Statement of Richard M. Lipton on the Subject of Tax Simplification
April 26, 2001

4.  Administrative Provisions

2. Information Returns

   Sections 6041 and 6041A generally require reporting of all payments made in connection with a trade or business that exceed $600 per year. The $600 per year threshold has never been adjusted for inflation. Section 6045(f) now requires reporting of gross payments to attorneys (including law firms and professional corporations) even if the payment is less than $600 if the portion constituting the legal fee is unknown. The IRS cannot process many Form 1099 information returns from non-financial institutions and as a result such returns do not provide truly useable information. Anecdotal evidence suggests the IRS may not use the information on these information returns in examinations of the taxpayers and that these information returns cannot be reconciled to tax returns. The reporting threshold should be increased to $5,000 (which harmonizes with section 6041A(b)) and adjusted for inflation in full $1,000 increments.

3. Penalty Reform

   The Section of Taxation believes that reform of the penalty and interest provisions is appropriate. There are many cases in which the application of penalty and interest provisions takes on greater significance to taxpayers than the original tax liability itself. The Section of Taxation is concerned that these provisions often catch individuals unaware, and that the system lacks adequate flexibility to achieve equitable results.

4. Extenders

   Uncertainty in the tax law breeds complexity. The constant need to extend certain Code provisions (such as AMT relief for individuals, the research and experimentation tax credit, and the work opportunity tax credit) adds confusion to the law. In many cases, temporary extension undermine the policy reasons for enacting the incentives in the first place because the provisions are intended to encourage particular activities but uncertainty surrounding whether the provisions will be extended leaves taxpayers unable to plan for those activities. The on-again, off-again nature of these provisions, coupled in some cases with retroactive enactment (which often necessitates the filing of an amended return), contributes mightily to the complexity of the law. These provisions should be enacted on a permanent basis.

5. Rationalize Estimated Tax Safe Harbors

   Section 6654 imposes an interest charge on underpayments by individuals of estimated income taxes, which generally are paid by self-employed individuals. This interest charge generally does not apply if the individual made estimated tax payments equal to the lesser of (i) ninety percent of the tax actually due for the year or (ii) one hundred percent of the tax due for the immediately prior year. The criteria for the prior year safe harbor have been adjusted regularly by the Congress during the past decade. Between 1998 and 2002, for individuals with adjusted gross income exceeding $150,000, the prior year safe harbor percentage increases and decreases from year to year over a range from 105 to 112 percent. The purpose of these increases and decreases is to shift revenues from year to year within the five and ten year budget windows used for estimating the revenue effects of tax legislation. Congress should determine an appropriate safe harbor percentage (perhaps 100%) and apply that amount for all years. Consideration should also be given to simplifying estimated taxes (for example, by the enactment of a meaningful safe harbor) for all corporations.

We appreciate your interest in these matters. The Section of Taxation would be pleased to work with the Committee and its staff on these important issues.