New year, new law, new challenges
Tax Cuts and Jobs Act impacts 2018 filing season forcing extensions
INSIGHT ARTICLE |
The one-year anniversary of the signing of sweeping tax law changes under the law commonly referred to as the Tax Cuts and Jobs Act (TCJA) brings a new challenge, the need for taxpayers, practitioners, and the IRS to implement the most significant changes in over 30 years as they prepare their tax filings. While few would suggest filing taxes as one of their favorite activities, unfortunately, based on a report from the Treasury Inspector General for Tax Administration (TIGTA), the 2019 filing season will likely present additional headaches. Based on the report by TIGTA, the IRS has fallen behind on necessary forms, procedures, and guidance for taxpayers to file their 2018 taxes. The delays in IRS readiness and the complexity of the tax law changes will create challenges for taxpayers and their advisors. At a minimum, taxpayers should be prepared to extend and file their returns later in the year, even if they have previously filed by the March or April 15 deadlines. Taxpayers should consult their tax adviser and make a plan to address the appropriate timing and additional steps necessary to file their 2018 returns.
A myriad of sweeping tax changes means new forms
While Congress has a history of making several small tweaks to the tax code every year, most of these changes do not require significant adjustments to tax forms. However, the TCJA introduced sweeping changes, including several new code sections and major tax technical concepts, requiring the IRS to develop completely new forms and make meaningful revisions to others. Additionally, Congress and the White House tasked the IRS with fulfilling the political promise of individuals filing Form 1040 on a postcard, creating additional work to modify Form 1040 and the accompanying schedules. Each new or redesigned form requires developing associated instructions, publications, and updating the IRS’ aging technology to accommodate the changes and new forms. The IRS has estimated the TCJA will require creating or revising 450 forms, instructions, and other publications. These changes will require the IRS to modify 140 information technology systems.
Examples of new forms this filing season include Forms 8926 and 8990 for corporations and individuals, respectively, to determine any disallowed business interest expense and carryforwards under section 163(j). Due to the plethora and complexity of the changes for taxpayers with international activity, the IRS has significantly revised Form 5471 and the accompanying schedules, adding schedules necessary to address foreign-derived intangible income and global intangible low-taxed income. As of mid-December, despite releasing over 100 forms and publications in the first half of the month, the IRS has yet to release several key forms or publications. For instance, the instructions to Form 1040 reference Publication 535 to determine the deduction for qualified business income from passthrough entities for taxpayers with incomes in excess of $157,500 ($315,000 if married filing jointly). As of mid-December, the IRS had not yet released an updated Publication 535 addressing the computation of this deduction. Other forms the IRS has issued are draft versions and come with warnings from the IRS that taxpayers cannot use these forms for filing purposes.
Is the IRS prepared?
To implement the drafting of forms, instructions, regulations and publications, and the adaptations to technology, TIGTA estimated the IRS needs an additional 1.1 million labor hours to be prepared for start of the 2019 filing season in late January. That is approximately 542 additional full time equivalent employees or contractors to get the job done. As of June 30, 2018, the IRS had only hired or re-assigned 117 employees to work on TCJA projects. The Consolidated Appropriations Act of 2018 authorized $320 million dollars to implement the changes necessitated under the TCJA. The IRS allocated over 85% of these funds to information technology projects, to implement the necessary technology updates outlined above. Based on internal breakdowns, the funds allocated to technology implementation included $135 million for non-labor technology expenses, including contract services.
Of those information technology expenses, the IRS identified 114 unique projects, but according to the report from TIGTA, the agency had only awarded or started procurement efforts for only 45 of the projects. These information systems projects are critically important to a successful tax season as the IRS mandates that most tax preparers file returns electronically. In addition to the IRS needing to make appropriate modifications to their systems, companies that produce tax return preparation software used by taxpayers and practitioners must in turn update their software to reflect new forms and be able to communicate properly with the IRS e-filing systems. In many cases, these updates require complex coding dependent on the IRS making appropriate modifications to their systems prior to the updating the tax preparation software. Several of these software providers have already indicated that they do not believe the new forms will be available prior to the tax deadlines.
Assessing the impact of recent regulations
While taxpayers and practitioners have now had a year to review and analyze the impact of the TJCA, the law required the IRS and Treasury to draft guidance outlining many of the law’s complexities. Taxpayers have waited months to discover if they will benefit from the section 199A deduction regarding qualified business income or how the section 163(j) business interest limitations will affect their company. The IRS published regulations regarding many of the changes made by the TCJA in the second half of 2018. Many of these regulations are of considerable length and require additional analysis before tax practitioners can assist in applying the guidance to individualized taxpayer situations. Treasury issued the regulations in temporary and proposed regulations. The guidance allows taxpayers to rely on the guidance to file their taxes. However, as the regulations are temporary or proposed, the regulations may face revision before the IRS issues them as final regulations. This creates some level of uncertainty.
In addition to the various issues delaying the IRS in its preparedness for the 2019 filing season, Congress continues to discuss various tax packages, which could include technical corrections to the TCJA or extending certain tax credits. If these bills were to gain traction in Congress and have an effective date with implications for 2018 tax returns, the changes could create additional delays and complications for the IRS and taxpayers.
Taxpayers should also be aware that each state faces challenges similar to those of the IRS. Many states have been slow to adopt or respond to federal tax law changes. These states will need to update forms, instructions, and their information systems based on their level of conformity with federal law or other state tax law changes.
To address and minimize the impact of the challenges facing taxpayers this filing season, it is critical that taxpayers make plans to extend their returns and discuss with their tax advisor an appropriate plan of action. Due to the complexity of the changes for entities, where taxpayers are receiving K-1s, it is important to understand that K-1s may be delivered substantially later than in prior years. Although the tax law changes and IRS delays create significant challenges for taxpayers, taxpayers must keep in mind that an extension of time to file a return is not an extension of time to pay taxes. S corporations and partnerships should plan to prepare estimated K-1s to provide to owners using the best available information and considering the impact of the tax law changes. Where uncertainty exists because guidance is still lacking, taxpayers need to discuss with their tax advisor reasonable approaches for making an estimate of their tax liability. Individuals and C corporations should work with their tax advisor to make estimates of their 2018 tax liability and file an extension prior to April 15.
While some taxpayers may benefit from simplified filings and a higher standard deduction eliminating the need to itemize their deductions, the significant tax law changes and challenges facing the IRS addressed above will increase the amount of time required to prepare returns for many. The substantial depth of regulations released in recent months will require analysis and application to each taxpayer’s facts. The additional requirements to complete new forms and provide supplementary information on others will increase the preparation time required to comply with many taxpayers’ filing obligations. Additionally, in the event of delays at the IRS in finalizing forms and updating information systems, taxpayers will face increased efforts in estimating their tax liabilities to file extensions of time to file. Taxpayers should be prepared for increased costs related to the additional analysis and preparation time and should address these concerns with their tax advisor.