The Looming Nightmare for the IRS and Taxpayers

The Internal Revenue Service has continued to warn Congress of the administrative consequences of going over the fiscal cliff. In another letter to the chairs of both the Senate Finance Committee and House Ways and Means Committee, IRS Tax Commissioner Steven Miller estimates that between 80 million and 100 million tax returns could be delayed if Congress fails to pass a deal that includes an Alternative Minimum Tax patch due to computer reprogramming issues. In his letter, Miller writes:

In my previous letter, I estimated that more than 60 million taxpayers might be prevented from filing their tax returns while we are reprogramming our computers. This figure includes those who would be subject to additional tax as well as those who would be required to perform the calculation to determine if the changes in thresholds and credit ordering rules affect their tax liability. As we consider the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers - 80 to 100 million of the 150 million total returns expected to be filed - may be unable to file.

This number results from the need to limit filing by those who may be potentially impacted. The IRS cannot process the returns of any taxpayers whose return characteristics do not allow us to differentiate them from those whose tax liability would be altered by the AMT expiration. This means that there are certain forms and schedules we could not accept from any taxpayer - even those who ultimately may not have additional AMT liability. Similarly, returns of any taxpayers whose income levels may subject them to the AMT could not be processed.

Furthermore, it may not be possible even to process some returns that are clearly not subject to or affected by the AMT. Allowing only some taxpayers to file as we reprogram could substantially increase the risk of fraud and error in initial filings as well as create the potential for a large number of amended returns.

There is no question the delay in processing tax returns would be a huge problem for federal government and taxpayers alike. Even worse, if the AMT patch is not retroactively reinstated, then 28 million more taxpayers are expected to pay the tax (and current AMT taxpayers would be hit as well). The distribution table below shows that this is a relatively harsh burden that not only hits upper-middle class households, but those in the middle class as well. Clearly, this is not desirable tax policy for either Republicans or Democrats.

Distribution of the Expiration of the AMT 

^{Source: Tax Policy Center}

The expiration of the AMT patch, along with many other provisions in the tax code, make it clear that at the very least the fiscal cliff negotiations should fix the current temporary nature of the tax code. We need more revenue, but it is also important that we reform the tax code to promote longer-term growth and reduce uncertainty for businesses and individuals. Failing to fix the AMT is not the answer, and we need a plan if we are going to deal with it.

Click here to read IRS Commissioner Miller's letter.