Sunday, March 22, 2009

CPAs' guaranteed employment act

Another tax season is in full swing. I hope all of you Turbo-Taxers are successful answering the myriad of questions correctly. Ah, the concept of simplifying taxes by asking plain English questions that anyone can answer. “Was this wash sale completed within 30 days of the conclusion of another wash sale involving the same stock issue? If yes…”

And what about the remaining few people who brave their taxes with a pencil and calculator? The instructions for Form 1040EZ are a mere 42 pages long. Remember, this was the form invented when the short form, 1040A, got too complicated. Instructions for Form 1040A are now 84 pages long. Double the complexity; double the fun! By the way, many years ago the short form was literally short—only half the length of a letter-sized sheet of paper.

If you’re tackling the long form, you’ll need to stay up a night or two reading the 161 pages of fascinating facts, tips and charts that accompany Form 1040. Practically a novel, there are more twists and turns and tangents than anything written by Dan Brown. The complex rules and frustration they generate result in a majority of people, even those with relatively simple situations, hiring professional tax preparers to get their returns filed.

That should convince anyone that tax simplification ought to be a top priority. In fact, there was an initiative started (which quickly fizzled) by the Bush administration to study our income tax system and to propose alternatives. At a press conference on November 4, 2004 the president said this: “We must reform our complicated and outdated tax code. We need to get rid of the needless paperwork that makes our economy—that is a drag on our economy, to make sure our economy is the most competitive in the world.” (He didn’t use a teleprompter.)

In a more carefully worded executive order of the president dated January 7, 2005, the President’s Advisory Panel on Federal Tax Reform was formed. This was a nine-member panel appointed by the president with the following marching orders:

“Submit to the Secretary of the Treasury in accordance with this order a report with revenue neutral policy options for reforming the Federal Internal Revenue Code. These options should a) simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws; b) share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and c) promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.”

The executive order required that only one of the options put forth by the panel be a Federal income tax. That is, the door was left open for one or more options that scrap the income tax concept for an alternative tax collection system, such as a national sales tax or a European-style value added tax.

The history of simplifying the Internal Revenue Code includes a number of efforts that accountants have dubbed the “CPAs’ Guaranteed Employment Act,” “Future CPAs of America Act,” and “If The Tax Code Gets Any Simpler, It Will Take A Genius To Figure It Out Act.”

At the time, I predicted that one of the first obstacles this panel would run into is the relationship between state income tax systems and the Federal income tax system. Forty-three states currently levy income taxes on their residents and nonresidents. Most of these state income tax laws leverage the Internal Revenue Code in determining what income is taxable and what deductions are available as well as how to perform many of the calculations necessary to arrive at one’s tax liability.

If you scrap the Internal Revenue Code for an alternative system, you are asking these 43 states to do the same. The last time I checked, most of our state governments are struggling to meet their current obligations and few, if any, have a lot of extra cash sitting around waiting to fund a complete rewrite of their income tax laws. So, chances were against this panel turning the current income tax system on its head and were for creating the next tax simplification (aka complication) act: “A CPA In Every Home Act.”

In the end, nothing happened. We were too busy handing out mortgages to people who couldn’t afford them. Click here to see the executive summary of this blue ribbon committee’s recommendations.

If you didn’t click back there to see the report, that’s okay. It has already collected four years of dust and it is clear that the new administration and congress are not at all interested in giving up control of the puppet strings that have been created over several generations via the Internal Revenue Code. That means three things: 1) the Fair Tax Plan has no legs, 2) Congress will increasingly control how you behave and what you do, and 3) CPAs have a bright future.

Copyright 2009 Randy Hunt

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