Tax Policy: Differences in Definitions and Rules in the Tax Code *

Current Politics and Economics of the United States, Canada and Mexico, January 1, 2016 | Go to article overview

Tax Policy: Differences in Definitions and Rules in the Tax Code *


United States Government Accountability Office

July 18, 2014

The Honorable Ron Wyden

Chairman

The Honorable Orrin Hatch

Ranking Member

Committee on Finance

United States Senate

The federal tax system contains complex rules and multiple definitions for the same or similar terms. These rules and definitions may be necessary to target benefits to specific groups of taxpayers, among other reasons. For example, according to a 2010 report by the President's Economic Recovery Advisory Board, most families with children receive at least two and frequently three or more child-related tax benefits.1 These benefits could be targeting lower income working families or families with child-care or adoption expenses. However, different rules and definitions can also impose a wide range of recordkeeping, planning, computational, and filing requirements upon individual taxpayers. Complying with these requirements costs taxpayers time and money. For example, income definitions, which are often used to reduce or phase out certain tax benefits, may be intended to target benefits to particular groups or prevent abusive tax-sheltering. However, because tax provisions phase out over different income levels using different definitions of income, calculating income can complicate tax preparation and increase opportunities for errors. Also, administering complex tax rules can strain the Internal Revenue Service's (IRS) ability to serve taxpayers because of the resources needed to develop guidance, clarify instructions, or address misreporting.

You asked about definitional differences across tax code provisions and how they may lead to tax code complexity and taxpayer burden. This report identifies instances in the federal tax code where the same or similar term is defined differently or when taxpayers are subject to different rules under various tax provisions, particularly those aimed at similar objectives. To determine what is known about the differences in definitions and rules across provisions in the tax code, we conducted a literature review, consulted relevant laws and regulations, and interviewed representatives from the tax filing and preparation community and federal agencies involved in tax policy and administration. While we attempted to be thorough in our research methods, our findings are not generalizable or designed to be a complete catalog of differences in the federal tax code.2 To determine which tax code definitions were within the scope of our engagement, we applied the following criteria: (1) based within federal tax code; (2) affected individual taxpayers (taxpayers that file Form 1040 and related schedules); and (3) compared distinct, separate terms or definitions. To determine which tax code rules were within the scope of our engagement, we applied the same criteria as for definitions but limited the scope to tax provisions that targeted similar taxpayer populations or policy objectives. Because the differences in these tax provisions were not always specified in statute but rather in Department of the Treasury regulations or IRS guidance, we reviewed these sources along with the federal tax code.

We conducted our work from September 2013 to July 2014 in accordance with all sections of GAO's Quality Assurance Framework that are relevant to our objective. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objective and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this product.

In summary, definitions for the same or similar terms can differ across tax provisions and policy objectives. These terms include (1) income, (2) small business, and (3) disabled. At least a dozen different tax code sections modify adjusted gross income (AGI) as part of determining the tax consequences of a particular provision. …

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