Complexity Remains #1 Problem, TEI Tells IRS Taxpayer Advocate.

Also Comments on IRS Funding, Fast Track Mediation Procedure

Complexity of the tax law remains the number one problem facing all taxpayers, Tax Executives Institute recently told National Taxpayer Advocate Val Oveson. The Institute's comments will be used by Mr. Oveson to prepare his annual report to Congress on the most serious problems encountered by taxpayers in dealing with the Internal Revenue Service. The report is required under section 101(a) of the Taxpayer Bill of Rights.

In a letter dated September 14 from TEI President Charles W. Shewbridge to Mr. Oveson, the Institute remarked that "[s]ome may fear that, like death and taxes, complexity will always be with us. At least in the case of large multinational corporations, that may well be true." TEI urged, however, that the complicated nature of today's economy should not be used as an excuse for not making the law simpler. "Everyone -- Congress, the Department of Treasury, the IRS, tax professionals, and taxpayers -- bears responsibility for the current state of the law," TEI said. The Institute cited the alternative minimum tax and the need for guidance on capitalization issues as examples of areas where significant improvements could be made.

The Institute also cited the complexity of the tax law's interest provisions as an area that hinders the efficient administration of the tax laws. A fundamental cause of the problem, TEI said, lies with the interest-rate differential, which produces anomalous (and unfair) results and more complexity where taxpayers both owe money to and are owed money by the government (but the debts bear interest at different rates). "Returning to one rate of interest for all taxpayers in respect of both under- and overpayments would greatly reduce or eliminate the need for netting and effect a significant simplification of current law," TEI stated. The Institute suggested that providing taxpayers with copies of interest calculations would be one way to make the administration of the interest provisions easier.

In the absence of a change in the law, the IRS should institute the most comprehensive netting system possible, the Institute urged, expressing regret that the IRS's most recent guidance on the issue, Rev. Proc. 99-19, signals a reluctance to do that. (The Institute's detailed comments on Rev. Proc. 99-19 were reprinted in the July-August 1999 issue of The Tax Executive.)

The Code's penalty provisions and their administration were also cited as problems within the tax system. "Penalties have become almost as complicated as the underlying provisions they seek to enforce," TEI said, noting that the standards for imposing penalties are not applied consistently across the IRS's Service Centers. In addition, notices of proposed penalties and the timeliness of IRS processing of taxpayer responses to notices can be significantly improved.

The Institute also urged that IRS districts be encouraged to enter into agreements with taxpayers concerning what records must be retained. "The key should be to reach out to taxpayers to reduce administrative burdens (and provide certainty), not to begrudgingly accept written retention agreements," TEI stated.

Finally, the IRS must be able to fund all programs and activities at their current level, the Institute stated, adding that the lack of stable funding for IRS programs must be counted among the top problems facing taxpayers.

The Institute's comments, which were prepared under the aegis of its IRS Administrative Affairs Committee, are reprinted in this issue, beginning on page 439.

IRS Funding: TEI Recommendation Heeded

On July 29, the Institute urged the House and Senate Conferees to ensure that the IRS receives adequate funding under the pending appropriations bill, H.R. 2490. The House version of the bill had cut $135 million from the IRS's budget for fiscal year 2000. Since the Institute filed its comments, the Conference Committee restored the cut funds to the budget, and an appropriations bill containing the larger IRS budget was sent to the President's desk for his signature.

In its comments, TEI noted the critical need to invest in and plan for the future of the agency. "Last year Congress took an important step in reforming and restructuring the Internal Revenue Service and insisting that the agency use business models to become more customer focused," the organization stated. "Unless the House-imposed cuts are restored, the Nation may be unable to reap the ongoing benefits of IRS reform." In other words, it is time for Congress to put its money where its mouth is and restore the $135 million, TEI concluded.

The Institute's comments are reprinted in this issue, beginning on page 442.

Mediation Procedure

In response to an IRS request for comments on the agency's draft Fast Track Mediation Procedure, the Institute on August 8 urged its adoption, noting that the procedure would make mediation more widely available to all taxpayers. The Institute's comments took the form of a letter from 1998-1999 TEI President Lester D. Ezrati to Thomas C. Louthan, Director of the IRS's Alternative Dispute Resolution and Customer Service Programs.

The draft procedure implements a new program designed to expeditiously resolve cases at the compliance level. The process involves an Appeals Officer acting as a mediator with no settlement authority and takes place between the taxpayer and IRS compliance function at a neutral site. Unlike prior procedures, it is not limited to taxpayers in the Coordinated Examination Program (CEP) or to factual issues involving an adjustment of at least $1 million that are already in the Appeals administrative process.

TEI urged the IRS not to limit the procedure to non-docketed cases, stating that the procedure may facilitate the resolution of docketed cases before trial. The Institute also urged that the procedure be expanded to include cases involving Industry Specialization Program (ISP) issues or Appeals Coordinated Issues (ACI).

The Institute's comments are reprinted in this issue, beginning on page 443.