What tax benefits would you sacrifice in exchange for a simpler tax code?
That's the question being posed this week by the top IRS watchdog, who set up a new website to field suggestions from the public on how to streamline the tax system. And the trade-off being pitched by National Taxpayer Advocate Nina Olson would indeed be a sacrifice.
Olson, in a blunt appeal to all Americans who tear their hair out over their 1040s, argued that the tax code is so complicated because it's saving everybody money in lots of different ways. Tax breaks for health care premiums, retirement plan contributions, mortgage interest and other expenses amount to thousands in savings every year for the average taxpayer -- $8,000 a year, to be exact.
But in exchange for simplifying the tax code, which would require Americans to give up at least some of those tax breaks, Olson said rates could be lowered and tax forms would be easier to complete.
But taxpayers can't have their cake and deduct it, too.
"If tax rates are to be substantially lowered, many existing tax breaks will have to be eliminated immediately and others will be phased out," Olson said in a statement. "But I believe most taxpayers will conclude this is a worthwhile trade-off."
Ideally, she said, the federal government could create a much simpler tax code while leaving the average taxpayer liability pretty much unchanged.
Olson is now taking suggestions from the public at her website. She wants to know what breaks people would be willing to give up and what provisions of the existing system are most burdensome or unfair.
Tax code reform is a common refrain in Washington. But every tax break passed by Congress -- like those in the massive package approved at the end of the lame-duck session -- makes it a shade more complicated.
The most recent call for simplifying the tax system came from the president's deficit reduction commission. Its end-of-the-year report, though, was not approved -- plus the commission co-chairmen got hammered for proposing a reduction in the amount of money homeowners could claim from the mortgage interest deduction.
With the housing market so unstable, eliminating or reducing that deduction could serve as a disincentive to buy and deprive middle-class homeowners of a valued tax break. The Mortgage Bankers Association argued last year that the deduction is "one of the pillars of our national housing policy" and that to restrict it would hurt consumers and home values. Some economists said the housing market is too fragile for such a big change. About one-quarter of tax filers received the deduction in 2008.
But Olson argued that most taxpayers would have to give up something in exchange for reform.
"If tax preferences are to be eliminated in order to reduce tax rates, we cannot pretend that broadening the tax base means eliminating someone else's tax break while preserving our own," she wrote in the report. "Everything must be put on the table."
Olson's report said all "special interest" tax breaks combined add up to about $1.1 trillion annually. Other popular provisions that contribute to that amount include lower rates for dividends and capital gains, public transportation subsidies and breaks for Medicare benefits.
According to the report, about 60 percent of taxpayers use a preparer to file their taxes, while nearly 30 percent use software to assist in filing their returns. The median cost of complying with the tax code is close to $260 a year.
The taxpayer advocate's office is an independent organization inside the IRS meant to help taxpayers.
Editor's Note: Click here to leave a suggestion for the IRS and post your suggestions for changing the tax system in the "comments" box below.