Income Averaging Catch? Fishermen Not Using It

A sampling of tax returns filed by fishermen in 2004 revealed that thousands of workers had overpaid an average of $530, after failing to take advantage of the averaging provision in calculating their income tax liability.    According to the report from the Treasury Inspector General for Tax Administration, more than 4,600 taxpayers -- about 90 percent of the fishermen who could have benefited from the averaging provision -- didn't take advantage of the provision included the American Jobs Creation Act of 2004. TIGTA said that the overpaid taxes for the individual returns filed during the 2004 tax year totaled more than $2.4 million; and a startling 90 percent of the fishermen’s returns were prepared by paid tax preparers.    The 2004 law allows fishermen to elect to compute their tax liabilities by averaging all, or a portion, of their taxable fishing income from the prior three years. The measure was designed to help fishermen recover from low-income years by keeping more of their income in successful years and offsetting potentially high tax burdens in isolated years.   At the time of its enactment, the Joint Committee on Taxation estimated the provision could save fishermen up to $61 million in taxes over the next decade -- between $3 million and $10 million annually.   During a prior audit, TIGTA noted that less than one half of taxpayers who could benefit from a similar provision for farmers, had actually taken advantage of the measure. The inspector general recommended to a variety of federal offices that a better and broader effort be made to educate both fishermen and tax preparers about the averaging provision.   The full report is available at www.treas.gov/tigta/auditreports/2006reports/200630158fr.pdf.