Steven Miller, the Acting Commissioner of the IRS has sent a letter to congress warning about the chaos that will be caused if congress doesn't pass an extension to the AMT exemption. AMT is the Alternative Minimum Tax.

The AMT was first passed in 1982. It is a law that sets the minimum tax that can be paid for specified income levels. The AMT limits the amount of deductions that a taxpayer can take. The taxpayer must pay the higher of either that taxes calculated using standard deductions or the AMT. The idea behind the law is to set a threshold for taxes paid by high income individuals. This would eliminate some loopholes that allow high income earners to pay a lower tax rate. Filers below the "exemption" do not have to pay the AMT.

A problem with the AMT law is that it does not include an inflation rate. So thirty years after the law was enacted the levels do not correspond with income levels. Every year the congress must raise the exemption level. The current one expired the last day of 2011. This is another part of the financial cliff that is looming at the end of the year.

If nothing is done then the exemption will go from its current level of $75,450 for married filers back to $45,000. For individuals the exemption falls from $48,450 to $33,750. This would impact 28 million filers for the 2012 tax period. There would still be 5 million filers who will be impacted by the AMT if an exemption for inflation is passed.

Commissioner Miller has instructed his agency to plan on another exemption this year since that has happened every year. Some years it has come 11 months late so he expects the same. this year. Interestingly the other two times it was fixed so late was 2007 and 2010. He did warn that if changes were not made it would throw the IRS into chaos. It would also impact tax prepares scrambling to help people file their 2012 taxes.