The Senate passed a bill that would extend expiring tax cuts, patch the alternative minimum tax for another year, provide clean energy incentives and equalize the disclosure standards for tax preparers and taxpayers.
The bill won overwhelming support late Tuesday afternoon by a vote of 93-2. "This is must-do legislation," said Senate Finance Committee ranking member Charles Grassley (pictured), R-Iowa. "The AMT relief prevents 24 million families from facing an average tax increase of at least $2,000 each. We're extending tax benefits for middle-income taxpayers, including deductions for out-of-pocket expenses for teachers, sales tax and college tuition."
The bill went to the House on Wednesday and is expected to win passage by the end of the week. It includes a provision advocated by the American Institute of CPAs that would equalize the tax return preparer penalties on understatement of tax liabilities. A law passed by Congress in May 2007 raised the tax return reporting standards for undisclosed, non-tax-shelter transactions for tax return preparers to a level higher than that required of taxpayers. The new bill would reverse that.
The proposal changes the standards for imposition of the tax return preparer penalty, reducing the standard for undisclosed positions to "substantial authority." The preparer standard for disclosed positions is "reasonable basis." For tax shelters and reportable transactions to which Section 6662A applies (listed transactions and reportable transactions with significant avoidance or evasion purposes), a tax return preparer is required to have a reasonable belief that such a transaction was more likely than not to be sustained on the merits. The proposal is effective for returns prepared after May 25, 2007. The estimated cost of the proposal is $22 million over 10 years.
"AICPA members last year quickly zeroed in on how important it is for Congress to establish equal reporting requirements for taxpayers and tax preparers," said AICPA CEO Barry C. Melancon in a statement. "We appreciate the Senate's understanding and the fact that senators acted promptly to correct conflict-of-interest problems that can come up when the IRS reporting requirements aren't the same." Melancon pointed out that the nature of taxpayers' representation could be affected when unequal thresholds create conflicts of interest between preparers and their clients.
Other provisions in the bill include clean energy tax incentives totaling approximately $18 billion, paid for by several offset provisions including a delay of the tax deduction for domestic manufacturing activities of major American oil and gas companies. Another offset provision tightens the rules by which oil and gas companies pay taxes on income earned overseas, and makes general fund money available with increased payments into the oil spill liability trust fund as new drilling is considered.
The clean energy incentives are also funded in part by a one-year extension of the Federal Unemployment Tax Act surtax at the current level, and by increasing reporting requirements for brokers on sales of stock.
The bill provides several extensions of expiring family and business tax cuts and other policies, including an expansion of the child tax credit, legislation providing parity for mental health treatment in the U.S. health care system and tax relief for victims of natural disasters. The bill also included an extension of the research and development tax credit, which expired last December. It can cover as much as 20 percent of R&D expenditures. Extensions of expiring tax cuts are partially offset by requiring hedge fund managers and others to account for deferred compensation - income held in offshore accounts and other corporate structures - as it accrues, rather than avoiding appropriate and timely income taxes.
The AMT measure would protect taxpayers from higher taxes, but at a cost of $64 billion. The cost of the AMT "patch" is not offset. Last year, efforts to offset the AMT patch faced opposition from Republicans and the White House, who repeatedly stalled the bill until Democrats agreed to remove offsets. This year, Congress wants to get the legislation passed quickly before it goes into recess in preparation for the November election.
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