Tax Administration: Compliance, Complexity, and Capacity

Exacerbating both concerns, and taxpayers’ understandable frustrations, Internal Revenue Service (IRS) resources and capabilities have not kept pace with the code’s growing complexity—in large part due to underfunding by Congress. This has inevitable consequences for the agency’s ability to provide timely support and assistance to filers, to effectively administer programs such as the Earned Income Tax Credit, and to deter tax evasion through audits and compliance actions.

This report focuses on the administration of the U.S. tax code and on the challenges of making the system more efficient, user-friendly, effective, and equitable than it currently is. We begin by discussing the overarching issue of complexity and its implications for the compliance burden tax filers face, while also identifying a few concrete steps that could simplify the tax code in the near term. Subsequent sections focus on other discrete aspects of the administrative challenge: closing the tax gap (that is, the amount of true tax liability that Americans do not voluntarily pay on time); addressing specific concerns about the administration of key anti-poverty provisions in the tax code (notably, the Earned Income Tax Credit and the Child Tax Credit); and improving IRS taxpayer service and capacity. The final section examines the advantages and disadvantages of switching to a system that does not rely on taxpayers to prepare and file tax returns—a strategy many have suggested would make tax administration less burdensome and would improve compliance, but one that we argue would not be feasible in the United States without significant reform to the U.S. tax code and a boost in IRS resources.

A point worth emphasizing at the outset is that the tax system challenges discussed in this report are not less important or less urgent by virtue of the fact that they are administrative in nature. On the contrary, attention to administrative issues is crucial to good tax policy design. The U.S. tax code is complex because Congress, over time, has deployed the code to advance various social or economic objectives. But these objectives will founder if the government administers the tax system badly or if the American public loses confidence in the government’s ability to manage a funding system that works as intended. Far from being afterthoughts in a discussion of tax policy, the issues explored in this report are central to the long-term health and integrity not only of the U.S. tax system but of the larger civic and political project in which all Americans—as citizens and taxpayers—are engaged.