Article: U.S. Income Tax Laws Are Too Complicated!
As published by Robert M. Mendell in Newsletter for Houston Chapter of Texas Society of Certified Public Accountants (June 1990)
As a tax law attorney in public practice and a licensed certified public accountant, I have a favorite fantasy at this time of year. In this fantasy, I refuse to prepare tax returns and, instead, instruct my clients to send their tax returns to their Congressman for preparation. Possibly it’s an idea whose time has come.
The large collection of U.S. tax volumes and treaties in my office library symbolizes, in large part, the basis of this fantasy. The “core” materials include:
- Two volumes of the Internal Revenue Code (2,754 pages of small print)
- Four volumes of Treasury Regulations (10,389 pages of small print)
- The Economic Recovery Tax Act of 1981 (ERTA)(490 pages of text and explanation)
- The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)(527 pages of text and explanation)
- The Tax Reform Act of 1984 (428 pages of text and explanation)
- The Tax Reform Act of 1986 (620 pages of test and explanation)
- The Revenue Act of 1987 (329 pages of text and explanation)
- The Technical and Miscellaneous Revenue Act of 1988 (TAMRA)(1,328 pages of text and explanation)
- The Revenue Reconciliation Act of 1989 (368 pages of text and explanation)
My office library also contains three walls of tax interpretive materials. A stack of these books on their backs easily reaches a height of 165 feet, and as can be imagined, the arduous task of comprehending and interpreting the legislation and regulations currently comprising our income tax system is tremendous.
The Texas State Board of Public Accountancy requires an average of 40 hours of continuing education annually for CPAs to retain their licenses, one of the most vigorous, if not the most vigorous, continuing educational requirement of any profession. Yet this education mandate pales in comparison to the pace and volume of the continuing education necessary to become proficient in each tax code revision. This task requires a competency not only in accounting, economic and tax principles, but also the development of a professional discipline for coping with the enormous verbosity of the ever-changing tax legislation. Let me offer an example of one of the relatively easier to follow, but at the same time, very prolific, tax code provisions with general application. An abbreviated excerpt from Section 163(h) of the Internal Revenue Code-which actually comprises three pages of text-provides:
“In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year…For purposes of this subsection, the term “personal interest” means any interest allowable as a deduction under this chapter other than…any qualified residence interest (within the meaning of paragraph (3)…The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on-
- 1. Acquisition indebtedness with respect to any qualified residence of the taxpayer; or
2. Home equity indebtedness with respect to any qualified residence of the taxpayer…The term “acquisition indebtedness” means any indebtedness which-
a. is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer; and
b. is secured by such residence.
Such term also includes any residence secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness…
The term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed:
- The fair market value of such qualified residence, reduced by;
- The amount of acquisition indebtedness with respect to such residence…
The term “qualified residence” means-
- The principal residence (within the meaning of Section 1034) of the taxpayer; and
- One other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by a taxpayer as a residence (within the meaning of Section 280A(d)(1)”.
All of this is to let you know that you may deduct interest expense with respect to your home.
The system’s verbiage is only a reflection of that system’s inherent problems. Progressive tax rates lead taxpayers to become “creative” in structuring their affairs to fall in the lower tax rates which, in turn, leads to complicated legislation to head off such attempts. Multitudinous exceptions to general tax rules are enacted to favor special interest groups or to shape public policy. Proliferating exceptions generate more ambiguity and spawn still more legislation to limit the exceptions. The baffling tax form is the offspring of this complicated structure of tax rules.
Even with the legislation’s exacting verbosity, the difficulty of precisely interpreting the tax laws is exemplified by a recent Money magazine article. Money asked 50 tax professionals to calculate a mythical family’s taxes. The experts came up with 50 different figures for the family’s tax bill ranging from $12,539 to $35, 813. The correct tax, according to the accountant who developed the test, was $23, 393. The fact that no two professionals could agree is another example of how Byzantine the system has become.
The Bush Administration’s top tax officials and Congressman influencing tax policy now agree that aspects of the tax law are too complicated. On February 7, 1990, Fred T. Goldberg, Jr., IRS Commissioner, told the House Ways and Means Committee that “the legislative frenzy of the past 10 years has left a troubling legacy of complexity, uncertainty and administrative burden on business and individual taxpayers and the IRS itself”. A committee has been organized to undertake a simplification study.
The weight of this problematic tax system rests on the shoulders of the frustrated tax return preparer, generally a certified public accountant. Although he or she is not the author of the tax legislation, each professional tax return preparer must bear the burden of applying the principles and rules contained in such legislation. CPAs are very sympathetic with client’s frustration. After all, we know the extent of the training and experience required to fathom the tax laws. We know that preparation of even the simplest tax return now requires the aid of a computer program. We know that 20 hours of tax return preparation may result in only $200 in tax savings for the client. Even worse, we know that 20 hours of tax return preparation may result in no tax savings to the client or may even result in unanticipated additional taxes due to complex tax “loophole” closers contained in recent tax legislation.
The complexity and perceived unfairness of the tax rules, combined with the frustration of not receiving the tax benefits taxpayers heretofore have come to expect, leads many normally law-abiding citizens to contemplate noncompliance with the tax laws. The CPA, however, has a professional and legal obligation to prepare accurate tax returns in accordance with specified guidelines—guidelines that can sometimes be even more bewildering than the tax code—while dealing with the added frustration of the tremendous cost borne by the client for preparation fees. Too often this client’s frustration culminates in fee disputes between the client and the CPA resulting from the client’s misplaced blame. Client dissatisfaction can also be generated by the CPA’s unreceptiveness to the client’s newfound inclination to explore noncompliance alternatives. Perhaps Congress should reconsider the impact of its tax legislation program run rampant for numerous reasons, including the wedge that has been driven between the taxpayer and his or her tax return preparer.
Article submitted by Robert M. Mendell, a director of the Houston Chapter of the Texas Society of Certified Public Accountants-the largest chapter in Texas with 6,800 members-and chairman of the Taxation Committee.