AMT, tax gap called taxpayers’ biggest problems
WASHINGTON — A law meant to crack down on wealthy tax dodgers has instead become the most serious problem facing millions of other taxpayers.
For the government, meanwhile, the biggest tax problem is the billions of dollars in unpaid taxes, says National Taxpayer Advocate Nina E. Olson. She reported Tuesday to Congress on the hurdles Americans face in meeting their tax obligations.
Olson, who works independently within the Internal Revenue Service, also urged Congress to repeal IRS authority to contract collection activity to private agencies, saying the IRS is better trained and more efficient in going after delinquent taxes.
The advocate is required to submit an annual report to Congress listing at least 20 of the most serious problems encountered by taxpayers.
This year the list was topped by the alternative minimum tax, which was enacted in 1969 to close loopholes that enable the wealthy to avoid paying taxes. But because the law was not indexed for inflation, a provision that originally affected about 20,000 taxpayers now hits tens of millions.
“Today the AMT is left to punish taxpayers for engaging in such ‘classic tax-avoidance behavior’ as having children or living in a high-tax state,” the report said in its summary.
Rep. Charles Rangel, D-N.Y., the incoming chairman of the House Ways and Means Committee, and Senate Finance Committee leaders Max Baucus, D-Mont., and Charles Grassley, R-Iowa, have promised to address the AMT issue this year. But repealing the law, under which taxpayers reaching a certain income level lose dependent or state and local tax exemptions, could cost up to $1 trillion over the next decade. There’s no consensus on how to make up for the lost revenues.
Grassley, in a statement, said it was good that the advocate was “joining the chorus” on the AMT, which he described as “taxpayer enemy No. 1.” But he said it was premature to call for ending the private collection program, saying it was just getting off the ground and “we have to make it work.”
The second most serious problem was the gap between what taxpayers should be paying and what the IRS is collecting, estimated at $290 billion a year. The advocate said that noncompliance by some taxpayers requires good-faith taxpayers to pay an additional $2,200 a year.
It said the gap could be narrowed by tax simplification, third-party information reporting and improved IRS compliance initiatives.
The report said the government loses billions of dollars because it does not intervene at an early stage on delinquent tax accounts, and does not fully utilize collection payment alternatives such as installment agreements.
It said the IRS also fails to provide the meaningful services that low income taxpayers need to meet their obligations regarding delinquencies, doesn’t do enough to help small businesses with tax guidance, and lacks adequate oversight over unenrolled return preparers.
“Simplifying the tax code, particularly by repealing the AMT and reducing the inequities caused by the tax gap, will go a long way to helping America’s taxpayers,” said Olson.
The IRS, in its comments on the report, said it often allows taxpayers in arrears to pay over time, noting there were 2.77 million installment agreements in fiscal 2006, up 5 percent over the previous year.