Because Congress was slow to take up legislation to protect taxpayers with moderate income from having to pay the alternative minimum tax, it is likely that the Internal Revenue Service will have to delay processing 50 million taxpayers, the acting chief of the agency told the nation's accountant association last week.
Because Congress was slow to take up legislation to protect taxpayers with moderate income from having to pay the alternative minimum tax, it is likely that the Internal Revenue Service will have to delay processing 50 million taxpayers, the acting chief of the agency told the nation's accountant association last week.
"The processing of as many as 50 million taxpayers, including low-, middle- ... and upper-income taxpayers, will be delayed" because legislative action is coming so late in the year, acting IRS commissioner Linda Stiff told about 500 attendees at the National Conference on Federal Taxes, sponsored last week in Washington by the New York-based American Institute of Certified Public Accountants.
"In addition, we estimate that up to $75 billion in refunds may get caught up in this," she said.
It will take the IRS 10 weeks to reprogram its system for the so-called "AMT patch" Congress is considering. The IRS is to begin processing 2007 tax returns Jan. 14.
Unless Congress enacts a "patch" to prevent moderate-income taxpayers from being subject to the tax, about 23 million taxpayers will have to pay the AMT, which was originally enacted in 1969 to prevent wealthy people from using supposed loopholes to escape paying income taxes. Only 4 million taxpayers paid the AMT in 2006.
Because the AMT was never indexed for inflation, in recent years, taxpayers with more moderate income have been subject to the law, which prohibits deductions for many items, including state and local taxes or personal exemptions for children. Congress has been enacting one-year "patches" to prevent that from happening, and it is considering doing so again this year, but the $50 billion cost of doing so has delayed action.
But congressional action on the one-year patch has been so slow in coming this year that it will be difficult for the IRS to process returns in a timely manner, Ms. Stiff told the AICPA. And late congressional action will affect more than just people who would otherwise be subject to the AMT, she said.
"The situation we face at the IRS is not only the delay of approximately 25 million taxpayers who are immediately impacted by the AMT, but it's the impact on an additional 25 million taxpayers who may be affected by these credits," Ms. Stiff said.
That will include a wide group of taxpayers, including those who claim the child tax credit, the child and dependent care credit and education credits, she said. As those credits are disallowed under the AMT, processing of tax returns that use them will be delayed.
The IRS cannot reprogram its system in advance of enactment of the legislation, Ms. Stiff said. "Unfortunately, our systems are such that once you get past the early planning, we can only program the systems to do one way of processing returns. And we have an obligation that we process our systems consistent with the laws on the book. We don't get to reprogram those systems, hoping for a different law, and then if it doesn't happen or it's changed, not having any system available," Ms. Stiff said.
A major concern for accountants is a section of the Small Business and Work Opportunity Act of 2007, which was signed into law last May. The law raises the federal minimum wage, and it also includes tax breaks for small businesses.
But Section 6694 took the accounting industry by surprise. The provision raises the legal standard that tax preparers must meet for trying to ensure that the positions they are taking on their clients' tax returns are correct [InvestmentNews, July 23]. Previously, the legal standard that tax preparers had to meet was that their position had only a "one-third likelihood of success," according to Alan Einhorn, a partner in the Washington office of New York-based Deloitte Tax LLP, a subsidiary of Deloitte & Touche USA LLP.
That was lower than the standard set by the new law, which requires that the tax preparer must have a "reasonable belief" that the preparer's position is correct. That means there must be a likelihood of more than 50% that their position will be found to be correct, Mr. Einhorn said.
"This creates a conflict with our clients, which is untenable," he told the attendees. The legal standard that taxpayers must meet has not changed, and that standard is lower than what tax preparers are required to meet, Mr. Einhorn said. "Our whole set of guidance has been turned upside down," he said.
Under the new law, tax preparers will have to counsel their clients to include disclosures in their tax returns to protect the preparer, Mr. Einhorn said. "How can we recommend to our clients that they put a disclosure in the tax return, when it's in our best interest as a preparer, but it's not in their best interest?"
"I don't personally recall a statutory provision recently that has created so much anxiety, anger and negative comments," Mr. Einhorn said.
"We do realize that there's a disconnect between the standards a tax preparer is subject to and those of the taxpayer," Ms. Stiff said at the conference. "It will probably take [Capitol] Hill to fully resolve the issue," she said, adding: "That resolution may not necessarily be the one that you would most hope for."
Sara Hansard can be reached at shansard@crain.com.
