February 2, 2006

Chairman William Thomas
House Ways and Means Committee
1102 Longworth House Office Building
Washington, District of Columbia 20515

Dear Chairman Thomas,

As President of the National Association of Enrolled Agents (NAEA), I am writing on behalf of 40,000 enrolled agents (tax practitioners licensed by the United States Treasury Department) to bring to your attention the need for reviewing §121 (the exclusion of gain from the sale of a principal residence) of the Internal Revenue Code.

NAEA is the premier organization representing the interests of the 40,000 enrolled agents (EAs) across the country. Since EAs are the only tax practitioners that the IRS directly tests and regulates, our membership stands at the forefront of providing ethical and accurate tax preparation to the public. Our members collectively represent millions of hours of experience working with taxpayers at almost every level of tax administration. With this background, we believe EAs are uniquely positioned to provide insight into the practical workings of our nation’s tax laws.

Many enrolled agents have recently raised concerns with some provisions of the current §121. For example, the $250,000 exclusion ($500,000 for married individuals filing joint returns) established by Congress in 1997 has never been indexed for inflation. In the nearly ten years since, the price of housing has risen considerably, and many people who must move for job-related or other personal reasons have been hit unexpectedly hard with capital gains taxes.

The significant rise in property values in the past five years also causes us some concern in regard to the accurate reporting by taxpayers (and unenrolled preparers) of capital gains. Failure to report accurate capital gains on the sale of property will contribute to an already alarming tax gap number. Congress should spend some time reviewing, in consultation with the IRS, the reporting requirements for the sale of a principal residence. Tighter requirements would help ensure better compliance with the underlying statute.

Finally, we believe that there are substantive equity arguments to be made for revisiting the time frame allotted to a surviving spouse to claim the full exclusion of $500,000. Currently, to take the full exclusion, the surviving spouse must sell the principal residence in the year of the spouse’s death. It seems unreasonable that the amount of time a surviving spouse has to sell a principal residence depends upon the date of his or her spouse’s death. Whether a spouse dies on January 2 or December 2 in a given year, the surviving spouse must sell by December 31 to get the full exclusion. That is clearly unfair and in fact, the surviving spouse may be at a significant disadvantage and either have a much shorter period of time to sell the home or in some cases simply not have the time necessary to effect the sale of the residence. Further exacerbating this situation is the fact that in most instances the most sound advice to offer a recent widow or widower is to do nothing drastic—and very little is more drastic than selling one’s home. NAEA would suggest that §121 be amended to provide that a surviving spouse be allowed a full twelve months from the date of death to sell the principal residence and be entitled to claim the full exclusion.

Thank you in advance for your work on simplifying and making the Internal Revenue Code more equitable for all taxpayers. We look forward to working with you and your staff in revisiting these IRC §121 issues.

Sincerely,
 
Francis X. Degen, EA, USTCP
President