IRS Commissioner Doug Shulman warned lawmakers Wednesday that making retroactive changes to the tax code in early 2011 could create an “unprecedented and daunting operational challenge” that could lead to service disruptions and delayed refunds for millions of taxpayers. Several popular tax breaks expired at the end of 2009, including a deduction for educators’ out-of-pocket classroom expenses and a property-tax deduction for homeowners who claim the standard deduction. Congress hasn’t acted on legislation that would extend the incentives through 2010.
Even more significantly, Congress hasn’t enacted a stopgap measure that would limit the number of taxpayers subject to the alternative minimum tax. The AMT is a parallel tax system that eliminates many popular deductions and credits, resulting in a higher tax bill. It was originally intended to prevent wealthy taxpayers from using loopholes and deductions to avoid paying any taxes. But it was never indexed to inflation, and in recent years, Congress has enacted a “patch” to limit its growth. If Congress fails to act by year’s end, more than 21 million taxpayers will face an average tax increase of $3,900 for the tax year 2010.
Leaders from both parties assured the IRS in November that they plan to approve an AMT stopgap by year’s end. Shulman said he has directed the IRS technology team to program the agency’s computers accordingly. If Congress fails to approve the fix, Shulman said, “Our computers will have been programmed incorrectly, and we will need to delay filing for these individuals as we reprogram our computers to the actual law in effect.”
In the past, Congress has approved tax extenders and the AMT before Dec. 31. This year, though, tax code updates have been tied up in the debate over the expiration of the Bush tax cuts. Republicans want all of the tax cuts extended, while President Obama wants to allow them to lapse for wealthy taxpayers.
“While I know you and your colleagues have a difficult challenge to enact legislation this year,” Shulman said, “I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011.”