The House is expected to vote sometime this week to renew the tax extenders package through the end of this year. The timing of the extender package may still post serious issues for state tax administrators.
Tax extenders are a package of approximately 55 tax provisions, affecting both businesses and individuals that expired at the end of 2015. If Congress decides to extend these provisions and retroactively apply the extension to 2014, this could create an insurmountable logistical nightmare for state and federal tax administrators as the filing season is set to begin.
As administrators closely watch Congress, many of them have worked out a "best" and "worst" case scenario. However, the window for the “best case” scenario has closed. “The best thing that could have happened was for Congress to breeze through house-keeping items and vote on extenders by the end of November and maintain the status quo, but it's clear that won't happen," said Smith. "The medium-bad is waiting until December to act. The worst-case scenario is when Congress kicks the decision into January. If this happens, it would create serious compliance issues. It's going to lead to an ugly filing season."
If Congress votes on an extender package sometime this week, the worst case scenario will probably never come to pass. However, even immediate Congressional action at this point would lead to serious administrative issues. In October, I.R.S. Tax Commissioner, John A. Koskinen, warned Chairman Ron Wyden (D-Ore.) that waiting until December to enact retroactive tax law changes affecting 2014 could result in service disruptions and even force the I.R.S. to postpone the opening of the 2015 filing season and delay the processing of tax refunds for millions of taxpayers.
Waiting to pass an extender package that may potentially add new provisions would leave the I.R.S. and state tax administrators with little time to reprogram systems and make processing changes. "This is very difficult for software developers and state tax administrators since they can't do their work until it is clear what the law will be. If there are major changes to the law, it could delay the entire filing season both on the state and federal level," said Smith.
Despite the technological age, with only a few paper forms left, a decision this late in the year is still problematic for tax administrators. "This is a major administrative headache," said Verenda Smith, Deputy Director of the Federation of Tax Administrators (FTA). "This was hard enough in the paper days. Now processing computers have to be updated as well. You need new testing scenarios for the software developers who are writing tax preparation software. Nobody has money in their budgets for overtime, and it's already the busiest time of the year for the IT shop."
As the clock runs out on the window for the "medium-bad scenario," while Congress debates the fate of these provisions, the 2015-filing season and approximately $1.5 trillion dollars of debt over the next 10 years hangs in the balance, according to the Committee for a Responsible Federal Budget (CRFB). "With only a short amount of time left to make a decision and mounting administrative concerns, there is pressure on Congress to act quickly," said Smith. Otherwise, the potential consequences for both state and federal tax administrators will be dire. "This is the definite downside to a state's choice to piggyback its individual income tax on the federal tax base. The states cede control. They do so for many good reasons. But letting Congress decide when something will happen is a big risk."
Continue the discussion on LinkedIn: Are tax extenders giving you any headaches?
By Radha Mohan
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