Professor Leigh Osofsky teaches courses addressing various aspects of taxation and policy. Prior to entering academia, Osofsky clerked for the Honorable Pierre Leval on the United States Court of Appeals for the Second Circuit and worked as a tax attorney at Fenwick & West, LLP, specializing in tax transactional planning and also serving as counsel in complex tax litigation matters. She has published articles in New York University School of Law Tax Law Review, University of Virginia School of Law Tax Review, and The University of Florida College of Law Tax Review.
Written by: PROFESSOR LEIGH OSOFSKY
Imagine that it is April 15th and you are rushing to complete your annual tax return. You own a local pizza shop, and this past year a flood in the pizza shop damaged the shop’s plumbing. You paid $6,000 to fix it and you are trying to determine whether you can take a deduction. Your annual plumbing expenses are usually around $3,000. You heard from a neighboring business owner that you cannot deduct expenses paid for “improvements.” Now imagine that, in trying to decide whether the $6,000 expense you paid constitutes an “improvement,” you consult the following two statements, the first of which is from the Treasury regulations and the second of which is from an Internal Revenue Service publication:
Statement 1: “Requirement to capitalize amounts paid for improvements. Except as provided in paragraph (h) or paragraph (n) of this section or under § 1.263(a)-1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3) of this section) paid to improve a unit of property owned by the taxpayer.”
Statement 2: “Improvements. Improvements are generally major expenditures. Some examples are new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall and lighting improvements.”
Which of these two statements is going to be most helpful to you in determining how to fill out your tax return? If you are like most taxpayers, the answer will be Statement 2. The $6,000 you spent was double your normal plumbing expense, and therefore Statement 2 may help you determine that the $6,000 expense was a nondeductible “improvement.” However, this conclusion may not actually be correct. The “major expenditure” standard from Statement 2 does not appear anywhere in the governing Treasury regulations, and the Treasury regulations actually contain examples that suggest that your expense in this case may be deductible. In other words, even though the IRS publication may help you make a decision about how to fill out your tax return, this decision may not be in accordance with the actual tax law.
In an article forthcoming in Emory Law Journal, Joshua Blank (professor of tax practice and faculty director of the Graduate Tax Program, New York University School of Law) and I explore how, in its taxpayer publications, the IRS often attempts to explain complex and ambiguous tax law in terms that are clear and simple to most taxpayers. In so doing, the IRS is fulfilling an important, but underappreciated, duty: to serve taxpayers by explaining the tax law to them in a way they can understand. The IRS is not alone in having to explain complex, ambiguous law to the public. The Plain Writing Act of 2010, spearheaded by Cass Sunstein when he was administrator of the Office of Information and Regulatory Affairs, requires all federal agencies to use plain writing in their official communications with the public. Sunstein and others have celebrated the Plain Writing Act as increasing simplicity, equal access to government programs, and government transparency.
In this article, we look at a different side to the plain writing story. We explore how, rather than increasing simplicity, which would involve the elimination of complexity in the underlying law, plain language communications (such as IRS publications) often yield “simplexity.” Simplexity exists when the government presents the law as being clear and simple, without actually eliminating any of the underlying complexity or ambiguity. In particular, we show that, in its IRS publications, the IRS often transforms complex, ambiguous law into seemingly simple statements (“IRS simplifications”) that (1) present contested tax law as clear tax rules, (2) add administrative gloss to the tax law, and (3) fail to fully explain the tax law, including possible exceptions.
Following an extensive review of IRS publications, we detail many examples of each category of IRS simplification. Moreover, our research shows how these IRS simplifications get absorbed and adopted, not only by taxpayers filling out their own tax returns through the use of IRS publications, but also by many secondary sources, training tools for enrolled agents, accountants, and other tax professionals, and even by widely-used tax preparation software. Sometimes these IRS simplifications benefit the government, while other times they benefit taxpayers. Either way, they offer the IRS a powerful tool to shape the public’s perception of the tax law.
After setting forth many examples of IRS simplifications, we explore how simplexity offers a number of potential tax administration benefits, but can also threaten vital values of democratic governance and fairness. In terms of benefits, IRS simplifications allow the IRS to explain the tax law so that it will be comprehensible to large swaths of the public. They also reveal the IRS’s own views of the tax law, thereby allowing taxpayers to avoid controversy, or at least prepare for it. And, to the extent that taxpayers follow government favorable IRS simplifications, they can help the government raise revenue.
However, IRS simplifications can also have the unintended effect of obscuring taxpayers’ knowledge of the underlying tax law. Moreover, since they are created in an opaque fashion, IRS simplifications threaten government transparency. They are also likely to impose unequal benefits and burdens on different types of taxpayers. While sophisticated taxpayers will be in a good position to reject government favorable IRS simplifications, unsophisticated taxpayers are more likely to just follow them, resulting in inequitable treatment. Finally, administrative law does not present adequate solutions to the problem posed.
Since simplexity offers both important benefits and some significant threats, we offer a number of strategies for maximizing the benefits of simplexity while minimizing the drawbacks. First, we explore the possibility of having the IRS “red-flag” its own simplifications, which will preserve the IRS’s ability to speak in plain language to taxpayers, while minimizing some of the opacity and inequity. Second, we explore how having institutions outside the IRS (such as the Government Accountability Office) review the IRS’s red flagging can help make it meaningful. Finally, we discuss potential structural reform of certain of the IRS’s functions.
The article both shines a light on previously unnoticed IRS simplifications in IRS publications and more generally critically examines what plain language looks like in practice. Across the government, federal agencies must use simplexity in order to communicate complex or ambiguous law in a way the public can understand. The article highlights important values to consider in this translation process.
