Tax politics slow IRS readiness
Systems officials map out their procedures for change in the alternative minimum tax
Lawmakers battling over how to offer relief from an onerous tax might leave tens of millions of taxpayers with a bigger tax bill and the Internal Revenue Service with a systems headache.
Congress continues to wrangle over a legislative fix that would prevent the number of taxpayers who pay the alternative minimum tax from jumping from 4 million to 23 million. The longer the fight drags on, the less time IRS officials have to change their procedures and systems to implement the fix.
Richard Spires, the IRS’ deputy commissioner for operations support, said that at the very least, lawmakers’ late action will delay when taxpayers receive their refunds. Not knowing the final outcome of the political fight, the IRS is making preparations with the assumption that the alternative minimum tax fix will be similar to the one in 2006, Spires said.
If lawmakers approve a measure by mid-December to extend the alternative minimum tax exemptions and the president enacts it, the new requirements will delay until February the IRS’ ability to process tax returns, Spires said. The IRS will need about 10 weeks to reprogram systems, revise business operations and test the changes, he said.
“This is a major back-end impact on the taxpayer and on our operations as we then have to clean this whole thing up,” Spires said last month at a conference sponsored by the Council for Electronic Revenue Communication Advancement, an organization of tax professionals.
The IRS must synchronize changes throughout the system path that tax returns follow. Any change in the alternative minimum tax hits seven major systems in the IRS’ submissions pipeline, including the 1040 e-filing system, and each of those systems is large and complex, Spires said.
The agency must change its tax computation process to determine whether the taxpayer is subject to the alternative minimum tax. Then it must alter the order of calculating the affected tax credits that the taxpayer may apply and modify the business rules used to compute tax. In addition, the IRS will have to adjust the systems that detect and highlight errors for resolution and fraud.
The IRS has some automated tools, but programmers generally will have to make those software changes manually, officials said.
The IRS Oversight Board, which has been following the political debate, said it is concerned that the alternative minimum tax debate could delay the processing of tens of millions of returns and refunds worth tens of millions of dollars.
“The more time that transpires before legislation is enacted, the more severe the risks become,” said Paul Cherecwich, the board’s chairman, in a Nov. 26 letter to Sens. Max Baucus (D-Mont.), chairman of the Finance Committee, and Charles Grassley (R-Iowa), ranking member of the committee.
The board also released an issue report about the impact of late alternative minimum tax legislative changes, which states that a delay might lead taxpayers who have been filing electronically to revert to paper filing. More paper filing will increase the IRS’ processing costs and the probability of taxpayer and IRS errors, the report states.
The ripple effect of delays extends to the software industry, which participates in the IRS’ Free File Alliance, and tax practitioners and electronic return submitters, said David Williams, director of the IRS’ Electronic Tax Administration.
The IRS has made weekly calls to that community to share information on preparations for alternative minimum tax changes, Williams said.