Alternative Tax Nightmares

Did you know that you have an advocate in Washington, D.C., who's charged with looking out for your best interests in the world of taxes? Well, you do. Meet Nina Olson, the National Taxpayer Advocate. Her office was created in 1996 to help resolve taxpayers' problems with the IRS and she reports to the IRS Commissioner.

Last week, Olson sent a report to Congress detailing big problems faced by taxpayers, such as sole proprietor tax noncompliance and the Alternative Minimum Tax (AMT). The first item relates to self-employed people, many of whom apparently fail to report (and therefore pay taxes on) more than $100 billion in income.

The AMT was cited as the No. 1 problem and should be of interest to even more of us. As Olson explained, "Although the AMT was originally enacted [in 1969] to prevent wealthy taxpayers from avoiding tax liability through the use of tax avoidance techniques, it now affects substantial numbers of middle-income taxpayers and will, absent a change of law, affect more than 30 million taxpayers by 2010." As this article explains, those 30 million taxpayers represent a full quarter of all households. More than half of them will have incomes of $100,000 or less and they'll include 37% of those earning between $50,000 and $75,000. These obviously aren't the rich. They're often people who have large families, live in high-tax states, and/or have exercised certain incentive stock options.

The problem is that while many taxes are designed to be adjusted to account for inflation, the AMT is not. So, as time marches on, it traps more and more people in its net. And what the AMT means for those taxpayers is at the very least a lot more time spent preparing their return (one estimate is an additional 12 hours) coupled with the possibility of owing extra taxes.

Olson not only listed tax problems plaguing Americans, but also suggested some solutions. For the AMT, she recommends either scrapping it entirely or tweaking it to reduce its impact on middle-class taxpayers.

Clearly, there are some broken gears in our tax machinery. An Associate Press article recently pointed out, for example, that, "In a recent audit, IRS employees made errors on 83% of tax returns they prepared for auditors." If even IRS employees can't sufficiently comprehend our tax laws, what hope do we mere taxpayers have? Well, at least we have a Taxpayer Advocate. Go get 'em, Nina!

Learn more about the AMT in Roy Lewis' Alternative Minimum Tax Planning and more than you ever wanted to know about taxes in our Tax Center.