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NSPA's threshold concept - restoring a modicum of sanity to the tax code.

NSPA's Threshold Concept -- Restoring a Modicum of Sanity to the Tax Code

The NSPA Federal Taxation Committee last year proposed for the first time a new concept in dealing with the intricacies of the nation's revenue laws -- the "threshold" concept. Before explaining this concept, a little background should prove helpful.

The clamor for tax simplification has grown steadily louder and stronger since the Tax Reform Act of 1986 (TRA). While this is in some ways ironic, since TRA was supposed to aid simplicity, it is not coincidental.

TRA divided the taxpaying public in half. For some, TRA has in fact made tax matters demonstrably simpler; the number of short forms being filed rises each year. For others, however, the increased burden of TRA and subsequent "corrections" has been little short of nightmarish. In a nutshell, for those for whom TRA was good, it was very good; for those for whom it was bad, it was very bad.

This, too, is not entirely coincidental. One of the major policy objectives of tax reform was equity. Whether real or perceived, TRA sought to stem abuses of the tax system. In doing so, the natural (or perhaps unnatural) tendency was to create intricate hoops through which taxpayers would be required to jump in order to avail themselves of a supposed tax advantage. To some extent, the rationale underlying this complexity assumes that those whose finances are complex enough to be able to use these tax advantages can also afford to pay for the expertise to do so.

As independent accountants can testify, however, for too many taxpayers this is simply not the case. A large slice of middle-class America has been caught up in a web of intricacy presumably intended for wealthier targets. These taxpayers are, by and large, the clients of NSPA members.

Recognizing this, the National Society's Federal Taxation Committee set about developing a solution to this problem. From this, the threshold concept was born. NSPA has advocated this concept numerous times, before both Congress and the IRS. Recent events might even lead one to conclude that it has begun to receive the consideration it deserves.

The best way to explain the threshold concept is by way of example. The first time NSPA publicly advocated the concept was at an IRS hearing regarding the definition of "activity" under the passive loss regulations. The rules defining "activity" were mindboggling. In fact, as NSPA pointed out, the agency took over 100 single-spaced typed pages to define a single word!

Since you don't need to be Donald Trump to be subject to the passive loss limitation rules, NSPA urged a different approach for average taxpayers who could not possibly be expected to understand, let alone comply with, 100 pages of bureaucratese -- the threshold. Thus, in the passive activity area, under the NSPA scheme a taxpayer whose income falls beneath a certain threshold would be permitted to use "any reasonable method" of defining (technically, "aggregating" and "disaggregating") his or her activities.

Lest one is inclined to think that such a proposal amounts to a huge giveaway at the Treasury's expense, NSPA reminded the IRS that this was precisely the definition the agency used in its temporary regulations on the same subject.

One can quickly see numerous potential applications of the threshold concept as a means of simplifying the impact of the revenue laws on middle-class and small business taxpayers. Several times since the IRS hearing just discussed, NSPA has pressed this view on Capitol Hill. Most significantly, it was the cornerstone of our recommendations to House Ways & Means Committee Chairman Dan Rostenkowski's (D-IL) highly publicized "simplification study."

Many people in Washington read the Ways & Means Committee's report on this study, which included NSPA's threshold concept. One of those people was IRS Commissioner Fred T. Goldberg, Jr. At NSPA's recent Annual Convention in Denver, Commissioner Goldberg told attendees that he approved of the threshold concept and that the agency in fact is looking at ways to incorporate it into several of their current regulation-writing projects.

This is indeed welcome news. If the threshold concept catches on, everyone will benefit -- NSPA members, their clients, the taxpaying public, the IRS, the Treasury and even reelection-minded members of Congress. In fact, it's hard to imagine any losers under the concept.

Such a confluence of "winners" does not occur very often in Washington, D.C. If the merits themselves aren't persuasive, this alone ought to give policymakers pause for thought.

Of course, there are those who would question putting "thought" and "Washington, D.C." in the same paragraph, but that's a subject for another column.
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Title Annotation:National Society of Public Accountants
Author:Berkery, Peter M., Jr.
Publication:The National Public Accountant
Article Type:column
Date:Oct 1, 1990
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