Emily Cauble

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Oftentimes, efforts to simplify the process of reporting the tax consequences of events that have already occurred exacerbate complexity faced by taxpayers at the stage in time when they are deciding how to act. Efforts to simplify reporting include, for instance, provisions that obviate the need to value assets prior to their sale or methods for determining tax consequences that reduce the number of computational steps used when determining tax liability. While such efforts may, to a degree, simplify tax compliance, they can also set traps for unwary taxpayers at the planning stage. Avoiding asset valuation or taking short-cuts when determining tax liability can cause a transaction’s tax consequences to depart from its economic consequences or make it so that small non-tax changes to a transaction can drastically affect its tax outcome. When tax consequences diverge from economic consequences or when small non-tax changes produce radical differences in tax outcome, taxpayers who act without considering the resulting tax consequences are more likely to act in a way that differs from how an informed taxpayer would act. With respect to decisions that taxpayers would alter if they considered the resulting tax consequences, simplifying tax planning may be more important than simplifying tax reporting. Taxpayers who are most in need of simplification—unsophisticated taxpayers—may more acutely feel the pain of planning complexity than reporting complexity. At the planning stage, such taxpayers are likely left to their own devices while they may be more likely to seek expert assistance at the reporting stage. The 2017 Tax Cuts and Jobs Act tinkered with two partnership tax provisions that illustrate the trade-off between compliance simplification and planning simplification. These particular changes made by the Act were a small step in the right direction. However, the measures were modest and should have gone further.