Senators dodge issue of tax laws' complexity

By Albert B. Crenshaw
Washington Post

The Senate Finance Committee spent a morning last week wondering whether Americans are getting good service from the armies of people they pay to help them fill out their income tax returns every year.

The senators asked about the honesty and competence of these paid preparers, about the fees they charge, and about many other aspects of this large and growing industry.

One question they did not ask, however, was why the industry exists at all.

That's a question few members of Congress want to talk about. The closest anyone on the panel came to it last week was when the ranking minority member, Sen. Max Baucus, D-Mont., began a question with "Given the complexity of our tax laws ... "

It's a given all right, and not one that's likely to change, even though experts including Congress' Joint Tax Committee and the Internal Revenue Service's national taxpayer advocate have complained that the complexity is both unnecessary and unfair, especially to lower- and middle-income taxpayers.

And it's expensive.

The IRS estimates that there are as many as 1.2 million paid tax-return preparers. More than 70 million taxpayers use them, paying fees that total something like $14.7 billion.

"Numbers like these suggest that taxpayers believe that paid preparers provide a valuable service," Congress' General Accounting Office said dryly in a report released at the hearing.

Valuable is one way to describe it. But it dodges the issue of why more than half of taxpayers don't feel capable of doing their own returns.

Some are too busy, certainly. But in far too many cases, the motivation is simply that they don't know how.

Low-income taxpayers are all but driven to paid preparers by the earned income tax credit. This is a very valuable, refundable credit — meaning that if the credit exceeds the taxes, the excess goes to the taxpayer in cash — for low-income working families. But the rules covering whether you're eligible and whether your children qualify are difficult to understand, and figuring the amount of the credit is no picnic.

Then there's the little-known Saver's Credit, which can offset some or all of a worker's contribution to a 401(k), and a handful of other breaks, many of which should not only be taken, but taken in a certain order to maximize their benefit.

Middle-class taxpayers who have only wages, interest and dividends for income and only mortgage interest and taxes for deductions may figure that complexity is something that applies to others. But are such taxpayers certain they aren't missing the child credit, one of the college-tuition credits or some other benefit? And are they confident they don't have to pay the alternative minimum tax?

The AMT can bite anytime. National Taxpayer Advocate Nina E. Olson, who has urged that Congress deal with the AMT before it ensnares more taxpayers, said it got her this year. "Last year it was theoretical; this year it's personal," she said last week.

In addition, tax-return preparation is increasingly becoming a marketing device for many companies, large and small. Olson recalled several years ago seeing a used-car dealership whose mascot was a duck and whose slogan was "File your taxes with the duck, use your refund for a truck."

"It seemed rather unlikely to me that this car dealer possessed much tax-law expertise," and "I began to wonder about the long-term effects on taxpayer compliance of commingling such mercantilism with tax filing," she told the Finance panel.

There are defenses that can be raised for complexity. The main one is that it is difficult to be fair and simple.

But what we have now is a tax law that drives taxpayers into the arms of tax preparers, and then allows the tax preparers to morph into pitchmen for such things as used cars and refund-anticipation loans. And this system is being made worse by electronic filing, which provides a quick confirmation to the salesman that the taxpayer is very likely to be getting a refund.

This hardly seems a recipe for renewed respect for the tax laws. So, when getting taxpayers to file and pay what they owe is an increasing problem, perhaps some increased focus on simplification would be good for the country.