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IRS: Majority of Taxpayers are “Special Interest”

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Tax Shelter imageEven the IRS says the tax code is too complicated. In a recent report, the National Taxpayer Advocate, who serves as the watchdog of the IRS, says the U.S. tax code is too long, too complex and takes too much time to figure out, which squanders taxpayers’ time and costs the government billions of dollars a year.

Both political parties like to blame the budget’s complexity on “special interest,” a code word that to Republicans means unions and minorities, and to Democrats mean big corporations.

The truth is much simpler, writes U.S. taxpayer advocate Nina E. Olson in the IRS’ 2010 annual report to Congress – “the vast majority of U.S. taxpayers” are “special interest.”

“Tax complexity doesn’t occur just because of “big money” special interests,” Olson wrote in her report. “It occurs because of the tax provisions that benefit each one of us. We are the special interests. And until we acknowledge that, tax reform discussions will deteriorate into shouting matches and finger pointing about cutting ‘their’ special tax breaks and not ‘ours.’”

Tax loopholes and write-offs are officially called “expenditures,” which all told cost the government $1.1 trillion a year, and save the average taxpayer $8,000 annually.

One of the biggest expenditures is the mortgage interest tax credit, which is claimed by the 67% of Americans who own homes, according to the Census Bureau. This single loophole costs the Treasury $131 billion in 2012, almost three times the entire $48-billion budget of the Department of Housing and Urban Development.

The exemption no longer serves its intended purpose when it was created in 1913: encouraging poor people and the lower middle class to buy homes, according to a study by the Brookings Institution. “Because most who benefit would own homes without the deduction, it mostly provides an incentive to live in more expensive homes, not to own instead of rent,” the study found.

Olson’s recommendation: Get rid of it.

“To start out, the assumption should be that all tax expenditures would be eliminated,” she writes.

Olson noticed other conflicts between American’s real-life credit lives and the tax code. Sometimes the IRS is too quick to believe a taxpayer’s private debt is paid off before it actually is, often because of reporting mistakes. This makes the IRS too aggressive in trying to obtain back taxes.

Olson says the IRS also does a poor job of calculating taxpayers’ ability to pay tax debts because it doesn’t take into account things like credit card bills, state or local taxes or overly high mortgage payments. That causes the IRS to demand unreasonably high tax debt payments, “creating hardships, and leaving the taxpayers less able to pay taxes due in future periods,” according to the report.

Image: JD Hancock, via Flickr.com

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