IRS Oversight Board fears tax processing delays

The Internal Revenue Service Oversight Board is “gravely” concerned that if Congress delays legislation to change the alternative minimum tax (AMT), the IRS may have to reprogram and test its systems before it can process tens of millions of tax returns and tens of millions of dollars in refunds.The IRS is prepared for the 2008 tax filing season, which begins Jan. 14, said Paul Cherecwich, the new chairman of the board, in a letter to Max Baucus (D-Mont.), chairman of the Senate Finance Committee, and Charles Grassley (R-Iowa), ranking member of the committee. It typically takes 10 weeks to reprogram its processes after enactment of tax law changes. The Treasury Department and IRS are doing whatever they can to soften the effects of possible AMT changes. “However, there is a limit to actions they can take,” Cherecwich said. The IRS and the oversight board anticipate that if the filing season were delayed until Jan. 28, it would hold up the processing of 7 million tax returns and $17 billion in refunds. If the season begins Feb. 18, it would postpone the processing of 38 million returns and $87 billion in refunds, based on 2007 IRS data. The consequences of a delay may also lead taxpayers who have been filing electronically to revert to paper filing. The IRS can shut down its systems for accepting electronic returns, but it cannot prevent taxpayers from mailing paper returns, even if they cannot be processed right away. More paper filing will increase the IRS’ costs for processing and boost the probability of error by the taxpayer and the agency, the board said in the report. The interruption could also affect the rate of voluntary compliance, a critical factor in reducing the tax gap.“The board believes the risks would inevitably be higher because confusion about tax obligations increases the risk of both deliberate and unintended noncompliance,” Cherecwich said.Furthermore, without legislative action, millions of middle-class taxpayers will be subject to higher taxes.“The IRS Oversight Board urges Congress to take quick action so as to mitigate the risks of AMT changes on taxpayers,” Cherecwich said in the Nov. 26 letter. The oversight board also released at the same time an issue paper on the effect of late AMT changes on the 2008 tax filing season. The House passed a bill earlier this month to prevent millions of families from falling prey to the AMT, which originally targeted high-income taxpayers. But middle-class taxpayers will fall within the threshold unless exemptions, or a patch, are extended. President Bush threatened to veto the House measure because it increases taxes on a limited category of investor and business groups to pay for it, part of the House’s “pay as you go” rules. In a response Nov. 26, Baucus said Republicans blocked an effort to bring the measure forward in the Senate earlier this month. He said he would work with other senators and Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, to complete AMT legislation as soon as possible.