The national taxpayer advocate's annual report to Congress.

• Author: Chambers, Valrie
• Position: Part 3

In the second of a two-part piece, this item outlines the recommendations of Nina Olson, the national taxpayer advocate, for legislative reforms to the Code as presented in her annual report to Congress. Part I, in the July issue, recapped Olson's recommended changes within the IRS.

Legislative Recommendations

The main message of the national taxpayer advocate's legislative recommendations is "Simplify." Olson requested the repeal of the alternative minimum tax (77% of the additional income subject to the AMT stems from the disallowance of dependency deductions and state and local taxes) and the elimination or reduction of sunset provisions and phaseouts that hinder tax planning, including the misestimation of interim tax payment requirements. These simplifications could be offset with higher marginal tax rates.

She then recommended that Congress simplify existing portions of the Internal Revenue Code in which several disjointed tax treatment choices are available to individuals. For example, the numerous family status provisions could be simplified by consolidating them into two categories: (1) a refundable family credit to reflect the costs of maintaining a household and raising a family and (2) a refundable worker credit as an incentive for low-income individuals to work. The 11 education tax incentives could be simplified by uniformly defining common terms, income-level thresholds, phaseout ranges, and inflation adjustments across provisions. The 16 retirement tax incentives could be streamlined by uniformly establishing eligibility rules, contribution limits, taxation of contributions and distributions, withdrawals, loan availability, and portability. The numerous pension plan provisions could be consolidated into a single retirement plan for each of three categories: individual taxpayers, plans offered by small businesses, and plans offered by large businesses. (Plans for government agencies would conform to either the second or third category, depending upon their size.)

In addition, Congress could simplify the treatment of cancellation of debt. Financially distressed individuals are often unaware that cancellation of debt income (CODI) can increase their tax liability. While exceptions exist, reporting under an exception is complex and requires filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with the tax return (a form with which many tax preparers are unfamiliar)...