly pleased to have met Senator Roth's challenge before another April 15th tax-filing deadline has passed. Now we are issuing a challenge back to Congress--use our package of simplification recommendations as a starting point to create and enact legislation that will reduce the uncertainty and complexity burden imposed on many taxpayers."

For many years, the AICPA has maintained that Congress must give simplification a prominent position in the tax process on an on-going basis. Although it should not take precedence over revenue and tax policy objectives, simplification must be an integral part of the tax legislative, regulatory and administrative process. The Institute recognizes that a tax system that is "simple" for all taxpayers may never be designed, but a "simpler" system is attainable. It will, however, require both a review of current tax law and complexity analysis of new legislative proposals.

Paul J. Sax, Chair of the ABA Section of Taxation, raised the prevalent question at the press conference, "Why would the three leading organizations of tax professionals be advocates for simplification? Don't they make their living from tax complexity?" His response was that tax professionals understand something very important: the tax system is being undermined by complexity. The complexity of the Code is undermining the will of taxpayers to pay their taxes.

Charles W. Shewbridge III, President of TEI, noted that "TEI members know that the tax system will never be truly simple for them and their companies. That's because we live in a complicated, interconnected world. But TEI sincerely believes that the tax code can be simpler for individuals in particular, but also for small businesses, entrepreneurs and large corporations. For this reason, TEI joins with the ABA and AICPA in recommending changes that will benefit not only taxpayers both large and small, but the government as well."

The joint initiative received recognition and praise from both Sen. William V. Roth, Jr. (R-DE) (Chairman of the Senate Finance Committee) and Sen. Daniel Patrick Moynihan (D-NY) (Ranking Minority Member of the Senate Finance Committee). Senator Roth stated, "Simplification of the tax code is one of my foremost goals. I am grateful that the ABA Section of Taxation, the AICPA Tax Division, and the Tax Executives Institute have put so much time and effort into these tax simplification recommendations." Senator Moynihan explained, "We have a problem which Congress must begin to address more earnestly and that is that somehow we have lost legislative pride in the simplicity of our measures. We must reward thoughtful, public deliberation and analysis of our measures, even if it risks passage of the legislation. And we must reward a quest for simplicity. I applaud these groups for their thoughtfulness and continued endeavor to simplify our tax laws."

Drawing from the larger package of simplification recommendations developed by the three organizations, the press conference highlighted "Ten Ways to Simplify the Tax Code." They included:

Scrap the AMT: When the alternative minimum tax (AMT) was originally enacted in 1969, it was aimed at millionaires who paid no income taxes. But it hits an unintended target today--middle-class taxpayers. If not for temporary relief carved into the law late last year, the individual AMT would prevent many middle-income taxpayers from taking advantage of credits intended to benefit them. Unchecked, it will prevent millions of middle-class Americans from taking routine deductions for state and local income taxes within a few years--and is spinning a web of mind-bending complexity to boot. So is the corporate AMT, which requires companies to keep two separate sets of books for tax purposes and has the perverse effect of taxing struggling companies at a time when they can least afford it. Both should be repealed.

Make education tax incentives as simple as the three Rs: The Code includes at least eight different education incentives, including tuition credits, education IRAs and more. However, the eligibility criteria vary from one incentive to the next, and most of them are so complicated taxpayers need a college degree just to determine if they qualify. The Administration's budget for 2001 would further complicate this area (not to mention making it more difficult to administer), by creating new education incentives--and new eligibility criteria. These incentives could be streamlined in a number of ways, such as simplifying eligibility or replacing current tax benefits with a single, universal education deduction or credit.

Streamline capital gain taxes: If a taxpayer plans to buy a share of dotcom stock soon and sell it in a few years, how much tax will he pay on any capital gain from the sale? The question is simple, but the answer is not. If the taxpayer buys it before 2001, for example, the stock can be treated as though it were sold on the first business day after Jan. 1, 2001. If the taxpayer does this, he will be eligible for a special 18% tax rate on the gain. However, the stock must be held for five years first. If the taxpayer holds it for five years, he may also be able to exclude 50% of the gain, which could be a better deal than the 18% rate. Confused? Many taxpayers are. This convoluted provision is just one result of countless attempts to fine-tune capital gain taxes. While each situation in and of itself may be defensible, taken together they make it nearly impossible for taxpayers to understand and the IRS to administer. Capital gains taxes should be simplified by establishing a single long-term holding period for all types of assets and eliminating multiple preferential rates.

What counts as a family? Uncle Sam can't make up his mind: Eligibility for several tax breaks depends on a taxpayer's family status. Unfortunately, many provisions define families in different ways. The Code's definition of a family for the dependent deduction, for example, is different from the definition for the earned income tax credit. Add a growing number of divorced parents and nontraditional families, and the result is complexity that makes it difficult for taxpayers to comply and the Service to administer. Those family-status definitions that can be harmonized should be. If they cannot, eligibility requirements should be simplified and safe harbors established to make it easier for taxpayers to determine eligibility.

Phase out phaseouts, or make them understandable: Under current law, many tax breaks--like child and education credits, personal exemptions and itemized deductions--are "phased out" at certain income levels. The idea? To target them at lower- or middle-income taxpayers. The problem? These provisions phase out at different income levels and in dozens of different ways--leaving taxpayers at every level confused about whether they qualify. Phaseouts should be eliminated or made uniform, so that benefits phase out at similar income levels and work in similar ways and taxpayers can easily determine whether they qualify for tax breaks.

Synchronize safe harbors for the self-employed: Self-employed individuals make estimated tax payments every quarter. As long as they pay a specified percentage of the prior year's tax bill (called a safe harbor), the self-employed are not penalized for underpayment. The safe-harbor level fluctuates, however, making it difficult for the self-employed to know what they must pay to avoid penalties. Policymakers should settle on one safe harbor and make it permanent. They should also amend the rules to provide an understandable safe harbor for all business taxpayers.

To be an independent contractor, or not to be an independent contractor? These are the 20 questions: Businesses must apply a confounding 20-question test to decide whether workers are employees or independent contractors for tax and pension purposes. Not only is the test complex, many of the questions are subjective, and employers get precious little guidance on how to answer them. The consequences of incorrect classification can range from penalties for employers to lost benefits for employees. Policymakers should establish an objective test for worker classification or at least minimize the consequences of missing a question on the test, by reducing differences in the tax treatment of employees and independent contractors.

Extend extenders permanently: Some Code provisions, such as relief from the individual AMT and the tax credit for research and development, expire periodically unless Congress extends them. The result is uncertainty, and uncertainty breeds complexity. Even worse, the on-again, off-again nature of these provisions is a disincentive for the activities they intend to encourage. The "extenders" should be permanently enacted.

Simplifying capitalization and expensing--a capital idea: The tax treatment of some business expenditures depends on whether they are classified as business expenses--and are therefore deductible in the current year--or capitalized, in which case they are either deducted as the asset depreciates or when it is sold. The classification depends on whether the expenditure produces a "future benefit." That determination, however, is rarely obvious or easy, placing an enormous drain on government and taxpayers alike. The process should be simplified with an objective, administrable test.

Untangle the FTC: The foreign tax credit (FTC) is intended to prevent double taxation by sparing businesses or individuals from paying taxes on the same income to both a foreign country and the U.S. The rules governing the FTC are already complex for taxpayers and the IRS, and the global economy is making them even more so. The FTC, as well as other international tax provisions--like subpart F, which deals with Americans who own 10% or more of a certain foreign company, and rules for passive foreign investment companies--should be simplified.

(Note: The full text of the package of simplification recommendations is available on the AICPA Website at www.aicpa.org.)

Editor's note: carol Ferguson is Technical Manager of the AICPA Tax Division.

DC Currents is designed to heighten awareness of the Division's work and keep readers apprised of Tax Division activities involving tax policy, technical issues and other practice support matters.

For further information about this article, contact Carol Ferguson at [phone].

Carol B. Ferguson Technical Manager AICPA Washington, DC