The Advocate and the AMT

Just in case you haven't gotten around to reading the Taxpayer Advocate's annual report that I mentioned earlier today, and since I promised I'd be back, here's a closer look at this year's top tax trouble: the alternative minimum tax (AMT).

National Taxpayer Advocate Nina E. Olson calls this parallel tax system the "poster child for tax-law complexity." It's already on the hit list of the new 110th Congress and Olson, who has targeted the AMT in previous reports, gladly provides Capitol Hill with more ammunition.

She notes the cost to affected taxpayers (the average AMT taxpayer in 2006 will owe an additional $6,782) and castigates the AMT for punishing taxpayers for "engaging in such 'classic tax-avoidance behavior' as having children or living in a high-tax state."

Even IRS Commissioner Mark Everson is on board with this recommendation. During a speech at a tax panel meeting I attended in December, Everson said, "Something needs to be done. The problem is we send people though this whole regular tax routine, then pull the rug out from underneath them and say, 'just kidding.'"

Adding up the AMT: The obstacle that for years has been blocking any major overhaul or repeal of the AMT is that it brings in so much money.

A 2004 Congressional Budget Office report estimated that if the AMT were eliminated, the U.S. Treasury would lose roughly $600 billion over the next decade. A June 2005 analysis by the Center on Budget and Policy Priorities projected that full repeal would top $1 trillion through 2015.

So the reason more and more taxpayers are still dealing with the awful AMT sort of makes sense, and dollars and cents, now.

Still, the new Congress says it, too, wants to rectify the inequities of the AMT. New Ways and Means Chairman Charles Rangel (D-New York) says the tax-writing committee will take up the matter soon.

On the Senate side, new Finance Committee Chairman Max Baucus (D-Montana) has already introduced a bill to repeal the AMT; among the measure's cosponsors is the committee's ranking minority member and former chairman, Charles Grassley (R-Iowa).

Right hand, meet left hand: Such taxpayer- friendly intentions, however, are going to run headlong into another Congressional goal, to operate under a "pay-as-you-go" budget rule.

That's just what it sounds like. New spending cannot be approved unless lawmakers come up with money from somewhere else (meaning new taxes on someone) or cut other spending (meaning killing somebody's favorite federal program) to offset any revenue loss to the Treasury.

When you, and by you I mean those elected employees on Capitol Hill, start trying to come up with ways to make up the billions or possibly trillions that would evaporate with AMT repeal, it tends to make your -- and lawmakers' --  heads spin.

And if Representatives and Senators make the wrong (i.e., politically unpopular) choice, heads could roll next election day.

Other NTA comments: Check out what fellow tax and personal finance bloggers are saying about the 2006 Advocate's report:

• IRS collection system is flawed (FRAUDfiles)
• Uncollectible taxes and AMT (Tick Marks)
• Calls to Repeal Outsourcing of Tax Collections (TaxProf)