Taxpayer relief or taxpayer headache? Simplicity sacrificed once again.

Taxpayer Relief or Taxpayer Headache? Simplicity Sacrificed Once Again

America has a new tax law. That's good news for most taxpayers who will qualify for the child tax credit and who will be able to turbocharge their savings plans for retirement and their children's education by opting to use the new tax-slashing incentives. The bad news is that complexity permeates nearly every provision of the Taxpayer Relief Act of 1997.

The new complexity will hit us all. As tax professionals, we think such complexity is wrong.

For taxpayers, it means deciphering new and confusing rules, increasing the likelihood of making more errors in filing returns. There will be more frustration, too, which in turn leads to cynicism and disdain for compliance. For those taxpayers using paid preparers (and there will be more need now), it means higher fees, since there are more issues to consider, more time needed to sift through all the new rules, and greater cost for return preparation.

For tax professionals, it means significant educational costs to master the new law's intricacies, not to mention the cost of updated software and publications to reflect these changes.

For government officials, it means drafting regulations and technical corrections, revising tax forms and publications, and training revenue agents and officers in what the new law says.

Taxpayers will soon discover that complexity is the hurdle to jump in order to claim any of the new tax law's goodies. Take, for example, the muchballyhooed child tax credit, which comes with lots of rules and exceptions. Whether a taxpayer can use the full child credit depends on the taxpayer's alternative minimum tax (AMT) liability (because the credit cannot be used to reduce the AMT). So, in order to determine whether the credit is of any benefit, taxpayers must calculate their AMT liability, and compare their regular tax liability (reduced by the child credit) to the minimum tax liability. That's not even a simple process to describe, let alone complete. And, if that's not bad enough, calculating the AMT is also more complicated now. Because of the capital gains tax changes in the law, we understand that at least 22 lines will have to be added to the AMT form.

Figuring out individual retirement accounts (IRAs) won't be easy either. First, taxpayers need to keep in mind that IRAs now have two different income phaseouts, depending on whether the old deductible IRA or one Of the new Roth or educational IRAs is involved. (To convert a present IRA to one of the new Roth IRAs, still another income limitation needs to be taken into account.) They might not even be eligible for certain (or any) IRAs. Second, taxpayers have to consider which available option best suits their needs, keeping a close eye on their income level, since the availability of the various IRAs is tied to different income levels.

The new capital gains provisions are also not straightforward. Depending on the nature of an asset, when it was bought and when it was sold, the new law will impose an individual long-term capital gains rate of 28%, 25%, 20%, 18%, 15%, 10% or 8%. It gets even more complicated for installment sales, which do qualify for the new capital gains rates; if real estate depreciation is involved, the new 20% and 25% rates need to be taken into account. According to discussions with government officials, they are still not clear (as of the time this issue went to press) as to exactly how the two different rates are to, be handled.

There will always be some complexity in our tax system. We live in a complex world. Any tax system will necessarily reflect the complexity of our business and personal transactions. In addition, simplicity should not crowd out other criteria, such as fairness, equity and revenue impact. However, with this law, Congress seems to have given little thought to a simpler way to achieve the policy goals it sought.

Sacrificing simplicity is disheartening. Even more discouraging is that Congress ignored the advice of the body it created to scrutinize the country's tax system. Our tax laws are overly complex, concluded the National Commission on Restructuring the Internal Revenue Service in its June report. It proposed some fundamental reforms in the way Congress writes tax law so that simplicity can become an integral goal of all tax policy. In fact, the IRS Restructuring Commission suggested Congress use a tool very much like the AICPA's complexity index to assess new legislation.

Congress needs to have a yardstick so that a tax bill's complexity can be consistently measured as a bill moves through the legislative process. To be effective, this yardstick must also apply to amendments and late breaking changes made to bills. Admittedly, this makes adopting tax legislation more cumbersome, but the present method of last-minute changes, revenue tinkering and complex back-room compromises is worse. Plenty of such "11th hour" laws exist, hopelessly complicating the law.

Every member of Congress should know, before he votes, how the proposal affects the overall complexity of the Code, so that the decision to vote for a complex provision becomes an affirmative act for which the Representative or Senator can be held accountable at the Polls.

Congress needs to use uniform effective dates and stop using multiple phaseouts and percentage limitations. These are an indirect way to raise revenues that add unnecessary complexity. [See the article that follows for a discussion of the phaseout ranges.] Congress has used such obscure, complicated and indirect devices to raise taxes for decades. Such actions create nothing but disdain for the tax system in particular and government in general. Congress has to start being honest with taxpayers, make simpler laws and call a tax increase what it is--a tax increase.

Lawmakers will have a shot at resurrecting simplicity when they start considering legislation to implement the recommendations included in the IRS Restructuring Commission's report. They won't need to look any further back than the Taxpayer Relief Act of 1997 for a study in complexity and an illustration of what not to do in order to have simplicity in future tax laws.

Is Congress up to the challenge? If history is a guide, I wouldn't hold my breath.

Editor's note: This department is written by tile AICPA Tax Division's professional staff. It I's 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.

The authors' views, as expressed in this column, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.

If you would like additional information about these articles, contact Eileen Sherr Technical Manager, AICPA Tax Division, at [phone] or [e-mail].

From Michael E. Mares, CPA, Witt, Mares, & Company, PLC, Newport News, Va.; Chair, AICPA Tax Division's Tax Executive Committee