By Jay Dismukes

Make everything as simple as possible, but not simpler.— Albert Einstein

NEW YORK—Just as President Bush signed into law the nation’s third-largest tax cut bill in history last month, the New York State Society of CPAs issued to Congress a 25-page report that identifies seven areas of the Internal Revenue Code that the Society believes are eligible for simplification.

With the Jobs and Growth Tax Relief Reconciliation Act of 2003 now passed and the possibility for more tax legislation on the way, a specially appointed Society task force has called on federal legislators to begin making good on their oft-mentioned but as yet unrealized pledge of tax code simplification. (The eight-member task force, chaired by former NYSSCPA President Alan E. Weiner, believes there is a complete absence of simplification in the most recent tax act.) To help spur the lawmakers to action, in early May the members prepared extensive commentary with suggested solutions of “egregious” tax items that “affect a great many people, or possibly the wrong people” and could be simplified.

Though there were many avenues the task force members considered pursuing, they ultimately decided to concentrate on the identification of individual, not business, tax simplification issues. The task force did not advocate scrapping the complete tax code or even simplifying it in its entirety, and they felt it best to leave matters of revenue loss possibly resulting from simplification to the decision making of economists and Congress.

“There is nothing wrong with having a tax law that requires outside professionals…but it could be made simpler,” Weiner said of the task force’s intent. “You can’t make a law that is so difficult that it is almost impossible to administer fairly,” he added of the alternative minimum tax (AMT), one of the areas that the task force identified as too complex.

The Seven Deadly Sins

In addition to the AMT, the task force also urged Congress to consider simplifying the following tax items:

• Earned Income Tax Credit (EITC)
• Phase-Outs
• Definition of a Child
• Floors: Limitations on Deductions
• Taxation of Social Security Benefits
• Sunsets

For each item, the 25-page report includes a summary of the problem, an in-depth discussion of the related issues, and a concise conclusion with solutions to assure proper compliance.

EITC: “Understanding the intricacies of the Earned Income Credit and the differences with other tax provisions is a daunting process that sometimes deters those trying to accurately obtain this substantial benefit,” the report states. “In addition, as with no other tax provision, an eligible taxpayer must prove eligibility at the filing stage, not merely later if an item is subject to audit.”

The task force added that the complexities of the EITC, which was intended to ensure that all workers stay above the poverty level, make compliance very difficult. The confusion stems from a number of factors, including the presence of two different credits: one for taxpayers without children and another with children, with different criteria for each.

Referring to a three-generation household of parent, child and grandchild, the task force revealed additional complications. Under such a scenario, the taxpayer claiming the credit may not be a qualifying child of someone else claiming the credit, and the same child may not be used by more than one person; but two taxpayers, with only one to take the credit, could claim the same child. The calculation of the credit, the task force said, also is difficult to discern.

To simplify the EITC rules, the task force recommended allowing the use of ITINs and ATINs in addition to Social Security numbers for all qualifying children; removing the age requirements for the credit for taxpayers with no children; eliminating the reduction in the credit based upon the one-half self-employment tax adjustment, and eliminating Form EIC and providing a check-off box like that for the child tax credit.

Definition of a Child: Referencing a study prepared by the Department of the Treasury in April 2002, the task force requested that Congress make the definition of a child consistent.

“Because of these differing definitions, the Treasury found that many taxpayers did not claim benefits to which they were legally entitled and that there were large numbers of errors by those taxpayers who did claim the benefits,” the task force wrote.

Among other suggestions, the task force recommended closer examination for the treatment of a foster child, as well as consistent application of the age criteria for the child tax credit and the earned income credit.

Taxation of Social Security Benefits: The task force pointed out that current rules can result in the taxation of up to 85 percent of Social Security benefits, even leading to the elimination of the benefit of receiving tax-exempt interest. The members instead advocate a fixed taxable percentage not to exceed 50 percent, as well the repeal of various modifications to determine the tax base.

Sunsets: Perhaps of significant interest to the accounting profession are the report’s conclusions regarding sunsets, which it states “make for bad tax law.”

In the discussion, which cites a number of well-known publications that refer to sunsets as “budget gimmickry” and “creative accounting,” the task force said the practice creates uncertainty in the tax law.

“If Congress cannot pass a bill without an automatic triggering device to cause its collapse, then the bill should not be enacted in the first place,” the report states.

The discussion also draws attention to the apparent irony of a Congress that has been highly critical of businesses that make creative use of accounting rules, only to employ very similar techniques when drafting tax legislation.

“Congress is criticizing business for loopholes…Why isn’t anybody criticizing Congress? Aren’t they essentially doing the same thing?” Weiner said of sunsets. “They are taking advantage of a loophole. They are avoiding a law that they passed.”

Behind the Scenes

Late last year, at the behest of incoming Society President Jeffrey R. Hoops, the task force on simplification began to take shape. In the ensuing months, Society members and the tax committees were made aware of the NYSSCPA initiative and the makeup of the force slowly fell into place. With the team established, Weiner provided each member with a compendium of tax simplification articles that they used to help them pare down and determine the topics that had the most pressing needs for address by Congress.

Every item in the report had two writers, with at least one of the writers possessing strong expertise on the issue to which he was assigned. The task force conducted the bulk of their work in a relatively short time and submitted the report to then Society President Jo Ann Golden and the Tax Division Oversight Committee for their approval several days prior to the tax act’s passage.

The Society sent the 25-page report to the New York state Congressional delegation, members of the Joint Committee on Taxation (the joint committee of members of the Senate Finance Committee and the House Ways and Means Committee) and the assistant secretary of the Treasury for tax policy.

In addition to Weiner, the following Society members comprised the tax simplification task force:

• M. David Bahr
• Sheldon Barasch
• Arthur Bloom
• Joseph L. Charles
• Alan J. Dlugash
• I. Jay Safier
• Harold K. Wiebusch

To view the entire report, go to the Society’s website at www.nysscpa.org and click on “NYSSCPA Comments on Tax Simplification” under the Info Highlights banner.