Tax Policy:

Differences in Definitions and Rules in the Tax Code

GAO-14-652R: Published: Jul 18, 2014. Publicly Released: Jul 18, 2014.

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What GAO Found

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. Depending on the code section, modified adjusted gross income (MAGI) is determined by incorporating as few as one and as many as nine modifications. For example, for purposes of the adoption tax credit, among others, MAGI is computed by adding back the following income excluded from AGI: foreign earned income; income from American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands; and income from Puerto Rico. 
  • The definition of small business can differ based on number of employees, amount of gross receipts, and other characteristics. For example, under the Patient Protection and Affordable Care Act, a small business must have 25 or fewer full-time equivalent employees, among other requirements, to claim a certain tax credit, but to be eligible for a Savings Incentive Match Plan for Employees Individual Retirement Arrangement, a business must have 100 or fewer employees, among other requirements. Small business is also defined differently depending on whether a taxpayer is claiming a gain or a loss for a small business stock. If the taxpayer is claiming a gain, the qualified small business is defined by gross assets. If a taxpayer is claiming a loss, the small business is defined by amount of equity capital. 
  •  The definition of disabled also varies across the tax code. All definitions include the inability to engage in some activity, but definitions differ by duration of impairment, whether proof of disability is required, what type of activity is limited, and whether income replacement benefits are received. 

Rules and definitions for the same or similar terms can also vary among tax provisions with similar policy objectives, such as (1) child-related tax benefits, (2) education tax benefits, and (3) retirement savings benefits. 

  • Navigating the number of child-related tax benefits can make it challenging and time-consuming for taxpayers to determine how to claim each benefit, especially since families can receive multiple benefits in one year. This is burdensome because each benefit is governed by slightly different eligibility definitions, rules, and calculations. For example, each benefit is phased out in a different range and at a different rate. Many of the benefits require multiple calculations, and each defines an eligible child using a different combination of age, residency, and relationship requirements. 
  • The tax code includes at least eleven different provisions benefiting taxpayers with educational expenses. All of these provisions encourage educational investment, and most help offset expenses for tuition and fees. However, rules determining eligibility for these benefits differ by income qualifications, eligible expenses, educational institution, and education level. 
  • The tax code offers at least half a dozen tax-favored retirement savings incentives. All these incentives encourage taxpayers to save money for retirement and have age distribution requirements. However, they also have different rules for contribution limits, contribution method, timing of distributions, taxation of withdrawals, and loan allowance. 

While simplification of definitions and rules can have benefits, some differences will always be required to appropriately target tax policy goals.

Why GAO Did This Study

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. 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. Also, administering complex tax rules can strain the Internal Revenue Service's ability to serve taxpayers because of the resources needed to develop guidance, clarify instructions, or address misreporting. GAO was asked to identify 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 tax provisions aimed at similar objectives. To address this objective, 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. Our findings are not generalizable or designed to be a complete catalog of differences in the federal tax code.

What GAO Recommends

GAO is not making any recommendations.

For more information, contact James R. McTigue at 202-512-9110 or mctiguej@gao.gov.

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