The new tax legislation passed at the end of 2017 was already setting this tax season up to be a confusing one. But new tax laws plus a government shutdown?
“Those two together, quite frankly, mean the perfect tax storm,” one accountant told Yahoo Finance.
First, there’s the withholding question. UBS’s economists have said that tax refunds are likely to be about 15% to 25% higher in 2019, equating to about $40 billion to $70 billion more sent back to taxpayers than in 2018. Morgan Stanley agreed, expecting 2019 refunds to be 26% greater than last year’s thanks to high withholding and taxpayers waiting for guidance after 2018’s new tax plan.
Meanwhile, others are forecasting tax refunds to be lower than expected because withholding tables were adjusted too aggressively, causing many workers to not withhold enough.
To that point, the IRS announced this month that more people who didn’t withhold enough would get their penalties waived.
A GAO report found IRS models showed fewer people will get refunds and more will owe this spring.
Amidst all of this, the shutdown has crippled the IRS’s operations, and unpaid workers have been given permission to skip work.
In other words, no one knows what to expect.
‘I tend to think personally it’ll be pretty rough’
“There’s a lot of speculation about how smoothly things will go or whether it’ll be the roughest season in decades,” said Dan Rahill, a CPA and lawyer who works as a tax partner with BDO Chicago. “I tend to think personally it’ll be pretty rough.”
Whenever the tax laws change, accountants and taxpayers have to adjust, a process that is not always smooth. First there’s the uncertainty about how tax laws will actually affect people.
“Change almost always adds to the error rate on tax returns and contributes to uncertainty,” said Mark Luscombe, principal analyst, tax and accounting at Wolters Kluwer. “This year almost everything has changed.”
Furthermore, the clarifications CPAs and taxpayers need have been slow to come out of the IRS, which continues to see its budget get slashed.
“With a tax law passed at the end of 2017 that was largely drafted in secret and that was, for the most part, effective within a month after enactment, guidance has been slow in coming from the IRS,” said Luscombe.
If the guidance was bad before, the shutdown isn’t helping. Hearings have been postponed for proposed tax regulations until the government re-opens.
This is stressing people like Rahill, a past board chair of the Illinois CPA society who frequently teaches continuing education for accountants.
“I have to give a speech next week on ‘opportunity zones,’ and there aren’t final regs,” he said. “People have asked me questions and I’m like, ‘that’s a good question!’”
Specifics of the tax law such as “opportunity zones,” areas that have special tax status for economic development reasons, require phone-book-length guidance. This guidance is being held up by the shutdown, frustrating accountants.
“We have a lot of questions as to what qualifies,” said Rahill.
Rahill applauded the IRS for publishing an inch-thick stack of guidance earlier that clarifies things for pass-through businesses and more, like the fact that life insurance isn’t a financial service.
But it’s cold comfort.
“The IRS is unable to field any sort of telephone service, it’s not issuing refunds, not processing amended returns, audits have been on hold, not processing paper returns without remittances,” said Rahill. “Right now, I think that the longer this goes, the more backlog will develop and once employees do return when the shutdown ends, it’ll take a while for them to recover.”
A high level of uncertainty
A big part of the uncertainty surrounding 2018’s returns comes from withholding. If everyone were to take the standard deduction (which increased to $24,000 for married couples filing jointly) instead of itemizing, it’s broadly true that taxes would fall slightly for many, the CPAs noted.
But the broad changes to deductions in the Tax Cuts and Jobs Act make it much more complicated.
“The changes to the mortgage interest deduction, the state and local tax deduction, the medical expense deduction, and the casualty loss deduction are likely to result in a larger percentage of errors on tax returns than normal,” said Luscombe. “The new 20% deduction for pass-through businesses affects many taxpayers, from sole proprietors to owners of partnerships and S corporations. There are many uncertainties as to who qualifies and how the deduction is calculated.”
Luscombe added that estimates for the number of individual tax returns that will be itemized will fall from 30% to just 12%.
For held-up guidance, when it eventually comes, CPAs like Rahill may have to brace for some tough phone calls, because all this uncertainty means more work for tax professionals and higher fees for clients.
“It could take 1.5 times [longer to do someone’s taxes], so if it took my team 40 hours last year, it could cost 60 hours,” said Rahill. “We have to approach clients and say, ‘we didn’t do this.’”
Filing early — before the IRS issues more guidance — can be tough as well, as it could result in the need to go back and amend.
“When we file a return, we file under penalties of perjury and if we have a position in there that is ‘gray,’ we can put disclosure statements to protect ourselves, but generally speaking we have to do the best we can, make the best judgements,” Rahill said. “It could result that in June a final reg comes out, then we’re obligated to amend the tax return. Is the client going to want to pay for that? Well, the regs weren’t written yet.”
Tax filing season begins Jan. 29 and the deadline for 2018 returns is April 15.