Advocate says taxpayers, IRS befuddled by confusing laws

WASHINGTON -- There are education tax breaks that require an 83-page manual to decipher. A dozen options for retirement savings accounts. A mysterious "second layer" of taxation -- the alternative minimum tax -- that could mean the difference between a refund or a tax bill.

As Americans start thinking about filing their 2004 returns, the IRS ombudsman Tuesday highlighted problems likely to confound some taxpayers.

The biggest of all, the national taxpayer advocate said, is the web of complicated, sometimes contradictory, often impenetrable tax laws.

Taxpayers struggle to understand the rules. They make mistakes and lose themselves in the IRS bureaucracy. The IRS labors to explain the laws, communicate with taxpayers and resolve conflicts.

"Taxes shouldn't be the realm of accountants and highly paid professionals," said taxpayer advocate Nina Olson. "For the vast majority of taxpayers, they literally should be something that they can complete themselves."

Taxpayers instead struggle to make basic financial decisions, such as which incentives to use for education and retirement.

The deductions, credits and savings accounts designed to help families with education costs come with different eligibility requirements. Six apply income limitations -- at six different levels. Fees, books, supplies and other expenses may or may not be covered.

Among a dozen retirement savings plans, the allowances and penalties for early withdrawal can vary widely. Each has different rules governing how contributions can be deposited, borrowed or withdrawn.

These education and retirement rules can be streamlined to help people understand and use the tax incentives, Olson said. President Bush asked a commission to study and recommend changes to tax laws this summer.

The alternative minimum tax, on the other hand, should just be abolished, she said. Taxpayers increasingly get trapped in this tax, originally aimed at the richest tax dodgers, because they have children, live in states with high income taxes or exercise certain stock options.

"I'm a taxpayer advocate for even the rich people. Why should they have to deal with complexity?" Olson said.

She also urged the IRS to let people file their tax returns electronically without paying a preparer to submit them. "That bugs the life out of me. I shouldn't have to do it," she said.

The IRS said its computers aren't equipped to receive and process electronically filed returns sent by individuals.

These complications make it hard for the IRS to communicate with taxpayers and explain their obligations, Olson concluded.

The IRS increasingly encourages taxpayers to use its Web sites and telephone menus or volunteer organizations to find information. Taxpayers spend less time talking face-to-face with IRS personnel.

When taxpayers and the IRS do try to communicate, the message is easily confused, Olson reported. The nation's tax collectors mail more than 100 million notices each year that taxpayers often can't understand. The IRS has a harder time helping taxpayers apply the laws to their individual circumstances as laws become more complex.

To show the difficulties taxpayers face while dealing with the IRS, the Taxpayer Advocate Service reviewed the agency's audits of the earned income tax credit, a benefit for low-income taxpayers aimed at lifting workers out of poverty.

The office found that 43 percent of the taxpayers who asked the IRS to reconsider its decision during an audit to deny the claimed credit got some or all of the credit reinstated. On average, those taxpayers got 94 percent of the amount originally claimed.

The study concluded that those taxpayers didn't improperly claim the credit. "Rather, the audits merely showed that the taxpayer flunked the IRS audit process," Olson said.

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On the Net:

IRS Taxpayer Advocate Service: http://www.irs.gov/advocate/