IRS watchdog urges simpler tax code to cut costs, confusion

WASHINGTON Wed Jan 9, 2013 2:32pm EST

WASHINGTON Jan 9 (Reuters) - U.S. tax breaks need to be pared back to spare taxpayers costs and complexity, according to an Internal Revenue Service watchdog report released on Wednesday even as political chances for a tax code overhaul may be receding.

Congress should consider rebuilding the tax code from scratch and permit tax breaks only if the costs and complexities are justified, the Taxpayer Advocate Service, an oversight arm of the IRS, wrote in its annual report to Congress.

A tax-code revamp, last accomplished in 1986, faces a tough road ahead in 2013 as Democrats and Republicans in Congress and the White House argue over what tax reform means.

The convoluted tax code means many taxpayers accidentally pay too much in taxes, or too little, which can trigger an IRS audit, the report said.

Ninety percent of taxpayers pay for professional help to file their taxes or buy commercial software to do returns on their own. Unscrupulous taxpayers can find loopholes in the tax code to dodge tax payments.

"Tax law complexity leads to perverse results," said Nina Olson, who heads the Taxpayer Advocate Service.

The report noted that only 12 percent of businesses and sole proprietors said they believe taxpayers pay their fair share of taxes, a finding Olson said showed an "extraordinary lack of public trust."

Lawmakers should stress the savings that could be achieved from curbing popular tax breaks for health insurance, mortgages and municipal bonds, among others, O l son said. Curbing those tax breaks would allow for lower overall tax rates.

Separately, the Government Accountability Office, an investigative arm of Congress, on Tuesday offered lawmakers guidance on evaluating tax breaks such as deductions, credits and exclusions for businesses and individuals.

The most expensive tax breaks are the tax exclusion for employer-sponsored health insurance, for employer pensions and the home mortgage deduction, according to government estimates.

Tax breaks cost the government $1 trillion in foregone revenue in fiscal year 2011, the report said.

The complexity of the tax code is a boon to tax preparation businesses such as H&R Block Inc. and Intuit Inc. , which charge customers about $20 for basic online tax preparation. Premium preparation for businesses can top $100.

There is a growing trend toward online tax preparation, said Gil Luria, an analyst with Wedbush Securities.

More taxpayers paid for expert help than filed from their home computers last year, according to IRS data.

But the number of taxpayers filing electronically from home increased 9.6 percent ahead of the April 15, 2012, tax filing deadline. The number of taxpayers who paid a practitioner to do their returns increased 4.1 percent, IRS said.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article