John J. Scroggin published an interesting and entertaining survey of tax complexity in the Wealth Strategies Journal (Tax Complexity, History, and Humor, July 8, 2014).
The article begins with a quote from Judge Learned Hand:
“In my own case the words of such an act as the Income Tax… merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception—couched in abstract terms that offer [me] no handle to seize hold of [and that] leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.”
Some key points from the article:
- Even seasoned return preparers are flummoxed by the tax law. Scroggin cites studies in which the same tax information was provided to many different return preparers with the result that no none came up with the same amount of tax due or refund on the return.
- Politicians call for tax simplification but haven’t delivered on the promise.
- Complexity makes tax filing much more burdensome and expensive and impedes voluntary compliance.
- Complexity acts as a drag on the economy.
- The IRS finds it increasingly difficult to administer the tax laws as a result of growing complexity and diminished funding.
- Factors adding to complexity include:
- Girth of the tax code now estimated to contain 4 million words.
- Sun-setting tax laws that politicians like because they disguise the long term cost of the tax expenditure.
- Constant changes in the tax code.
- Incomprehensibility of many provisions of the tax code.
- Too many conditions that block purported tax benefits
- Many different phase – out provisions with many different phase out schedules.
- Too many exceptions and limitations.
- Too many penalties that often apply to unintentional mistakes.
Scroggin quotes Alfred E. Neuman who said” Today, it takes more brains and effort to make out the income-tax form than it does to make the income.”
Scroggin offers some ideas as to why the tax code is so complex which include:
- Special interest lobbyists obtain lucrative special tax breaks for clients.
- Social engineering through the tax code or using the code to achieve non-tax social goals.
Scroggin admonishes tax professionals never to rely on memory when giving a tax answer. The code is simply too complex these days, he says. Instead read the code sections and run the numbers.
COMPLEXITY WITH REGARD TO OFFSHORE DECISIONS
Does this tax complexity impact decision making in the Offshore Voluntary Disclosure area? The answer, of course, it does. Like everything the IRS does, it has turned the decision whether to make a Voluntary Disclosure into a deceptively simple but excruciatingly difficult analytical problem.
There is no one solution for a client who has an unreported offshore bank account. There are a number of alternative routes one may take to come into compliance:
- OVDP and Opt-out
- Streamlined Process for taxpayers residing outside of the U.S.
- Streamlined Process for taxpayers residing in the U.S.
- Transitional Rules for those who’ve mailed their OVDP Letter before July 1, 2014.
- Quiet Disclosure.
- Filing forward.
- Do nothing is Statutes of Limitations have run.
- Traditional Voluntary Disclosure for those with domestic unreported income.
- Optional compliance procedures for those with unfiled FBARS but no unreported income.
- Optional Compliance Procedures for those with unfiled information returns but no unreported income.
Selecting a course to a safe harbor is a difficult decision-making process. No two taxpayers are in the same boat and no one course of action will fit every case. The facts and circumstances surrounding the establishment of the account, its maintenance and closure, if closed, must be determined and evaluated. Only then can a sound decision be made how to proceed. Making the wrong choice can have disastrous consequences including jail time and imposition of draconian penalties that amount to seizure of your property. Thus, the decision process should be taken very seriously and conducted with the assistance of an experience OVDP tax lawyer.
Robert S. Steinberg, Esquire