Indecision on fiscal cliff tax provisions leaves IRS in limbo

In a bid to protect his workforce as well as taxpayers, acting Internal Revenue Service Commissioner Steven T. Miller on Tuesday warned two key lawmakers of “serious repercussions” of a failure by Congress and the president to extend key expiring tax provisions such as the alternative minimum tax before year’s end.

In letters to Sen. Orrin G. Hatch, R-Utah, ranking member of the Senate Finance Committee, and Rep. Sander Levin, D-Mich., ranking member of the House Ways and Means Committee, Miller expressed concern about the array of tax provisions that remain up in the air while the White House and lawmakers navigate the so-called fiscal cliff during a lame-duck session of Congress.

After describing IRS planning for the 2013 filing season, Miller explained that past delays by Congress in addressing what are called “tax extenders” were manageable because “the IRS consulted with Congress and was provided with bipartisan, bicameral assurances that Congress was working expeditiously to enact a patch. The IRS, in turn, made a risk-based decision to leave its systems programmed assuming that Congress would continue its historical practice and again enact extensions of both the increased AMT exemption amount and the special tax credit ordering rules.”

The agency is planning the same approach this year, Miller continued, but if Congress fails to meet the Dec. 31 deadline for the extenders, then more than 60 million taxpayers -- or nearly half of individual filers -- would be affected. “Because of the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later,” Miller wrote. “Tens of millions of these taxpayers would unexpectedly have to pay additional income tax for 2012, leaving them with a balance due return or a much smaller refund than expected. For millions of other taxpayers, refunds would be delayed.”

Inside the IRS, he said, “the changes to the tax credit ordering rules that result from a lapse in the AMT patch are highly complex and cut deeply into the core tax processing logic of IRS’ critical filing season technology systems.”

Beyond the AMT, Miller noted potential processing problems related to the uncertain status of tax deductions for educators’ out-of-pocket classroom expenses, tuition and related fees for higher education, and state and local sales taxes.

Hatch released a general statement warning of “the largest tax increase in history” if the government goes off the fiscal cliff, saying, “28 million middle-class families and individuals will, for the first time, get hit with the alternative minimum tax and owe $92 billion in new taxes.”

Levin said, “Congress must act now to address our unfinished business and give middle-class families certainty by extending this expiring relief. Just as there is no reason not to extend the middle-class tax cuts immediately, there is no reason Congress does not act on a bipartisan basis as it has in the past to fix the AMT.”

Jeffrey Trinca, a longtime Senate tax counsel now a vice president of Van Scoyoc Associates, told Government Executive, that “Congress is adding to the risk at IRS during the filing season.” In the “good old days,” he said, Congress would finalize tax changes by the end of November or earlier, and IRS would make the necessary program changes in its computer systems. At the end of November, officials would say “no more” and, barring new legislation, they would “pause everything and focus on load testing,” Trinca said.

Such testing means beginning by processing say, 1,000 returns and examining the error rate, and then going up to 10,000, then a million and then 10 million while mitigating the errors to an acceptable level. “To the extent that Congress shortens the process, they add to risks that the computer programs will shove back,” or reject certain returns for incorrect math or other errors, which could prompt letters to millions of taxpayers who then call in.

“With 170 million returns, an error rate of, say, 2.3 percent affects a lot of taxpayers,” Trinca said. “By squeezing the time before the law is set in stone, when IRS turns the lights on around Feb. 1, they would have a big load of people wanting refunds and the system could stall.”

Douglas Shulman, whose last day as IRS commissioner was Nov. 11, said in a Nov. 7 speech to the American Institute of Certified Public Accountants that he would like to see “Congress keep a keen eye on tax legislation that adds to complexity and is difficult for taxpayers to comprehend and for us to administer. You can create the most elegant piece of policy in the world, but if we can’t administer it or taxpayers don’t understand how to take advantage of it, the value of that policy plummets.”