Don't Mess With Taxes

The National Taxpayer Advocate’s midyear report to Congress that was released on June 25 included, among other things, recommendations that the Internal Revenue Service continue its efforts to expand digital tax transactions and make them easier for taxpayers to use.

Such technological tax advances are also are of keen interest to the Electronic Tax Administration Advisory Committee (ETAAC). The federal advisory committee was established by Congress as part of 1998's IRS Restructuring and Reform Act.

And on the same day this week that the Taxpayer Advocate’s report was issued, ETAAC released its annual report to Congress.

ETAAC’s primary goal when formed was to help the IRS meet that law's targets for electronic filing of tax and information returns. Over the last 27 years, the electronic evolution has become a major part of all of our lives, including our taxes.

ETAAC members note that their latest report includes “a robust list” of 14 recommendations — four to Congress and 10 to the IRS — “for improving U.S. tax administration at the federal level in an era of rapidly changing technology and evolving taxpayer needs.”

Simple tax laws are a long shot: ETAAC’s first recommendation for Congress, and number one in the overall 14-point list, is particularly timely. It deals with tax legislation.

The House and Senate are currently haggling over a comprehensive bill to enact many of the second Trump administration’s policies. That includes extending myriad tax laws from the signature legislation of Donald J. Trump’s first term. Unless Congress acts, they will expire on Dec. 31.

When it comes to considering those, and future tax laws, the ETAAC report goes big. It addresses the holy grail of tax legislation. Tax simplification.

I appreciate the effort, and applaud the optimism. But, good luck with that.

My cynicism aside, here’s the case ETAAC makes in recommending that Congress consider tax simplification when implementing tax policy goals. This would, in turn provide for more efficient tax administration and federal budgetary savings.

One way to simplify taxes, argues ETAAC, is make as few as possible changes. New tax law requires new IRS guidance, which also increases inefficiency and IRS resource expenditures, says ETAAC.

In addition, Internal Revenue Code revisions alter and/or disrupt taxpayer planning, affecting not only taxpayers and the IRS, but also state tax departments and tax preparation software providers. This too often leads to inefficiency and wasteful expenditure of public resources.

“While a new Code provision might be necessary to achieve tax policy goals, we believe it is crucial to balance taxpayer and IRS stability needs by minimizing nonessential modifications when considering Code changes,” according to the report.

Long term tax laws are better: ETAAC’s report also urges lawmakers to aim for tax code stability. The panel suggests lawmakers carefully consider which that provisions they choose to make temporary when crafting statutory language.

“While we recognize that Congress must address budgetary constraints when enacting Code changes, complex deadlines potentially result in taxpayer confusion, inefficiency in taxpayer planning, and increased burden on the IRS to address the complexity,” says the report.

It cites the state and local taxes (SALT) federal tax deduction change as an example of a costly tax code revision that caused the expenditures of resources. In addition to the guidance of the original Tax Cuts and Jobs Act (TCJA) law, the IRS had to deal with state workarounds, and now Congress is mired on how to extend the expiring law.

Along that same vein, ETAAC recommends that Congress minimize complicated exceptions and elections to tax laws. “Consideration should be given to volume of use, taxpayers impacted, and resource utilization efficiency in crafting statutory language to avoid unnecessary burden and waste,” says the report.

Look ahead: Finally, ETAAC says Congress should avoid retroactivity in tax law.

“Taxpayers need clear rules and rely on existing Code provisions when making decisions, such as whether to make capital expenditures,” argues the report. “Retroactive application of new provisions causes inefficiency in the tax system, resulting in resource burdens and noncompliance and should be avoided.”

Unfortunately, the ETAAC Congressional recommendations did not come out soon enough to affect the current Capitol Hill contretemps over the One Big Beautiful Bill tax and domestic policy agenda.

To be honest, I’m not sure Senators and Representatives would have taken the advice regardless of when ETAAC issued it. But again, kudos to the panel for trying.

As for the other three ETACC Congressional recommendations, they are —

• Provide predictable funding to the IRS for efficient and effective taxpayer service.
• Authorize the IRS to regulate noncredentialed tax return preparers to prevent harm to taxpayers and the tax system.
• Prioritize, in conjunction with the IRS, continued technology modernization and policy enhancements for information sharing efficiency and transparency.

Focus on IRS technology: The ETAAC yearend report, in keeping with the original reason for the panel’s creation, also expands on IRS efforts to upgrade its technology in ways that improve taxpayer service and options.

In its 10 recommendations to the tax agency, ETAAC address digital interactions with taxpayers and the use of artificial intelligence (AI).

“The IRS should build on its current efforts to transition taxpayers to digital interactions, including instituting reforms that may limit taxpayer preference,” says the report.

When it comes to AI use, ETAAC recommends the IRS proactively disclose its use of the technology in a clear and simple manner. This will build public trust in it and other new technologies the agency may implement, as well as enhance the IRS’ ability to gather input from taxpayers and other stakeholders, such as tax professionals.

Free filing options: ETAAC also discusses free filing options, a touchy subject since the IRS’ successful and apparently well-received Direct File program is about to be killed off by the comprehensive tax legislation now being debated.

ETAAC says the IRS should coordinate with relevant stakeholders — state tax agencies, Free File partners, and Volunteer Income Tax Assistance (vita) and Tax Counseling for the Elderly (TCE) programs — to share and analyze real-time data from all free-to-file options, including Direct File.

This will help improve customer service, conduct timely fraud prevention, and have parity with data generated from other filing options, according to the report.

As for the rest of the report’s recommendations to the tax agency, ETAAC says the IRS should —

• Improve communication, outreach, and education around tax law and implementation changes, such as TCJA expiration and 1099-K form issuance thresholds.
• Review and update their current list of Modernized E-File (MeF) reject codes and explanations to provide greater clarity regarding the cause of a rejected return and how to resolve the reason for the reject.
• Update tax return forms, including relevant paper forms, to enhance security, combat fraud, identity theft and ghost preparers, and improve taxpayer understanding of tax return requirements.
• Accelerate its successful deployment of human-centered design principles in new applications to taxpayers and tax professionals to increase efficiency and reduce compliance costs.
• Create additional tools to combat scams and schemes promoted on social media and other communication platforms.
• Eliminate unnecessary filings for extensions that are already automatic.
• Make it easier for taxpayers who previously filed jointly, and first-time taxpayers, to make tax payments to the IRS.

ETAAC also notes that that real‐world insights underpin this report’s initiatives.

“At the heart of these recommendations is the joint perspective and alignment of tax practitioners, enrolled agents, state and local tax administrators, and other respected experts from across the tax ecosystem,” according to the report’s executive summary.

You also might find these items of interest:

• Tax preparer regulation among ETAAC’s 12 recommendations in 2024
• IRS Commissioner touts the tax agency's generational digital transformation
• IRS’ 2025 filing season one of the smoothest ever, but Taxpayer Advocate warns of coming tax challenges

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