IRS watchdog: ‘Fiscal cliff’ imperils 2013 filing season

By Bernie Becker - 06/27/12 01:58 PM ET

Congressional delays in dealing with expired or expiring tax provisions could complicate next year’s filing season for both the IRS and taxpayers, a new government report says.

Nina Olson, the national taxpayer advocate, said in her most recent report to Congress that a cloud of uncertainty hangs over the 2013 filing season, with roughly 100 provisions either having lapsed before the end of 2011 or set to do so by the end of the year.

“An aura of uncertainty prevails as the IRS and taxpayers wait for word about what will be the law governing us this year and for the near future,” Olson wrote.

Olson, the in-house watchdog for the IRS, also noted that Congress has made a habit of making late tax changes in recent years, even though that has proven to make it difficult for taxpayers to make plans and for the IRS to administer the law.

“Because of the magnitude of these challenges and the uncertainty about such a large number of important provisions, the 2013 filing season is already at risk,” she added.

“The 2013 filing season is likely to pose problems for many (if not most) taxpayers and the IRS if Congress does not address the many provisions that have already expired or soon will,” wrote Olson, who files two reports with lawmakers each year.

A patch to keep the Alternative Minimum Tax from hitting middle-class families, the popular research-and-development credit and a deduction for state and local sales taxes are among the scores of provisions that expired at the end of 2011.

Meanwhile, the Bush-era tax rates on income and capital gains — not to mention estate tax provisions and expansions of certain tax credits often used by low-income families — are scheduled to lapse at the end of this year, all part of the so-called “fiscal cliff” of tax increases and spending cuts that analysts believe is a threat to the economy.

Still, legislation on issues like the so-called Bush tax cuts isn’t expected to make it through Congress before November’s election, and the fiscal cliff is likely to be a focal point of the post-election lame-duck session.

Lawmakers have held meetings and hearings on the expired and expiring temporary tax provisions, commonly known as extenders. But while some congressional tax-writers have said they hope to craft a tax-extender package before November, other observers have predicted that action on targeted tax breaks will also be pushed off to the lame-duck session.

In her report, Olson noted that millions of taxpayers were unable to file until February of 2011 due to last-minute tax changes that left the IRS scrambling to reprogram its systems.

The taxpayer advocate also said that delays in making tax policy can blunt the impact of certain incentives, create problems for taxpayers who count on refunds to pay their bills and even saddle some with unexpected penalties.

At the IRS, officials have had to plan for separate scenarios three times in recent years, Olson said, “essentially doubling its work and drawing focus and resources from other important projects.”

Doug Shulman, the IRS commissioner, has also warned against congressional inaction on the tax front.

“If Congress can’t act by the end of the year, and even starts to think about retroactive legislation of things like the AMT, which have already expired, you could have a real disaster in the filing season,” Shulman said at the National Press Club in April.

— This story was updated at 3:04 p.m.