The Office of the National Taxpayer Advocate, a department inside the IRS itself, recently issued its annual report to Congress. Some specific areas where the IRS continues to be difficult and burdensome were highlighted in the report:

Complexity of the tax code: The NTA reported that “taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements.” This is a major labor imposition on American taxpayers and forces most to pay for other means of achieving tax-compliancy. According to the report, 90 percent of individual taxpayers either hire a person or firm to prepare their taxes for them or rely on tax software for assistance. This results in an average cost to the taxpayer of about $258 each per year (when last measured in 2007).

Social benefits programs overloading the IRS: The agency is continuously requiring more tax money and resources to distribute the money going out as a result of benefits programs. The report claims that the IRS is being “stretched thin” and finds itself “ill-equipped to meet the demands placed on it by the new health care law.” The central purpose of the IRS is to collect tax revenue. The agency claims that it cannot fulfill this purpose without more funding from the taxpayers because of the great increase in social benefits programs requiring the agency to pay out tax money. These new programs come about mainly through the number of refundable tax credits currently available. Unlike non-refundable tax credits (which give a tax relief down to zero total tax liability) the refundable tax credits actually “refund” the filer other taxpayers’ money if they are credited a negative total tax liability with a refundable tax credit. This is a one-two punch for taxpayers from the federal government as they are forced to foot the bill for a host of costly new benefits programs and also increase funding to the IRS for distribution.

IRS and growing enforcement: In the past, the IRS has never been popular but it has always managed to garner a decent amount of voluntary compliance. However, recently the NTA report brings to light the fact that in order to achieve better performance numbers in practice, it is a better policy to rely increasingly on enforcement. This is demonstrated by some officials increasing funding for the enforcement programs. Between fiscal year 2007 and 2010 the budget for enforcements has increased more than five times. The report continues to state that, especially because of social benefits programs the IRS is responsible to administer, it is becoming more of an enforcement agency rather than a service agency.

Inadequate IRS appeal hearings: If taxpayers are not satisfied with IRS findings or believe that the agency was in error in attempting to collect a certain tax, it is the right of the taxpayer to have this issue looked at and reviewed for appeal. The NTA report expresses major concern regarding this process. Currently there are many hearings that come up for review by the IRS that have been demonstrated to be either untimely (increasing taxpayer labor and possibly financial burden) or have inadequately dealt with the issue. The report bluntly states “IRS actions and Appeals’ handling of CDP [Collection Due Process] hearings may deprive taxpayers of meaningful hearings.”

S-Corporation election guidelines hurt small business: Small businesses have several available options for filing taxes but the most attractive for most businesses is S-Corporation status. The cumbersome election process required to qualify is one that large companies can afford to handle relatively easy but the NTA report claims that although small businesses may qualify, the process is so cumbersome and complex that it unduly burdens them by forcing re-filing of already filed information and usually results in filings for retroactive relief. This frequent process hurts the allowable deductions of small business and increases cost and labor for both the business and the IRS in sorting out the confusion.

Along with listing several major problems with the IRS, the National Taxpayer Advocate also makes recommendations for legislation to fix issues within the Agency. Listed are some of the highlights of those recommendations:

Elimination (or reduction) of “Tax Sunsets”: The NTA reported that there are over 100 provisions in the current tax code that are “temporary” and set to expire. This makes it incredibly difficult for businesses and individuals to plan for the future when it is uncertain if Congress will vote to extend a particular provision or not. These “Tax Sunsets” also make it difficult to estimate liabilities or income as well. The report calls for the elimination (or reduction) of these provisions by listing several ways to remove the incentive to enact these types of measures.

Recently, there was debate in Congress about whether or not to vote to prevent tax hikes as previous legislation, which produced higher labor productivity, grew the economy by 0.7 percent, and increased overall output by 0.4 percent (according to The Tax Foundation) was set to expire. If this legislation was allowed to expire, the result would have been tax increases on personal income for every bracket, a return of the death tax, higher taxes on marriage and family, and higher tax rates for savers and investors.

The uncertainty hurts business and needs to be reformed. Without the uncertainty, businesses and individuals will have a better understanding of what they can expect in the future and efficiently plan accordingly.

Repeal the Alternative Minimum Tax (AMT): The AMT was first created to trap a handful of taxpayers who some officials felt didn’t pay their “fair share.” Today however, the AMT affects a large portion of taxpayers and essentially forces many to compute their taxes twice and pay the higher amount. The AMT operates on a complex and completely different set of rules and does not offer deductions for dependants or taxes paid to state and local governments. This is an outdated and biased system that now affects about 4 million Americans and will affect up to 24 million Americans if a current patch “sunset” is allowed to expire. The elimination of this tax would free up taxpayers and IRS employees from a complicated system while also eliminating the “trapping” of certain taxpayers.

Extend the due date for S-Corporation elections: This would allow businesses, usually small businesses, to avoid overlooking a paperwork problem that usually results in the taxation at a corporate rate without the benefit of deducting operating costs on individual tax returns. The problem is so wide-spread among small businesses that many have had to seek retroactive relief, straining the resources of the businesses and the IRS. In 2009, 24 percent of new S-Corporation filings were unprocessed returns. The extension of the deadline allows a greater time for businesses to complete their election and paperwork. It also allows for filing at a more convenient time so as to end the need for retroactive relief efforts and reduce the load put on both the IRS and businesses currently.