Taxation Office in the United States

Tax Administration

Administrative Complexity

New legislation places new demands on the administrative resources of the IRS and Treasury Department. The most immediate impact is felt in the task of redesigning tax forms and instructions to incorporate the changes. Interpretation of the law through regulations and rulings is necessary and may require revision of the recently issued forms. It may be difficult or impossible to issue timely guidance before effective dates. IRS personnel must become acquainted with new law promptly to provide guidance to taxpayers seeking to comply. Often they must be fully conversant with several conflicting provisions governing the same area (e.g., interest deductibility rules before 1987 and tracing rules after 1986) in order to perform the audit function.

The effort to achieve the highest possible level of certainty has historically caused the Treasury Department and the Internal Revenue Service to write detailed regulations that attempt to address all issues. This pattern has often caused delays in providing general guidance to taxpayers. The drafting of exhaustive regulations creates added complexity and a tremendous compliance burden for the small taxpayer. An example was the original proposed passive loss regulation defining the term “activity” which, for all but the most sophisticated taxpayers, was incomprehensible and nonworkable. It is positive the Treasury´s and the IRS’ reissuance of simpler regulations in this area and the efforts to seek opportunities to simplify other regulations in a similar manner, such as they have done with section 7701. Naturally, certain tax areas demand specific, detailed regulations.

Taxpayers and the IRS alike have difficulty interpreting complex provisions. In addition, the IRS faces an even greater burden than taxpayers when factual issues are involved because taxpayers are in control of the reporting and presentation of facts relevant to a particular issue. For example, enforcing the research and experimentation credit is an extremely difficult task for the IRS because of problems in tracing and categorizing various expenditures and in judging whether the taxpayer meets requirements such as “technological innovation.” Likewise, enforcing the luxury excise tax rules is difficult because of problems in identifying taxable transactions.

Complexity in making factual determinations is dramatically reduced from an administrative perspective to the extent that a provision relies on the interaction of two parties with contrary or adverse interests. For example, contracts for the sale of assets or an entire business are the result of pressure to establish the true purchase price; each party has tax and non-tax incentives to correctly state the agreed-upon price in the contract and purchase price allocation. These conflicting interests do not afford perfect controls, but they aid in verification.

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