Paulson Seeks 'Patch' For AMT

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Wednesday, October 24, 2007

With deadlines fast approaching for printing 2007 tax forms, Treasury Secretary Henry M. Paulson Jr. warned yesterday that Congress's delay in repairing the alternative minimum tax could affect 50 million households, or more than a third of all American taxpayers.

Congress has known all year that it must "patch" the AMT to exempt some 21 million middle-income Americans from the levy, which was originally meant to target the wealthy. But in a letter to lawmakers yesterday, Paulson said that if the AMT is unchanged by the end of the year, 25 million households would pay an average additional $2,000 in federal income tax.

Furthermore, he wrote, unless the AMT is altered by mid-November, the IRS will not have enough time to reprogram its computers and rewrite its instruction kits. If that happens, he said, "as many as 25 million additional taxpayers could face delays in processing of their returns and payment of their refunds."

The reason, he said, is that the AMT law directs how much and in what order taxpayers can claim a variety of deductions and credits.

"Based on historical filing patterns, we estimate that enactment of a patch in mid-to-late December could delay issuance of approximately $75 billion in refunds to taxpayers who are likely to file their returns before March 31, 2008," Paulson wrote.

Since winning control of Congress, Democrats have repeatedly vowed to fix the AMT . But neither the House nor the Senate has drafted legislation on the topic nor have lawmakers devised a way to pay for the change, which for this year alone would cost $50 billion. Congressional rules require that any tax cuts be paid for with tax increases or spending reductions.

Paulson's letter was sent to Republican lawmakers who have been needling Democrats for failing to follow through on their promise. Many of these Republicans have said Congress should fix the AMT without making up the lost revenue. "This is not a new tax cut that should be paid for," said Jim McCrery (La.), the senior Republican on the tax-writing House Ways and Means Committee. "This is preventing a tax increase."

Democratic lawmakers, eager to demonstrate fiscal responsibility, have been reluctant to embrace McCrery's suggestion. Last week, however, Democrats in the Senate began for the first time to seriously consider altering the AMT without paying for the change, as the deadline for change is so tight and its cost is so steep.

The AMT was approved in the late 1960s to prevent the super-rich from using loopholes to avoid paying any taxes at all. It was later revised without an adjustment for inflation, so millions of middle-income households started to be threatened with paying the tax. In recent years, Congress has patched the levy to prevent that from happening.

The IRS gives this example: Without the patch, a single taxpayer with two young children in day care and annual wages of $50,000 would have to pay $225 in federal income taxes this year. With the patch, the taxpayer would get a refund of $964.

Linda Stiff, acting commissioner of the IRS, said Congress has never waited this long to pass the patch, and the result could be an unprecedented upheaval in the filing season. "We don't recall anything of this magnitude," she said.

Spokespeople for the tax-writing committees in the House and Senate promised to take action soon but did not say when.

The IRS said it has 12 forms that would be affected by the AMT legislation, one for the AMT itself and 11 others dealing with tax credits that people who pay the AMT stand to lose. These include many widely used tax breaks including credits for child-care expenses, education expenses and residential energy use.

The IRS releases its basic 1040 and 1040A tax packages to its printing vendors by Nov. 7. All additional forms and instructions are set to be finalized by Nov. 16. Updated forms can be put on the IRS Web site within three weeks, but printed forms would already be dispatched.

Additionally, the IRS would have to update its computer software to adapt to whatever Congress decides. That process takes 12 to 13 weeks.

Should the AMT patch not be enacted until mid- to late December, Paulson wrote, updated forms would not be available to taxpayers until after the filing season has started in January, the IRS would not be able to process returns with the AMT and the 11 credits until mid- to late March and refunds due to millions of people would almost certainly be delayed for weeks.

"We are looking at a filing fiasco come April 15th," said Charles E. Grassley (Iowa), the ranking Republican on the Senate Finance Committee. "That is unacceptable."

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