Memos to the IRS: A Peek Inside Its Suggestion Box

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In the complicated, confusing, and confounding world of taxes, we taxpayers have a little-known ally deep in the heart of the IRS: the office of the Taxpayer Advocate, Nina Olson.

For years, she has pelted Congress and the IRS with her observations on problems in the system and suggestions for improvements. She also welcomes your thoughts via a suggestion box for tax reform ideas. So far, she's received roughly 1,500 submissions from folks like us, and she's still asking for more.

What Your Fellow Taxpayers Are Willing to Sacrifice

The suggestions offer an intriguing peek into American taxpayers' minds. The current tax code offers many tax breaks, but some of us are willing to give them up. For example:
  • The Child Tax Credit: One taxpayer said, "I have a child, but other people do not. Why should I get a tax break for a decision I made?" Others object to dependent exemptions, noting that the days of encouraging large families for farm work are gone.
  • Mortgage Interest Deductions: One person suggested, "If people can afford to buy a $1 million dollar home, then they do not need a tax break for taking out a large mortgage." Those who choose to rent, or who can't afford to buy property, will likely agree that this isn't a "fair" break.
Of course, fairness is not always as simple as it seems. Some have argued that people without children shouldn't have to pay taxes to support public schools. But an educated society can benefit all citizens, parents and non-parents alike. With taxes, fairness matters most in regard to the overall tax hit each of us takes.

What Taxpayers Want to Keep


Many other citizens cited tax breaks and regulations that they wanted to keep, including the currently low tax rate for dividends and capital gains. Considering that companies make those payouts after they've paid their own tax bills, the dividend tax actually represents a second tax on that money.

Having a low capital gains tax rate encourages people to invest, which is good for the economy. But low taxes on dividends and capital gains can also permit the very wealthy to pay a far lower overall tax rate than ordinary citizens. Warren Buffett has often remarked that his assistant faces a much higher tax rate than he does.

Some taxpayers consider certain breaks too small, such as the $3,000 per child that you may be able to deduct for day care expenses. One commenter suggested that the IRS increase that maximum, since those costs can be much larger in areas with higher costs of living.

Things Taxpayers Want to Scrap or Add

In addition to the well-liked policies that taxpayers would reluctantly give up for the greater good, there are quite a few they'd be far happier to dispose of. The taxation of unemployment benefits gets little love from commenters; as one said, "Talk about kicking somebody when they are down!" Taxing Social Security benefits is another no-no to some, since the money in the Social Security system gets there via another tax in the first place.

One person suggested that tax returns add the option of making a "donation" to reduce the deficit. It may seem a little wacky, but if 50 million households chip in $50 each, they could raise $2.5 billion.

Another out-of-the-box idea would let taxpayers decide where some of their tax dollars go, with interests ranging from war to green energy vying for dollars.

Even Tax Preparers Think the Tax Code Is Too Complex

A very common plea in the suggestions is for more simplicity. One person boldly writes:

"Get rid of all deductions, all special tax rates, all credits... The process should be so simple no one needs a tax preparer. I am a tax preparer and benefit from the current system, but it is still BAD BAD BAD for the country. It is a massive burden on the economy! I dare you to take away my livelihood! PLEASE!"

Tax preparation is costly. People and companies spend more than 6 billion hours on tax preparation, the equivalent of more than 3 million full-time workers. In Olson's 2010 report to Congress, she estimated that "the costs of complying with the individual and corporate income tax requirements for 2008 amounted to $163 billion -- or a staggering 11% of aggregate income tax receipts."

Most observers agree that the tax code is too complex, but opinions vary on just how simple it should get. Some suggest scrapping income taxes in favor of nationwide sales taxes, but others point out that that can hurt lower-income people more. Others suggest a flat tax for everyone (usually above a certain low income threshold) -- such as 10% -- or a simple graduated tax, with higher rates for those earning more, and few deductions, credits, or loopholes.

That's just a smattering of suggestions. Click over to the Advocate's website and drop your own thoughts and suggestions into the box. And for more tax tips and strategies, check out the WalletPop Tax Center.

Selena Maranjian is a longtime Motley Fool writer.

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caohellsux1978

Hi everyone! I got so tired of clicking on the link "Latest Financial News", and looking at stories that have been there over a month. Their top story has been there since January! And the stories that are actually current, you cant comment on them! I moved over to Yahoo. There pages are much, much better. You actually get current news, and you can even comment! What a novel idea!

July 12 2011 at 6:47 AM Report abuse rate up rate down Reply
RaymondC

When the current tax system costs US$300 BILLION per year in compliance costs and drives millions of jobs, thousands of factories, hundreds of corporate headquarters and possibly as high as US$14 TRILLION in American-owned liquid assets out of the USA for tax avoidance reasons, this is now officially economic insanity.

It's time to kibosh the entire tax code and start all over again with what Steve Forbes proposed in 1996: a simple, flat-rate 17.5% income tax where the only deduction/exemption/credit is exempting US$13,000 per adult in a two-adult household and US$9,000 per child in the household for the earned income and no longer count bank account interest, capital gains and stock dividend payments towards earned income. The result would be a tax filings so simple almost every American would fill out a form not much bigger than a postcard! :-) And because it encourages American residents to keep their savings and capital investments in the USA, the result is bringing back most of those jobs, factories, corporate headquarters and that US$14 trillion in liquid assets, a gigantic "natural bailout" that would result in the next American economic boom, a boom that would single-handedly "float the boat" of the other economies of the world that do business with the USA.

July 12 2011 at 12:12 AM Report abuse rate up rate down Reply
zy1e

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July 11 2011 at 10:44 PM Report abuse rate up rate down Reply
Danny Grosh

FLAT TAX, no write-off's. Everybody pays. The fairest system of all.

July 11 2011 at 12:50 PM Report abuse rate up rate down Reply
american

Reduce spending! The government should rely primarily on tarriffs and excise taxes to set their budget . Taxes are way to complicated!!! If nothing else...Please, please, please, get ride of the Alternative Minimum Tax - this is just confusing.

July 11 2011 at 12:48 PM Report abuse rate up rate down Reply
tevroc143

The tax code is set to allow those with the least to pay the most in a percentage of adjusted gross income. Corporate America pays the least and this is not fair. If everyone was required to pay their fair share, we would not have the current massive debt load. Republicans keep saying Corporate America needs EVEN MORE tax breaks to create jobs. We have been under this misguided "trickle-down" "voodoo economics" since W. Bush. If jobs were actually created using this flawed theory, we should have more jobs than people to work them. We don't! We didn't under W. Bush and still don't under Obama.

Corporate American needs to pay up and shut up. They are not doing anything, but destroying America. They have shipped our jobs overseas for years now and are destroying the environment. Republicans want to underfund the EPA so the polluters can further destroy our environment. Maybe Republicans don't need clean air and water. With their way of thinking, it is more than obvious their minds are already polluted. Their lack of empathy and remorse already can be diagnosed and they are sociopaths. Their massive, never ending greed is taking America down to third world status. The very ones railing on Obama are the ones who helped W. Bush take a balanced budget and double the debt in 8 years.

Two unfunded wars which they NEVER want to end and a Massive Defense budget they don't want to cut proves to me these sociopaths need to be removed from office. If you hate government so much, WHY do you keep running for office?

July 11 2011 at 12:35 PM Report abuse +1 rate up rate down Reply
ilm9p

Tax the church, tax it hard, and tax it now!

July 11 2011 at 6:57 AM Report abuse +1 rate up rate down Reply
Jan

Watch Zeitgeist the movie. Then, stop paying income taxes because there is NO law that says we have to, sleepers.

July 10 2011 at 7:46 PM Report abuse rate up rate down Reply
dfoster

Simplify the tax code - even the IRS admits they don't understand it all. Cap the state and federal taxes by statute (? 10% state, 25% federal) and eliminate the special interest deductions tacked on by politicians (NO exemptions at all?)

Congressional spending rule:
1) Decide how much money you actually have.
2) What is the best way to spend it for the best result.
(DO NOT fund every idea that seems like a benefit, and then raise taxes or debt limit to try to figure out how to fund them all - that scheme will bankrupt every family or business, and will soon bankrupt the country.

ps. Please don't tell me that the situation is too complex for ordinary citizens to understand and we just have to trust the politicians. WE work for a living, Uncle Sam doesn't. We pay taxes with our net profits, but the government HAS NO net profit.

July 10 2011 at 2:39 PM Report abuse rate up rate down Reply
smooth

A flat 15% to 20% tax rate whether your an individual or a business would be more than enough to operate an effective minimalized government and an extremely healthy standing military. Stop funding programs that can not be or are not getting proper oversight. Drug test welfare recipients,housing recipients, wic recipients, ssdi recipients, basically anyone getting a free government ride.

July 10 2011 at 1:57 PM Report abuse rate up rate down Reply
2 replies to smooth's comment
ThinkUp70

For someone only making $10,000, it would be a hardship to pay 15% of their income. If that same individual spent $5,000 of that income, they would only have to pay $150.00 for the year, with a national sales tax. It's a multitude of contributions that add up.

July 10 2011 at 2:48 PM Report abuse rate up rate down Reply
Jan

Churches don't pay taxes because they know the truth...there's is no law that says anyone has to pay taxes. Educate yourself on the origin of the Federal Reserve. It's the greatest lie ever told. :)

July 10 2011 at 8:07 PM Report abuse rate up rate down Reply