Delays in enacting the “extenders" legislation will have a significant adverse impact on tax administration. Because these provisions expired at the end of 2005, the 2006 draft tax forms do not currently include them. If these provisions are extended, the forms must be revised. Because of contractual deadlines with the vendors who print these forms, the Internal Revenue Service (IRS) is running out of time to revise the final forms and still be able to deliver them in time for the next filing season. This memorandum confirms Finance Committee tax staff discussions with the IRS.
The tax deductions for tuition and fees and the above-the-line deduction for certain classroom expenses of elementary and secondary school teachers, as well as the election to deduct State and local general sales taxes, expired on Dec. 31, 2005. Millions of taxpaying families and individuals claim these deductions. For example, for the 2004 tax year, approximately 2.66 million taxpayers claimed the deduction for certain expenses of elementary and secondary school teachers, 3.7 million taxpayers claimed the tuition and fees deduction, and 8.6 million taxpayers claimed the State and local general sales tax deduction.
To claim the tuition and fees deduction and educator expense deductions, taxpayers must file Form 1040 or Form 1040A. Taxpayers are guided by the instructions to these forms. To claim the State and local general sales tax deduction, taxpayers must file Form 1040 and Schedule A. Taxpayers are guided by instructions to Form 1040 and Schedule A.
The IRS contracts with numerous printers to ensure the delivery of the individual tax packages by the end of December so that taxpayers can file their returns in January. A large portion of returns (mostly returns claiming refunds) are received by the IRS in January. In order to ensure that tax form packages are timely mailed by Dec. 27, 2006, the IRS must provide the contents of the tax form packages to the printing companies by November 7, 2006. The IRS needs a 2 to 3 week period to arrange and compose the tax packages. Therefore, as a practical matter, all forms and instructions contained therein should be finalized by Oct. 15, 2006.
The tax law must be changed for these deductions to be extended. If these deductions are not extended prior to Oct. 15, 2006, the IRS will have to rely on the law as it is at that time. According to the IRS, this means the IRS will be required to prepare for printing without lines on the tax forms to claim these deductions. If the deductions are extended after the printing process is complete, the IRS will issue supplemental instructions on how to enter the deductions as write-in entries on the tax forms. These supplemental materials can result in an increased number of taxpayer errors, including failure to properly claim a deduction for which a taxpayer is eligible. Late legislation results in systemic program changes to both manual processing and electronic processing programs. Moreover, additional training will be required. There would also be a dramatic increase in telephone assistance, possible delayed refunds, and increased amended return filings. Software developers would have to update their software programs and e-file testing by the IRS would have to be reprocessed, potentially delaying the filing season. As the tax law change gets closer to the filing season, the chance of error associated with updating these systems to accommodate changes in the law significantly increases.
This year, the IRS resources are already strained due to changes to accommodate the telephone excise tax refund and the availability of split refunds. Split refunds allow taxpayers to have their refund directly deposited into two or three of their accounts at a bank or other financial institution. Prior to the 2006 filing season, refunds could be directly deposited into only one account. Late enactment of this legislation on top of these two new programs would pose additional risk to an already potentially difficult filing season.
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Source: Ranking Member’s News
