Lessons From Obama Nominee Tax Problems

It's been a bit surprising to hear of a variety of tax problems a few nominees for positions in President Obama's administration had. These problems were found on both self-prepared returns and those done by a paid preparer.

Two observations:

1. There are lessons from all of this for tax return preparers - I have a short article on this aspect of the errors in the 4/9/09 AICPA Tax Insider - here.
2. A few members of Congress have seen this as an opportunity to promote their major tax reform plan as being necessary to get rid of our current system that obviously is too complex as evidenced by the errors by people who should be able to understand the federal income tax law.

For example, Congressman Goodlatte said the following upon introducing legislation to repeal the Internal Revenue Code after 2012 (as an incentive to have to enact a new tax system):

" The need for tax simplification is further highlighted by the tax problems experienced by some of President Obama's cabinet nominees. These are highly educated individuals, some of whom claim specialized knowledge of the Tax Code, and one of whom will actually be in charge of ensuring compliance with the Tax Code, Treasury Secretary Geithner. And even they cannot correctly file their taxes. In addition, in today's Politico, there was an article detailing the problems that members of the Senate have in filing and complying with the Tax Code. In fact, the title is, ``For Senators, Tax Questions Are Taxing.'' If it is this hard for government officials, including those who write and enforce the Tax Code, to comply with the code, then imagine what it is like for the average American family to comply with it. All Americans find the Tax Code, well, taxing." [Cong. Rec. 2/11/09, H1204; HR 982]

Similarly, Congressman Stearns used nominee errors to promote the "fair tax":

"A simpler Tax Code may have prevented former Senator Daschle or current Secretary of the Treasury Geithner the embarrassment of having to explain their failure to properly pay the taxes due to the complicated IRS tax system." [Cong. Rec. 3/17/09, H3479; HR 25]

I'm not completely convinced on observation #2. Yes, a few of the nominee errors were due to complexities such as:

• No clear guidance on how to split tax preparation fees between Schedule A and Schedules C and E
• Extra recordkeeping such as what is needed from a charity on any contribution of $250 or more.
• Not knowing that overnight camp expenses don't qualify for the dependent care credit.

But, some errors were due to lack of understanding of the law, carelessness and taxpayers not giving enough information to their tax preparers.

Even the reforms suggested, such as the national sales tax and a flat tax, have complexities. For example, under the flat tax, an individual must pay tax on their wages and business income, but not on investment income. Suppose an individual collects and sells a few pieces of art at a profit - is that taxable business income or non-taxable investment income?

Also, carelessness is not limited to an income tax. For example, many people are careless in not paying their proper use tax.

We should certainly examine how our existing income tax can be simplified. There are plenty of ideas already proposed (see 3/25/09 blog entry on Obama's tax reform task force). It is time to act upon them. Problems such as complexity, a tax gap, inequities and inefficiencies are not unique to an income tax, but can be designed into any type of tax!

What do you think?