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Christopher Bergin

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The Other Cliff (Hint: It's in Your Tax Return)

Posted: 11/30/2012 10:20 am

The IRS is an interesting organization to observe. For one thing, it mostly tries to fly under the radar. I think this is caused by several factors. Among them, the IRS is a professional operation that goes about its business and is very good at doing what it is assigned to do with little or no public griping (which is probably why it got the job of running a lot of the new government health care system). And if you think about the mess of a tax system this agency has to administer, it really does an outstanding job.

Also, lots of people hate the IRS -- after all, to them, it just takes their money. Because of this, the IRS has developed a "bunker mentality"; it often prefers to hide.

The IRS is particularly careful about getting the attention of Congress. If you look at history, this makes sense; often when Congress notices its tax collector, it isn't good news for the IRS.

That's why it's been fascinating to watch the "smoke signals" coming out of the IRS meant to blow up the street to Capitol Hill. It's also pretty scary. Because if the IRS is worried about what happens to the upcoming filing season if our lawmakers do nothing about the so-called fiscal cliff, we should all be worried.

First came outgoing IRS Commissioner Douglas Shulman, who upon reaching the end of his term, warned Congress in early November that if it didn't address aspects of the fiscal cliff, specifically the patch to the Alternative Minimum Tax that expired almost a year ago, "there would be significant delays in the filing season." The patch protects almost 30 million taxpayers from paying the AMT, and the IRS systems assume the patch (and some other congressionally-provided fixes) will be there. Why? Because Congress passes the patch every year, and it would be insane (my words, not those of the IRS) not to. The problem is that Congress let the patch expire for 2012, and the patch has now become a chip in the game that is the fiscal cliff.

Then, on Nov. 13, acting IRS Commissioner Steven Miller sent a letter to Congress -- specifically, to the Ranking Democrat on the House Ways and Means Committee, Sander Levin -- saying that "there is potential for substantial disruption to the filing season ahead."

Then Miller dropped what at least I think was the big one. He warned that unless lawmakers address the AMT patch and some other rules, "the IRS would, at a minimum, need to instruct more than 60 million taxpayers that they may not file their tax returns or receive a refund until the IRS completes the necessary systems changes [to deal with what lawmakers didn't do]." Miller went on, "Because of the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later." [All highlights are mine.]

Just think of the insanity. Millions and millions of taxpayers, who every year plan on their refunds (the wisdom of which is an issue for another day) won't get them on time. They get screwed (a technical tax term).

And think about the effect on the economy of the delayed refunds if the IRS is forced to reprogram its processing systems because of the irresponsibility of our lawmakers. Former IRS official Clarissa Potter noted that those refunds -- about $170 billion -- are "a huge driver of the economy in the first quarter of every year, because the people who get those refunds spend them."

So, welcome to the other cliff. In Washington, our lawmakers continue to treat the cliffs they created like a game of chicken in a classic James Dean movie. And we all get to sit in the back seat.

The other day, a tax professional working in the trenches told me his clients think the lawmakers in Washington are a bunch of knuckleheads. Right now, I can't disagree with that.

 
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