Simplexity: Plain Language and the Tax Law

• Publication year: 2017

Simplexity: Plain Language and the Tax Law

Joshua D. Blank

Leigh Osofsky

SIMPLEXITY: PLAIN LANGUAGE AND THE TAX LAW

Joshua D. Blank^* Leigh Osofsky^**

Abstract

In recent years, federal government agencies have increasingly attempted to use plain language in written communications with the public. The Plain Writing Act of 2010, for instance, requires agencies to incorporate "clear and simple" explanations of rules and regulations into their official publications. In the tax context, as part of its "customer service" mission, the Internal Revenue Service bears a "duty to explain " the tax law to hundreds of millions of taxpayers who file tax returns each year. Proponents of the plain language movement have heralded this form of communication as leading to simplicity in tax compliance, more equitable access to federal programs, and increased open government.

This Article casts plain language efforts in a different light. As we argue, rather than achieving simplicity, which would involve reform of the underlying law, the use of plain language to describe complex legal rules and regulations often yields "simplexity." As we define it, simplexity occurs when the government presents clear and simple explanations of the law without highlighting its underlying complexity or reducing this complexity through formal legal changes. We show that in its numerous taxpayer publications, the IRS frequently uses plain language to transform complex, often ambiguous tax law into seemingly simple statements that: (1) present contested tax law as clear tax rules, (2) add administrative gloss to the tax law, and (3) fail to fully explain the tax law, including possible exceptions. Sometimes these plain

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language explanations benefit the government; at other times, they benefit taxpayers.

Having introduced the concept of simplexity to the legal literature, we show how the IRS's use of simplexity poses a trade-off between representing the tax law accurately and making it understandable to the public. We offer approaches for preserving some of the benefits of simplexity while also responding to some of its drawbacks. We also forecast the likely emergence of simplexity in potential future tax compliance measures, such as government-prepared tax returns, interactive tax return filing, and increased third-party reporting.

Introduction..............................................................................................191

I. The Duty to Explain the Tax Law...............................................196

A. The IRS as Customer Service Organization .............................. 197
B. Explanation Approaches ........................................................... 199
C. In Praise of Plain Language...................................................... 202

II. Simplexity in IRS Publications ....................................................204

A. What Is Simplexity? ................................................................... 205
B. Categories and Examples .......................................................... 207

1. Presenting Contested Tax Law as Clear Tax Rules............. 207

a. Deductibility of Ordinary and Necessary Business Expenses ....................................................................... 207
b. Deductibility of Home Mortgage Refinancing Points ... 210
c. Tax Characterization of Leveraged Leases .................. 212

2. Adding Administrative Gloss to the Tax Law ...................... 214

a. Capitalization of Improvements.................................... 214
b. Exclusion of Gain from Sale of Principal Residence .... 217
c. Multiple Individual Retirement Account Rollovers ....... 219

3. Failing to Fully Explain the Tax Law.................................. 221

a. Bartering Deductions ................................................... 221
b. Early Individual Retirement Account Distributions ..... 224
c. Characterization of Activity as Profit-Seeking ............. 226

C. Taxpayer Exposure to Simplexity .............................................. 228

III. Is Simplexity Sound?......................................................................234

A. Benefits ...................................................................................... 234

1. Tax Law in Plain Language ................................................ 234
2. Visibility into the IRS's Views of the Tax Law..................... 235
3. Administration and Revenue Benefits .................................. 236

B. Threats ....................................................................................... 237

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1. Reduced Tax Transparency ................................................. 237
2. Unequal Benefits and Burdens ............................................ 242
3. Inadequacy of Administrative Law to Police Threats.......... 245

C. The Trade-Off ............................................................................ 250
D. Potential Responses ................................................................... 251

1. Red-Flagging....................................................................... 252
2. Review of IRS Publications ................................................. 256
3. Structural Reform ................................................................ 258

E. The Future of Tax Administration ............................................. 259

Conclusion..................................................................................................263

INTRODUCTION

Imagine it is April 15th, "Tax Day," and as the sole owner of a local pizza shop, you are racing to complete your annual tax return before the U.S. Post office closes. Specifically, you are trying to decide whether you can claim a tax deduction for a $6000 expense you paid last winter to fix your restaurant's copper piping, which was damaged as a result of a flood. (Your expenses for plumbing are usually around $3000 annually.) You understand from the owner of the barbecue restaurant next door that his accountant recently told him he could not deduct expenses for "improvements."¹ Now imagine that you read the following two statements, the first of which is from Treasury regulations and the second of which is from an IRS publication regarding business expenses:

Statement 1: "Requirement to capitalize amounts paid for improvements. Except as provided in paragraph (h) or paragraph (n) of this section or under § 1.263(a)-1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3) of this section) paid to improve a unit of property owned by the taxpayer."²

Statement 2: "Improvements. Improvements are generally major expenditures. Some examples are new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements."³

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As you struggle to make a decision about whether to deduct the copper piping expense, which of these two statements is more helpful to you?

If you are like most people, you will most likely find Statement 2 to be far more helpful than Statement 1. After reading Statement 2, you may decide that your expense was a "major expenditure"—it was double your usual expense—and, as a result, you cannot claim the deduction. This conclusion, however, is not necessarily correct. The "major expenditure" standard in Statement 2, from the IRS publication,⁴ does not appear anywhere in the Internal Revenue Code or Treasury regulations. Further, the provisions that Statement 1, from the Treasury regulations,⁵ references contain specific examples that provide support for allowing you to deduct the expense immediately.⁶ While Statement 2 may help you to make a decision regarding the deduction, this decision may not be consistent with the tax law.

As this hypothetical illustrates, the IRS often attempts to explain tax law that consists of complex, ambiguous statutory rules and administrative regulations using terms that are "[c]lear and simple"⁷ to most taxpayers. While the IRS assesses and collects over three trillion dollars in tax liability annually as a tax enforcement agency,⁸ the agency also assists hundreds of millions of taxpayers each year⁹ in its dual role as a customer service organization.¹⁰ In this latter capacity, the IRS bears a duty to explain the tax law to taxpayers,¹¹ and taxpayers, likewise, possess the right to be informed by the IRS about the tax law.¹² Further, as a result of the implementation of the Plain Writing Act of 2010, spearheaded by Cass Sunstein in his role as Administrator of the Office

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of Information and Regulatory Affairs,¹³ the IRS must use plain language to convey the tax law in "easily understandable language on all of [its] forms, publications, documents and notices."¹⁴ Sunstein and others have heralded initiatives like the Plain Writing Act as increasing "simplicity,"¹⁵ which they argue enables taxpayers to self-assess their own tax liability, ensures equal access to information about government programs and services, and increases government transparency.¹⁶ As Sunstein has noted, the introduction of plain language in government communications should "promote clarity, because it is designed to ensure that when government communicates with citizens, it does so in a way that people can easily understand."¹⁷

This Article casts plain language efforts in a different light. As we argue, rather than achieving simplicity, which would involve reform of the underlying law,¹⁸ the use of plain language to describe complex legal rules and regulations often yields "simplexity." As we define it, simplexity occurs when the government presents clear and simple explanations of the law without highlighting its underlying complexity or reducing this complexity through formal legal changes. outside of law, simplexity is a concept that has emerged in recent years in diverse fields, including chemistry¹⁹ and biology,²⁰ cognitive psychology,²¹ literary analysis,²²...