To simplify tracking of the various tax bills under consideration by Congress, we’ve put together a chart of what’s moving and what’s being discussed, including separate tax bills on the AMT, energy production, education, housing, family tax relief, children’s health insurance, and international tax provisions.
As you can see, the total cost of the bills contemplated could exceed $1 trillion (!) over ten years. That’s a lot of offsets for Congress to generate, which suggests many of these bills will be delayed and/or scrapped as Congress weighs the benefits of action with the liability of the revenue raisers.
Another AMT Plan Floated
As you can see from the chart, the primary challenge in stemming the growth of the Alternative Minimum Tax is cost. Any change to the AMT reduces revenues by hundreds of billions over the 10-year budget window. That enormous cost is likely why the House has repeatedly delayed plans to produce a permanent fix to the alternative tax.
A recent plan proposes to offset this cost by imposing a new surtax on high income taxpayers. According to press accounts, the income threshold would be $500,000 and the surtax would be in the 4 to 5 percent range. That tax increase would offset a higher, permanent $250,000 AMT exemption ($125,000 for singles) that is indexed for inflation in future years.
If you are interested in the details, a similar plan has been outlined by Tax Policy Center here in town. The TPC plan would 1) raise the AMT exemption to $200,000 for families ($100,000 for singles) and 2) offset the cost of this increase with a new 4 percent surtax applied to a taxpayer’s Adjusted Gross Income above the $200,000 threshold.
The net effect of this plan on any particular taxpayer is complicated, as are all issues surrounding the AMT. Some taxpayers will pay more tax, some will pay less, and some will pay the same amount. But to date, all the AMT proposals floated in the House have embraced, to one extent or another, marginal rate increases for non-corporate taxpayers.
S corporations should pay attention. This new surtax would apply to all income above the $200,000 threshold, including your S corporation business income as well as any capital gains and dividends you receive. As a surcharge, this tax is applied on top of existing income taxes, resulting in a sizable increase in your effective marginal tax rates.
Big Four Weigh in on Tax Gap
In response to an IRS request for comments and suggestions in their on-going analysis of the tax gap, the large accounting firms have penned a 19-page white paper that outlines the issue as well as putting forward suggestions.
Perhaps an accurate summary of the paper would be: “Big business pays its fair share so the IRS should focus on small business instead.” Here’s the section related to S corporations and other pass-through businesses:
Mid-Size Corporations and Pass-Through Entities
Another potential area of high-risk involves taxpayers and entities that have been subjected to little or no enforcement in recent years. While larger corporations are examined with relatively high frequency (44 percent), mid-size corporations, S corporations, and partnerships are reviewed with much less frequency. The number of S corporations and partnerships has grown rapidly over the last several decades with very little enforcement activity occurring. IRS recently launched a new research project focused solely on S corporation returns. This is an important project to assess the level of compliance for S corporations, which should be completed as soon as possible. Gaining access to timely information from pass-through entities (e.g., partnership Forms K-1) remains a challenge to the ability of individuals, trusts, and estates (and their tax return preparers) to prepare an accurate income tax return on a timely basis. This issue should be considered as part of any effort to evaluate and improve compliance of pass-though entities.
As IRS continues to reengineer the examination process for larger corporations to provide close to real-time currency and streamlined examinations, and as IRS winds down a number of abusive tax shelter efforts, these resources should be redeployed to the task of assessing the level of compliance of mid-size corporations and pass-through entities and to identify noncompliance trends that should be addressed.
On a related note, the last time Treasury Secretary Hank Paulson appeared before the Senate Finance Committee to talk about the tax gap, he was asked to return in 90 days to let the Committee know what new approaches they were prepared to take. That 90 day window expires around July 18th — so expect some sort of hearing or meeting on the Tax Gap around that time. Exactly what new policies Treasury produces in the 90 days they were given remains to been seen.