Introduction 83 I. The Importance of IRS Publications 90 A. IRS Publications and the Practice of Tax 91 B. IRS Publications and Tax Scholarship 100 II. IRS Publications and Tax Complexity 105 A. The Problem of Tax Complexity 105 1. Agree-to-Disagree Hypothesis 109 2. Pluralism Hypothesis 113 3. Legal Craft Hypothesis 115 B. IRS Publications and the Path Forward 118 1. The Study of IRS Publications 119 2. Next Steps 122 3. An Objection 123 III. Publication 541 and Partnership Tax Complexity 125 A. The Problem of Partnership Allocations 128 1. The General Allocation Rules of Section 704(b) 130 2. Contributed Property Allocation Rules of Section 704(c) 134 B. Partnership Allocations and Publication 541 138 1. Section 704(b) 139 2. Section 704(c) 140 3. The Future of Partnership Allocations 143 Conclusion 146 Introduction
Taxpaying is not easy. In one recent poll, 23% of the individuals surveyed said that they would rather undergo root canal surgery than do their taxes, and 32% said they feared taxpaying more than death. (1) For most taxpayers, everything about the process of paying taxes--the law, the record keeping, the forms--often feels hard, expensive, and overwhelming. (2) Part of the problem is that taxpaying is not an activity that one can do alone. Very few taxpayers turn directly to the Internal Revenue Code to determine their federal income tax liability. Instead, taxpayers rely on intermediaries--legal experts, tax return preparers, commercial software, and the IRS--to navigate their annual filing obligations. These intermediaries are quite diverse in terms of the taxpayer populations they serve, the sophistication of their advice, and their cost. Yet all of these intermediaries perform a common function, bridging the gap between substantive tax law and the millions of individual and entity taxpayers required to file federal income tax returns annually.
IRS publications play a foundational role in communicating tax law to the millions of stakeholders that make up the federal income tax community of taxpayers, practitioners, government officials, and academics. (3) Like tax forms and the accompanying instructions, IRS publications are instruments for explaining substantive tax law to stakeholders in a simple, comprehensible, and accurate manner. (4) For taxpayers who file their own income tax returns, these publications are often their primary source of information regarding substantive tax law. (5) From the vantage point of many of these taxpayers, IRS publications are the tax law.
IRS publications are also essential to the tax system's other intermediaries, who rely on these publications in providing taxpayers with commercial return preparation services. For example, online platforms like TurboTax commonly default to IRS publications, tracking the IRS's language when explaining a tax law provision or referring a taxpayer to a particular IRS publication for additional guidance. (6) Likewise, the IRS relies almost exclusively on its publications to teach thousands of volunteer return preparers participating in the Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs about substantive tax law. (7) IRS publications also reach large numbers of stakeholders through the Internet, where search results commonly generate highly ranked results that include these explanatory materials.
Although central to the practice of tax, IRS publications are scarcely mentioned in legal scholarship and tax policy debates. Considering their influence and ubiquity in the federal income tax system, it is surprising how little attention scholars and policymakers pay to IRS publications. The few times that IRS publications are mentioned in the tax scholarship, they are merely viewed as a transmittal device, delivering information about tax law to taxpayers and tax return preparers who are the stakeholders primarily responsible for filing federal income tax returns. (8) The focus is on the role of IRS publications in the "retail" taxpaying process, particularly how to improve taxpayer compliance or foster values like legitimacy and transparency that are crucial to our federal income tax system. (9)
Yet to focus only on the role of IRS publications in the taxpaying process does not tell the whole story about these publications. This Article suggests that IRS publications not only help non-expert stakeholders, they can also play a vital and unexpected role in the expert world of scholars and policymakers. In particular, studying IRS publications can shed important light on one of the most pressing challenges facing the federal income tax system--complexity. (10) There is general consensus within the stakeholder community that substantive tax law is too complicated for taxpayers who must comply with the law and also for government officials who must enforce it. (11) Simplification is thus a unique tax reform priority that resonates with virtually all stakeholders. Even so, we never seem to make meaningful progress toward a simpler federal income tax. In fact, the more experts try to understand tax complexity, the more complicated substantive tax law seems to become. The result is a costly stasis where taxpayers are increasingly left with few good options as they struggle to navigate tax laws that they cannot understand.
This Article offers a novel framework for identifying and analyzing tax complexity through the study of IRS publications. Indeed, these instruments for communicating substantive tax law to non-expert taxpayers in a simple and accurate format also yield surprisingly important lessons for experts about the nature and prevalence of the underlying law's complexity. Expert study of IRS publications therefore represents an important first step toward isolating the tax law's most consequential complexity problems, the problems that require congressional or regulatory solutions. By evaluating the IRS's explanations of various substantive tax law provisions, experts can compare their "quality" and identify the provisions most likely to present stakeholders with serious complexity challenges.
Operationally, experts would study the IRS's explanation of a substantive tax law provision and, with a particular focus on simplicity and accuracy, ask whether the explanation is serviceable. (12) Put another way, the expert would ask whether a non-expert stakeholder could understand the explanation well enough to file her tax return and achieve something close to compliance with the underlying law. In assessing the serviceability of a particular explanation, the key is whether the IRS effectively communicates the "core" of the tax law provision, which includes its foundational rule, animating theory, and basic operating mechanics. The provision's surrounding "details," in contrast, fall outside this analysis, often involving exceptions, elections, or special rules that primarily impact sophisticated taxpayers receiving expert tax advice.
If an expert concludes that an explanation is serviceable, then the IRS has successfully mediated any complexity in the underlying law through its publication. This characterization as a relative success thus signals to experts that the substantive tax law provision should not be treated as a high priority complexity problem warranting congressional or regulatory intervention. If, however, the expert does not consider the explanation serviceable, then she has identified a substantive tax law provision that may suffer from a consequential complexity problem. Characterizing an explanation as a relative failure highlights instances where the IRS has not communicated a tax law provision's core simply or accurately. These relative failures can take many forms: the simplest form is omission, but failures may also result from explanations that are too complicated for non-expert stakeholders or from explanations that inappropriately oversimplify the underlying law. (13) In all these instances, the designation as a failed explanation functions as a red-flag, identifying substantive tax law provisions that potentially suffer from serious complexity problems and, in turn, require further study to determine the true nature and severity of the problem. (14)
This Article's approach allows experts to formulate a practical research and reform agenda that prioritizes substantive tax law provisions where the IRS has failed to mediate the underlying law's complexity through its publications. Although a failed explanation is not conclusive proof of a complexity problem in the underlying law, it signals a potential problem and, in doing so, focuses experts' attention on the complexity problems most in need of careful study. IRS publications therefore offer experts a transformative opportunity to bypass many of the theoretical roadblocks that have hampered past efforts to address the federal income tax law's chronic complexity problem. Indeed, the path to meaningful tax reform may begin in the most unexpected space, with the expert study of the decidedly non-expert explanations of substantive tax law found in IRS publications.
In order to illustrate the value of studying IRS publications, this Article turns to the rules of subchapter K, which govern the taxation of partnerships and their partners. (15) Although partnership tax may seem like an unconventional illustrative choice, partnerships play an especially vital role in the federal income tax system. Millions of non-expert stakeholders organize their businesses as partnerships for tax purposes and must navigate portions of subchapter K annually. (16) Likewise, partnerships and other non-corporate entities are now responsible for over half of the business net income reported each year. (17) At the same time, partnership tax is universally viewed as one of the most complicated areas of substantive tax law, as evidenced by six decades of scholarship critiquing virtually every aspect of this elaborate system. (18)
This Article thus...