Patching Up the AMT — In Time to Rev Up the IRS

Posted December 18, 2007 at 6:06pm

Despite dire warnings this fall that delaying the passage of an alternative minimum tax patch would wreak havoc at the Internal Revenue Service, tax experts and Congressional Democrats say the Bush administration appears to have exaggerated the problem for political purposes.

“I would bet serious money that if Congress got something done by the middle of December, the IRS would figure out how to implement it in time for the returns filed in January,” said Len Burman, a senior fellow at the Urban Institute, who was deputy assistant secretary for tax analysis at the Treasury Department from 1998 to 2000.

Additionally, IRS Congressional liaisons have told Democrats that they can make the change “easily,” said one senior Senate Democratic aide.

“I wish we had passed it earlier,” Senate Finance Chairman Max Baucus (D-Mont.) said. “It would have been better for everybody all around.”

But, he added, “I think that the criticism has been overblown or overstated. … They know how to deal with this.”

Sen. Debbie Stabenow (D-Mich.), a Finance member, also said the Bush administration has a long history of using agencies under its purview to further partisan political goals.

“I think the administration will use anything and everything for political benefit and so it’s no surprise that they would use the AMT or anything else for political purposes,” she said.

The IRS has said both the printing of tax forms and the speed of refunds would be affected if the AMT patch comes too late in the year.

According to Burman, AMT legislation being discussed in Congress will change three numbers: the exemption level for a married couple filing a joint return, other unmarried individuals and married couples who file separate returns.

Other changes to the tax, such as indexing for inflation, are not dependent on Congressional action and involve replicating past changes.

“If their computer system isn’t set up in such a way that those [duplicating changes] are just parameters that you can change by a switch … it suggests that their systems are incredibly inefficient,” Burman said. “It should take 10 seconds.”

These questions could be answered sooner rather than later. Finance ranking member Chuck Grassley (R-Iowa) last week asked Congress’ investigative arm, the Government Accountability Office, to look into the effects of delaying passage of AMT fixes.

The AMT originally was designed in 1969 to ensure that a small number of wealthy taxpayers could not use exemptions to get out of paying any income tax. But it never was indexed for inflation and threatens to hit 23 million middle-class taxpayers next year. Because of the nearly $1 trillion cost of a permanent fix, Congress largely has dealt with it on a yearly basis.

Beyond the speed with which the IRS should be able to move once Congress finally clears this year’s AMT patch — possibly today or Thursday — the agency is under no legal restrictions to wait until final passage of the bill before beginning to make programming changes. But in the past, the agency has begun making changes prior to Congressional approval, Senators, aides and tax experts said.

A House Ways and Means Committee spokesman said IRS officials also agreed this year to begin making changes to the AMT’s formula if Congressional tax writers assured them relief would be enacted. That’s exactly what Baucus, Grassley, Ways and Means Chairman Charlie Rangel (D-N.Y.) and Ways and Means ranking member Jim McCrery (R-La.) did on Oct. 30 this year.

In a letter, all four assured IRS acting Commissioner Linda Stiff and Treasury Secretary Henry Paulson that Congress would pass AMT relief in time for next year’s tax season. Members also requested that agency officials begin efforts to accommodate the tax change and told them exactly what the parameters would be.

“As the leaders of the Congressional tax-writing committees, we want to assure you that legislative relief is forthcoming so that no new taxpayers will be subject to the AMT for taxable year 2007,” the letter states.

According to one source close to the agency, the information provided in the letter is “95 percent” of what the IRS needs to begin programming the tax change.

Though he acknowledged that the IRS has likely already begun to make the necessary changes, McCrery said waiting until the end of the year to pass an AMT patch would still cause problems.

“I’m sure that all that [AMT] information is in the hands of some programmer to reprogram the computers, but it still takes time to do all that,” he said. “Yet my impression is they are ready to go — they have done the homework that gets them ready so they reduce the delay as much as possible, but there is still going to be a delay.”

An IRS spokesman did not respond to questions about whether the agency has already started to reprogram its computers.

But Treasury spokesman Andrew DeSouza said the Congressional letter is not enough to spur the IRS to action, even with the specifics it included.

“There could be a situation where, at the end of the day, when you look at the final legislation, it’s different,” he said. “[IRS officials] have done all they can in anticipating this patch.”

For the IRS to pre-emptively change a rule, DeSouza said there must be “mass agreement from both parties on both sides of the Hill and the White House.”

Others dispute that claim.

“There is a long-standing history that’s virtually unbroken,” said Ken Kies, managing director of the Federal Policy Group and former chief of staff at the Congressional Joint Committee on Taxation, from 1995 to 1998. “If the two chairman of the tax-writing committees and the ranking members introduce a technical correction bill — so they’ve all agreed on it — it’s always gotten enacted.”

In recent months, the tax has been the subject of political debate.

Democrats say that if the IRS has not in fact begun its initial programming changes to the AMT, the decision clearly came at the direction of the Treasury, with the directive designed to make Democratic leaders in Congress look inept at running the country.

Last month, the IRS Oversight Board sent a letter to Congressional tax writers detailing the confusion that would occur during the 2007 filing season if AMT relief is further postponed. According to the letter, billions of dollars in refunds will be delayed by the inaction, beginning Jan. 28. The IRS, said the oversight board, will be unable to stop the delay without legislative language.

As for why the administration seemed to be dealing more harshly with Democrats this year than they did with Republicans last year, Joelle Jordan, an oversight board spokeswoman, said, “At that point, when we held the [2006] meeting, it looked like [a 2006 extension] was on the verge of passing. So this year, it seemed to have more urgency.”

According to Jordan, IRS officials believe it is best to delay rejiggering their programs until they are absolutely sure that changes must be made. “Apparently it takes as long to take it down as it takes to bring it up,” she said.

Several sources said the agency’s computers are woefully outdated and labor-intensive, but others said that is exactly the reason that the IRS has in the past begun laying the groundwork for programming changes prior to Congressional approval.

Information supplied by the IRS to its oversight board indicates that it will be seven to 10 weeks from the date Congress passes AMT relief until tax returns can be reviewed accurately. They originally put the timeline at 13 weeks, although several sources said even the revised estimate is an exaggeration.

Still, that information was used extensively by Republicans in Congress in multiple press conferences and releases this fall that accused Democrats of mismanagement. This week, Republicans defended their public relations assault.

“I have to take what the IRS says at face value, in one respect,” said Senate Republican Conference Chairman Jon Kyl (Ariz.). “But the truth is we should have been able to get this done before the end of the year.”