A new report from the Treasury Inspector General for Tax Administration shows that less than one-half of eligible taxpayers are taking advantage of the farm income averaging provision. This allows farmers to elect to compute their tax liabilities by averaging, over the prior three years, all or a portion of their taxable income from farming. The provision is designed to smooth out the economic disparities that farmers experience from year to year.
Congress estimated that this provision would provide about $50 million of tax relief to farmers in Tax Year 2001, according to the report. For that year, about 52,000 taxpayers used the provision, but that's less than one-half the number of taxpayers who could have benefited from it. The report estimates that well over 64,000 taxpayers overpaid their taxes by not taking advantage of the provision. These taxpayers overpaid their 2001 individual income tax by more than $33 million. The vast majority of their tax returns - 89% - were prepared by paid tax preparers. Many other taxpayers, not studied in the report, likely overpaid their
taxes as well.
Sen. Chuck Grassley, Senate Finance Chairman and Iowa Republican, says he's concerned that tens of thousands of farmers aren't taking advantage of the income averaging provision. Grassley also repeated his concern that the IRS stopped an education program that would have helped farmers learn about this benefit.
Grassley said he believes a lot of the under-information came from the IRS' termination of several agricultural tax teaching programs traditionally coordinated with agricultural universities. Grassley wrote to the Treasury Department in May 2003 to express concern about this. He received a noncommittal response.
He is urging farmers to see whether they are eligible for income averaging. Also, he says he expects paid tax preparers to know the code to help benefit farmers. He adds that the IRS should issue a notice regarding amending these returns. "Many of these farmers should be able to amend their tax return to receive the benefit Congress intended by the income averaging provision. Family farms are struggling, and every penny helps to keep the crops in the field," Grassley says.
The senator is the sponsor of legislation to reform the Alternative Minimum Tax, which was designed to ensure high-income taxpayers pay their fair share but is hitting more and more middle-income taxpayers. The bill would make farmers subject to the tax only to the extent they would owe the tax had averaging not been elected. Grassley included this provision in his pending Tax Empowerment and Relief for Farmers and Fishermen (TERFF) Act (S. 665) and hopes to advance it as part of a small business and farmer tax relief package this year. The TERFF Act has 22 bipartisan co-sponsors.
View the report, "Most Taxpayers That Could Benefit from the Farm Income Averaging Provision Are Not Using It," online.