Paul L. Caron
Dean




Saturday, December 4, 2010

IRS Faces 'Daunting' Tax Filing Season, With Delayed Refunds, Unless Congress Acts by Dec. 31

Wall Street Journal editorial, Alternative Minimum Mischief:

Nancy Pelosi's House Democrats made their last stand for tax increases on Thursday, voting 234-188 to extend tax rates that expire this month only for some taxpayers. The soon to be former Speaker knows this has no chance of passing when the Senate votes as early as today, but apparently the liberal base must be served, no matter how pointless the gesture.

Meanwhile, another tax increase is about to hit the economy unless Congress acts by the end of the month. The dreaded Alternative Minimum Tax hike that usually whacks about four million upper-income households is scheduled to hit 26 million filers this tax year because Congress hasn't indexed the AMT income threshold for inflation. So a tax designed in 1969 to hit about 200 taxpayers may sock families with incomes as low as $60,000 a year. You know, "the rich." The average AMT surcharge will be about $2,000, according to ranking Republican Charles Grassley on the Senate Finance Committee.

This Congressional abdication is too much even for IRS Commissioner Doug Shulman, an Obama appointee, who wrote a letter this week scolding Congressional leaders for playing politics with the tax code.

Here is Commissioner Shulman's letter to House Ways & Means Committee Chair Sander Levin and Ranking Member Dave Camp and Senate Finance Committee Chair Max Baucus and Ranking Member Charles Grassley.

Thank you for your letter of November 9, 2010 [blogged here], outlining your efforts to enact AMT legislation that would allow the personal credits against AMT, and set the exemption amounts for 2010 to be $47,450 for individuals, and $72,450 for married taxpayers filing jointly. Based on your letter, which urged me to take all necessary steps necessary to plan for such changes, I have directed our technology team to program IRS computers with the assumption that there will be an AMT “patch” as outlined in your response. As a result, if the AMT is patched by the end of this year, the 21 million taxpayers who will no longer be subject to the AMT will be able to file their tax returns in a timely manner. Of course, if legislation has not passed by the end of this year, our computers will have been programmed incorrectly, and we will need to delay filing for these individuals as we re-program our computers to the actual law in effect.

At the same time, we are confronting the challenge of administering a number of common individual income tax incentives that have already expired (otherwise known as “individual extenders”). Examples include the deduction that educators claim for their expenses, the additional deduction for real property taxes for individuals who claim the standard deduction, deductions for tuition fees and expenses, and deductions for state and local sales taxes. At this time, we have programmed our computers in accordance with current law.

While I know you and your colleagues have a difficult challenge to enact legislation this year, I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011.

Specifically, it would be an unprecedented and daunting operational challenge to open the tax filing season under one set of tax laws with respect to AMT and extenders, begin accepting tax returns, and then have the law change. Re-programming systems and publishing new forms and instructions in the middle of filing season would introduce significant operation and compliance risks.

If this re-programming were undertaken, the IRS would have to delay processing refunds for some or all of the 21 million people affected by AMT legislation and/or the over 25 million people impacted by extenders legislation. The IRS would likely be faced with millions of taxpayers who filed and paid additional tax based on a law that later changed. These impacted taxpayers would then need to file amended returns, which could take months to process and send refunds. The overall strain on IRS service operations would affect not only AMT taxpayers and those who benefit from extenders, but would also spill over into service disruptions and/or delayed refunds for tens of millions of other taxpayers.

I hope this information about the operational challenges of AMT and individual extenders is helpful. These tax provisions can be distinguished from other pending tax legislation because they are so critical to ensuring that taxpayers experience a smooth tax filing season starting in January, and because it would be extremely detrimental to the tax system if changes affecting tax year 2010 were made after the end of this year.

I appreciate your continued attention to these critically important matters.

https://taxprof.typepad.com/taxprof_blog/2010/12/irs-faces-daunting.html

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Comments

May I ask why it is that it's "the liberal base must be served" when Democrats attempt to retain tax breaks for most Americans but not "the conservative base must be served" when the Republicans refuse to pass legislation unless the rich get a tax break too?

Posted by: Sharyn | Dec 4, 2010 6:36:25 PM