As many as 100 million U.S. households, or two-thirds of the total, may not be able to file their tax returns until at least late March 2013 if Congress doesn’t reach an end-of-year budget agreement, according to the Internal Revenue Service.
Steven Miller, the acting IRS commissioner, issued the new estimate in a letter today to congressional tax writers. With less than two weeks left in the year, Congress hasn’t prevented expansion of the alternative minimum tax, or AMT, for 2012. Tax filing is scheduled to start in January and run through mid-April.
“It may not be possible even to process some returns that are clearly not subject to or affected by the AMT,” wrote Miller, who had previously said more than 60 million returns could be affected. “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.”
For one thing, 32 million taxpayers collectively would owe $92 billion more in taxes if a so-called AMT patch isn’t enacted. Further, inaction would require the IRS to reprogram and test its computer systems. Officials must gauge by early January whether Congress is likely to act on the AMT, as lawmakers routinely have done in past years.
“It’s a very challenging situation,” said Linda Stiff, a former acting IRS commissioner and now a managing director at PricewaterhouseCoopers LLP in Washington. “This country has a really strong system of voluntary compliance and that’s kind of built for decades around people knowing what’s going to happen from January to April.”
The alternative minimum tax, a parallel tax system created in 1969 to ensure that wealthy people couldn’t avoid all taxes, is scheduled to expand to about 32 million households for 2012, up from about 4 million otherwise.
A bipartisan agreement to continue to prevent the AMT’s expansion hasn’t been matched with action. The issue is bound up in the unresolved budget debate between President Barack Obama and House Speaker John Boehner.
The IRS programmed its computer systems assuming that Congress would eventually patch the AMT, as it regularly does to offset inflation that isn’t accounted for in the permanent law. The patch creates higher exemption amounts so that taxpayers can continue to pay under the regular tax system.
It also allows some tax credits to be counted against AMT, affecting millions of taxpayers.
“If in fact there is no patch, they need to go back and change everything,” said Ed Karl, vice president of taxation at the American Institute of Certified Public Accountants in Washington.
The AMT tends to affect residents of high-tax states because it prevents taxpayers from deducting state and local taxes. Without the patch, about half of New Jersey households would pay taxes under the AMT for 2012.
The IRS wants Congress to act as soon as possible, Miller said in a Dec. 6 speech. He added that there was no “magic time” for the agency to determine how it will respond.
“This situation would create two significant problems: lengthy delays of tax refunds and unexpectedly higher taxes for many taxpayers, who will be unaware that they are newly subject to AMT liability,” Miller wrote today. “Moreover, if Congress were to act at some point next year to enact a new AMT patch, the time and substantial expense necessary for the IRS to reprogram its systems to reflect expiration of the patch would ultimately be wasted.”
Michelle Eldridge, an IRS spokeswoman, declined to elaborate yesterday on the agency’s decision-making process.
The IRS now says that between 80 million and 100 million taxpayers may be unable to file promptly. If Congress doesn’t act, the IRS hasn’t said exactly what types of taxpayers would be able to file immediately and who would have to wait.
No matter what the IRS does, Stiff said, the agency will have to start preparing to answer questions from taxpayers.
Stiff was acting commissioner for most of the 2008 filing season. That year, the IRS was grappling with the late December 2007 enactment of an AMT patch and a stimulus program that sent checks to taxpayers. According to the National Taxpayer Advocate, the average wait time for callers to the IRS doubled that year to more than 10 minutes.
“When you have this kind of confusion and uncertainty,” she said, “you have this increased call volume.”
The potential for a delayed or bifurcated filing season reflects the dual roles of the IRS. For many taxpayers with higher incomes, the agency collects payments close to the April 15 deadline for annual filing.
For lower-income households, the tax refund, often driven by the earned income tax credit, is a major financial event. In 2011, 75 percent of tax filers received refunds averaging $2,913, according to IRS.
The IRS won’t rush the weeks of reprogramming and testing its computers, because the accuracy of the system affects tax compliance, Karl said.
“It impacts the public’s thinking when the IRS doesn’t do a good job,” he said. “It’s very important for the IRS not only to do it right but give the impression that they’re in proper command of what they need to do.”
The AMT isn’t the only lapsed tax provision that Congress hasn’t addressed for 2012. Dozens of business tax breaks expired at the end of 2011 as did individual breaks, such as the ability to deduct sales taxes and teachers’ out-of-pocket expenses.
Even as Congress has failed so far to act on the AMT, both parties have offered a way out.
Obama’s latest budget proposal to Republicans and Boehner’s backup plan both would permanently patch the AMT. Boehner’s plan is scheduled for a vote tomorrow.
Companies including H&R Block Inc. and Intuit Inc.’s TurboTax are readying their tax-preparation products for changes Congress may make at the last minute.
“We try to prepare for multiple scenarios so we’re ready to go with our product within a matter of days of tax legislation being passed,” said Ashley Kirkendall, a TurboTax spokeswoman. The company’s desktop and online software, which already went on sale for 2012 returns, prompts users when updates are needed or automatically makes changes when customers log on, she said.
“From an industry standpoint it’s been there, done that,” said Gene King, a spokesman for H&R Block, the largest U.S. tax preparer. The company saw last-minute changes to the tax law in 2010 and is ready to update its products with a “seamless push to the client,” he said.
Budget deal or not, H&R Block is expecting a later start to e-filing this year on Jan. 22, 2013, King said. Early filers who usually look for refunds by Groundhog Day, King said, “may be waiting until Valentine’s Day.”