Year End Tax Dramas and the State of Tax Policy

The exchange of letters between the heads of the tax-writing committees and Commissioner Shulman illustrates the unfortunate state of our federal tax system. The delays in addressing items that expired at the end of 2009 - either to say definitively they won't be extended or to extend them much earlier, makes it impossible for the IRS to publish the 2010 tax forms and get its computers programmed to receive tax information for 2010.

On November 9, 2010, the chairs of the tax-writing committees sent a letter to IRS saying they would "do everything possible" to address 2010 AMT. Commissioner Shulman issued a letter to these folks later saying that as they had urged him to take all necessary steps, he had the IRS update the computers as if the AMT exemption amounts would be $47,450 for single and $72,450 for MFJ. He went on to say:

"I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011. … 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.”

He also noted that this matter affects more than AMT taxpayers because IRS time spent dealing with that issue leaves less time for helping other taxpayers. Forbes describes this all as "IRS Commissioner Gives Congress an Ultimatum" (Ashlea Ebeling, 12/1/10).

What is the solution? When should the tax rules for a particular year be set? It would seem that the answer should be before the year begins. Shouldn't taxpayers know on the first day of their tax year what the law is? Given the growing number of temporary provisions in the law and the reality that "temporary" really means "something we someday get around to renewing" we operate in a lot of uncertainty. I think that is going to continue and is an unfortunate way to design a tax system, particularly one that represents a significant expenditure to many individuals and businesses.

Howard Gleckman of the Tax Policy Center describes the activity this week to extend all of the 2001/2003 tax cuts as follows (12/7/10 blog post):

"To summarize, this package would make nearly the entire individual revenue code permanently temporary, which is horrible tax policy."

It is not good for a tax system to have year end drama of what that year's AMT rules are. And with an increasing number of temporary provisions only means that the drama escalates every year.

What do you think?