The Internal Revenue Service Oversight Board has sent a letter to the leaders of the Senate Finance Committee saying it is "gravely concerned about the serious risks to the 2008 filing season" if legislation to change the alternative minimum tax is delayed much longer.

In a letter to committee chairman Max Baucus, D-Mont., and ranking Republican member Charles Grassley, R-Iowa, the board said, "a delay threatens the IRS' ability to process returns and issue refunds in a timely manner and imposes significant burdens on taxpayers. Moreover, the more time transpires before legislation is enacted, the more severe the risks become."

Congress has been wrangling over how to fix the AMT before it spreads to upwards of 23 million taxpayers. A bill recently passed by the House attempts to pay for a patch in the AMT by raising revenue in other areas, such as taxing the earnings of managers of hedge funds and private equity firms at a higher rate. But the bill has run into stiff opposition and faces uncertain prospects in the Senate, in addition to a veto threat from President Bush.

The letter outlines a host of problems that could occur if Congress keeps procrastinating on patching the AMT. The filing season is scheduled to start on Jan. 14, 2008, but if it starts instead on Jan. 28, 6.7 million tax returns could be delayed and $17 billion in refunds would be issued late.

It gets worse from there.

A Feb. 4 start date would mean 15.5 million delayed returns and $39 billion in refunds not issued. With a Feb. 18 start date, the problem mushrooms to 37.7 million delayed returns and $87 billion in postponed refunds.

The board points out that the IRS generally needs 10 weeks to reprogram and test its systems when the tax laws change for the AMT. The IRS isn't able to set up multiple scenarios in its systems just in case Congress goes one way or another. It is able to prepare as much as possible for the likely changes, but at some point it has to wait for Congress to act. Late changes would drive up the costs of processing, as well as error rates, and cause more demand for expensive and risky refund anticipation loans for taxpayers. The IRS is supposed to issue refunds within 45 days, but the longer the AMT patch is delayed, the greater the risk that it will go over that limit.

The time for the political wrangling clearly has to end soon. Congress is under pressure from the IRS, the Treasury Department and the president to fix the AMT fast. It may need to abandon its self-declared pay-as-you-go policy, which is supposed to make up for any revenue lost for tax cuts, if it is going to get the problem fixed in time. Taxpayers and tax preparers will need certainty as they head into tax season.

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