The term “thread count” refers to the number of horizontal and vertical threads per square inch of fabric. Per the marketers of bedsheets: the higher the thread count, the softer and more luxurious the product. Envision how some high thread count sheets would look under a microscope: that is the current tax code. It is packed tightly, with little space between the threads. There are no gaps.
Now, picture some low thread count sheets; the type that even Walmart will not carry and feel similar to sandpaper. Put these sheets under a microscope and you will see gaping holes. That is what the tax code will be after the proposed tax reform.
Tax professionals and taxpayers are constantly seeking pathways by which to avoid or reduce tax obligation. While the current tax code is an exceedingly complicated cluster of jargon and details, it is tightly wound without excessive loopholes. This strategy limits ways to avoid tax. Recent history has illustrated that our trusted leaders do not foresee the unintended consequence of their actions. As recently as 2003, moderate changes were made to the tax code to encourage business equipment purchases. This change resulted in wealthy business owners being able to expense their Range Rovers up to $100K, a snafu which became lovingly known as the “Hummer Loophole.” More recently, under the Obama administration, tax credits were offered for the purchase of electric vehicles. However, the definition of a qualifying vehicle was not concise enough, as some electric golf carts qualified. Fast-acting golf and country clubs all around the country were able to replenish their entire fleet of golf carts for free under this tax credit.
The aforementioned, unintended consequences are from simple tax law legislation. Tax professionals immediately pinpointed and exploited these loopholes before the laws were changed. If the proposed comprehensive tax reform package becomes law, it will be chock full of unintended consequences. Tax professionals will find more loopholes and taxpayers will exploit them.
Our elected leaders have not shown that they work together well, so the loopholes may survive for multiple years. Furthermore, the IRS budget has been cut by 17% since 2010 and a reduction of enforcement staff by 23% thusly, the lines will be blurred between a smart taxpayer gaming the system and a tax fraudster cheating with limited enforcement and guidance because of the IRS budget cuts.
As a tax controversy attorney, I can view this impending doom as a positive, but our country will likely not see it through rose-colored glasses. We have made our bed with our elected leaders, and now we get to lay in it (with our scratchy, low thread count sheets).