IRS prepares for processing overhaul

The House passed legislation Dec. 19 that would prevent 20 million middle-class taxpayers from being hit with a much larger tax bill. President Bush is expected to sign the bill, which the Senate approved Dec. 6. The extension of expiring credits and exemptions means the Internal Revenue Service will have to reprogram its processing systems.

Without the series of credits and exemptions, called a patch, millions in the middle class would be subject to the alternative minimum tax, which originally sought to prevent wealthy people from avoiding taxes altogether. Because the AMT is not indexed for inflation, the earnings of many middle-class households are rising above its threshold.  

Treasury Secretary Henry Paulson Jr. welcomed passage of the AMT patch, saying the IRS could now begin the remaining preparations for next year's filing season.

"The IRS is doing all it can to have a fully successful filing season," Paulson said. "However, it is likely that there will be some delays, including delays of some refunds.”

IRS officials said they would immediately begin the final reprogramming steps for the tax-processing systems to prepare for the upcoming tax season once the AMT patch has been approved.

“Our people will do everything they can to quickly update our systems for this major change and make this filing season as smooth as possible for everyone,” said Linda Stiff, IRS' acting commissioner.

IRS officials said previously that they have been performing planning and design work based on the assumption that the AMT patch would be similar to the last patch in 2006. The agency would need up to 10 weeks to reprogram systems for processing, revise business operations and test the changes, said Richard Spires, IRS' deputy commissioner for operations support, at an industry event last month.  

The IRS will have to synchronize changes throughout the system path that tax returns follow. Any change in the AMT hits seven major systems in IRS’ submissions pipeline, including the 1040 e-filing system, and each system is large and complex, he said. The IRS will have to change its tax-computation process to determine whether the taxpayer is subject to the AMT, alter the order of calculating the affected tax credits that the taxpayer may apply and modify the business rules used to compute tax. The IRS will also have to adjust the systems that highlight errors for resolution and fraud detection.

The bill the House passed is the third version of an AMT patch, but unlike the previous two versions, it has no provisions to pay for the changes. The Senate blocked or did not pass the previous two House versions, and Bush threatened to veto them because the House originally proposed paying for the $50 billion to extend the credits by increasing the tax on profits of wealthy hedge fund managers and those who shelter their money in offshore tax havens. 

“I would have preferred to offset the cost of AMT relief, but moving ahead to protect taxpayers even at some cost was the right thing to do,” said Sen. Max Baucus (D-Mont.), chairman of the Finance Committee and author of the Senate bill the House just approved.

H.R. 3996 extends AMT relief for nonrefundable personal credits for one year and increases the AMT exemption amount to $66,250 for joint filers and $44,350 for single filers to ensure that no additional taxpayers are liable for the AMT this year.