Tax Refunds May Be Delayed Due to Congress

Tax Refunds May Be Delayed Due to Congress - More News


Nov. 16, 2007 (Associated Press) -- The tax-filing season may be off to a shaky start even before it officially begins.

Internal Revenue Service officials warn that millions of people may face delays in having their returns processed next year and getting billions of dollars in refunds. The problem: Congress still hasn't approved temporary relief for many people from the alternative minimum tax, or AMT, a parallel system that operates under many different rules than the regular system.

Some lawmakers predict Congress probably won't take action until next month. If so, that could spell major trouble, Treasury and IRS officials warn. That's because it takes time for the IRS to reprogram its computerized processing systems to reflect last-minute changes made in Congress, says Terry Lemons, an IRS spokesman. How long? "Up to 10 weeks after the bill is signed into law," he says. "The AMT is not simple, and these are not simple changes to our systems."

"As we look at the upcoming 2007 filing season, the potential exists for us to see a problem of greater magnitude than anything we have faced in the past," said Linda Stiff, the IRS's acting commissioner. In a recent speech, she warned that the processing of as many as 50 million returns "would be delayed."

Last week, the House passed a wide-ranging bill that includes temporary AMT relief. Although the bill is viewed as must-pass legislation, it includes other items that aren't expected to be accepted by the Senate, and President Bush has vowed to veto the bill in its current form. Thus, the final legislation is expected to be significantly different than the House version.

About four million people had higher tax bills for 2006 because of the AMT. That number would jump to about 25 million people for the 2007 tax year if Congress doesn't pass a relief bill. Among those most likely to be caught by the AMT are people with large families who live in high-tax areas, especially New York City.

Congressional delays could affect people who file on paper as well as the growing numbers of people who file electronically. A record 57 percent of all federal income-tax returns filed earlier this year for the 2006 tax year were zapped electronically to the IRS. That was up from 36 percent in 2002.

If the problem sounds familiar, that's because it is. Last year, Congress waited until December to extend several popular tax provisions that had expired at the end of 2005. Among these was the option to deduct state and local sales taxes, instead of state and local income taxes, as long as you itemized your deductions. Lawmakers resurrected this provision and others, and President Bush signed the bill into law on Dec. 20.

But congressional action didn't come until well after the deadline for the IRS to send its 2006 materials to the printer. As a result, claiming those deductions became unusually tricky, one of the reasons many people eligible for the sales-tax deduction didn't claim it, according to a government report.

"What we're facing with the AMT this year is of much greater magnitude" than last year's headaches, says Mr. Lemons of the IRS. "It's a far greater number of taxpayers" who may be affected, and "the delays in being able to file could potentially be much longer."

What's more, "millions of other taxpayers not involved in AMT returns may also have their refunds delayed because of the backlog in processing other returns," says Ms. Stiff, the acting IRS commissioner.

"We are worried," says Tom Ochsenschlager, vice president, taxation at the American Institute of Certified Public Accountants. Congress "is really putting the IRS in a box on this issue. That's going to make a lot of taxpayers upset."

While taxpayers who owe money typically wait until April to file and pay, millions of people fire off their returns early each year in order to get their refunds. An IRS spokesman says more than 54 million returns had been filed through March 2 of this year. About two-thirds of all taxpayers typically get refunds each year. The average refund this year was more than $2,200.

Makers of popular tax-preparation software, including Intuit Inc.'s top-selling TurboTax, say their 2007 versions will go on sale in retail stores soon. Naturally, the TurboTax versions will be based on current law, not on estimates of what Congress might do. But TurboTax officials say their computer systems are fast enough to make online changes soon after Congress decides what, if anything, to do. Still, that won't do tax filers much good if they're waiting for their refund early next year and the IRS system isn't yet ready to process their return.

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THE HOUSE VOTES to extend a tax break for many older taxpayers.

Under current law, people who are 70 1/2 or older can transfer as much as $100,000 this year directly from an individual retirement account to qualified charities without getting hit by income taxes on that money. The transfer counts toward that person's minimum required distribution requirement.

Charities say many people have taken advantage of this provision, which is set to expire at the end of this year.

The House voted to extend the provision through the end of 2008.

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SOCIAL SECURITY taxes will rise again next year for many workers.

The maximum amount of earnings subject to Social Security tax will rise to $102,000 from $97,500 for 2007.

An estimated 164 million workers will pay Social Security tax next year. Of those, nearly 12 million, or 7 percent, will pay higher taxes as a result of the higher taxable maximum.

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