December 1, 2010 / 4:19 PM / 9 years ago

U.S. tax chief warns of glitches if AMT fix delayed

WASHINGTON (Reuters) - The U.S. tax chief told lawmakers on Wednesday the Internal Revenue Service needs clarity on the fate of the alternative minimum tax, which could ensnare 21 million unintended taxpayers if a law is not amended before year-end.

Yvonne Caurion of New York City prepares her U.S. 1040A Individual Income Tax form at a U.S. Post office in New York, April 15, 2010. REUTERS/Mike Segar

The AMT was enacted to ensure the very wealthy pay some tax after deductions and credits, but because it was not indexed to inflation, it is roping in more and more middle-class taxpayers each year.

Tax-writing lawmakers in the House and Senate have pledged to IRS commissioner Douglas Shulman that they would enact a legislative “fix” so the millions of taxpayers don’t get hit with additional tax.

Shulman said the IRS has adjusted its computers to assume this is the case, but he warned problems would emerge if no legislation is passed.

“Of course, if legislation has not passed by the end of this year, our computers will have been programed incorrectly and we will need to delay filing for these individuals,” he said in a letter to the top lawmakers on the congressional committees charged with tax policy.

The dilemma underscores the challenge facing the IRS as it waits for Congress to deal with a host of tax laws, many expiring at the end of the year, and some which have already expired but are expected to be renewed eventually.

Expiration of the Bush-era tax cuts for all individual income gets the most attention, but the AMT, and a host of annual tax “extenders” for individuals and business are also up in the air.

President Barack Obama’s top economic advisers and key leaders in Congress kick off talks on Wednesday to break an impasse over extending low Bush-era tax rates that expire in a month.

Shulman was appointed by former President W. Bush but kept on by Obama. The IRS has traditionally been a somewhat non-political agency and the IRS chief does not typically take policy positions.

Shulman also mentioned the uncertainty surrounding the individual tax extenders, such as those that allow teachers to deduct expenses for their jobs, deductions for real property taxes, and state and local taxes.

Shulman said the IRS has programed its computers to reflect current law - which means those tax breaks are not renewed.

“It would be an unprecedented and daunting operational challenge to open the tax filing season under one set of tax laws with respect to AMT and extenders, begin accepting tax returns, and then have the law change,” Shulman wrote.

With respect to the Bush-era individual rates, some analysts believe the IRS has a certain amount of discretion in sending employers withholding tables that they use to determine taxes taken out of paychecks. These tables could be delayed by several weeks, some have said.

Reporting by Kim Dixon; Editing by Andrew Hay

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