Q: Are farmers taking advantage of a provision of the tax code called income averaging?
A: A new federal report says tens of thousands of farmers who may benefit from income averaging instead overpaid their federal taxes by as much as $33 million for the 2001 tax year. Approximately 52,000 taxpayers used income averaging to compute their 2001 tax return. But according to the report, that’s less than half of the number of taxpayers who could have benefited from the provision. Moreover, many others not studied in the audit likely overpaid as well.
Q: Why isn’t income averaging being fully utilized?
A: According to the report, taxpayers and/or their paid preparers either didn’t know about a key change in the benefit, didn’t think they’d benefit, or used preparation software that led them to believe there would be no benefit. Some farmers also may have concerns about the Alternative Minimum Tax. I’m working to advance legislation that would make farmers owe the tax only if they already would have been subject to pay it if averaging had not been used.
Q: What needs to be done to improve awareness and understanding of this tax benefit?
A: The Internal Revenue Service needs to do a much better job of educating tax preparers and taxpayers. In this case, Congress renewed a tax benefit in 1997 to help farmers smooth out the boom and bust years that so often affect a farmer’s annual income. But this report shows it hasn’t done its job getting the word out. I’m particularly concerned the IRS terminated an education program coordinated with agricultural universities to sponsor agricultural tax teaching programs. Essentially, tax preparers and their farmer clients were left in the dark. In fact, the overwhelming majority of the tax returns studied for the report – 89 percent – were prepared by paid tax preparers. That means farmers paid for expertise that cost them more than they legally owed to Uncle Sam. As chairman of the Senate Finance Committee, which bears oversight authority of the IRS, I am working with the top decision-makers at the IRS to improve outreach and understanding among the taxpaying public before more farmers are financially harmed.
Q: How do farmers determine if they were eligible for income averaging in previous years?
A: As a federal lawmaker and a lifelong family farmer, I share the same philosophy whether I’m doing business on the farm or in Washington. A penny saved is a penny earned. The IRS ought to issue a notice to make farmers and their tax preparers aware of their options. And I would encourage farmers to check whether they are eligible to file an amended return. Family farmers work hard to stay in business. Many farmers should be able to amend their tax return to receive the benefit Congress intended to help them meet their tax obligations and weather the highs and lows brought upon by Mother Nature and the marketplace.