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2006: A look back - A look ahead  
  Taxpayers cleaned up with new credits last year, but be forewarned: Big Brother will be looking more closely in 2007.
 Personal finance calendar  Personal finance calendar 

Taxes 2007: The IRS will take closer look

Tax gap vs. tax cuts
While some view tighter deduction rules and increased enforcement as bordering on taxpayer harassment, that direction is generally preferable to the other key way to boost revenue: tax increases.

For the last five years, taxpayers and lawmakers have embraced tax cuts. Since 2001, some part of the tax code has been tweaked each year, usually adding to or extending existing tax breaks.

"It's getting harder and harder to raise taxes," says LeValley, especially as the U.S. population ages and faces the difficulty of saving for retirement or children's college costs or both.

What about the alternative of cutting spending? That, too, is something that Washington finds hard to do.

"Every politician says we'll get rid of the waste," says LeValley. "If we could have done that, we would have already. Programs to find the waste often become wasteful themselves."

The difficulty of taking back tax breaks, both politically and practically also makes it likely that we've heard the last of the much-heralded panel that President Bush appointed to come up with ways to simplify the tax system.

That disappoints many who follow Congress and the tax code.

Targeted tax cuts
LeValley expects we'll see additional targeted tax cuts favoring certain behaviors, such as saving. While that will make those getting the specific breaks happier, she sees it as "a bad trend, one that increases complexities."

Take, for example, a family that claims the child tax break, the child care credit and an education-related tax break. "How many schedules and forms does a family of four already have to fill out?" asks LeValley. Even if lawmakers give that family more tax breaks, it likely will pay for them in the form of added tax paperwork.

"You have added forms, more limitations, more room for error on the administrative side," she says. "None of us are being well served by this tax system. It's ceased to be a revenue collection system. Instead it's become the biggest place for politicians to give things to constituents and interest groups."

And as long as that continues, the IRS will be looking at those constituents and interest groups to make sure they are at least giving back a bit to the U.S. treasury.

Freelance writer Kay Bell writes Bankrate's tax stories. She blogs daily at Don't Mess with Taxes from her home in Austin, Texas

-- Posted: Nov. 1, 2006
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