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Tax reform legislation is working its way through Congress at breakneck speed, but while quick passage may be desirable to Republican lawmakers looking for a legislative win, it may make the IRS’s job of implementing the law a whole lot harder.
The Tax Reform Act of 1986—the last major overhaul of the tax code—was a bipartisan, multi-year effort, said Lawrence B. Gibbs, who was the Internal Revenue Service commissioner at the time. “And as a result, we had a pretty good idea in 1986 where the issues and problems were going to be and what the concerns were going to be,” Gibbs, now senior counsel with Miller & Chevalier Chartered, told Bloomberg Tax.
“We’d already begun to hear from taxpayer groups, practitioners, and others as the bill wound its way through the Congress,” he said. “That’s not going to happen this time, I suspect.”
The 1986 process began in January 1984 when then-President Ronald Reagan directed his Treasury Department to put together a comprehensive tax reform plan, which was released that November.
Not having the time to consider the tax changes—at least not to the extent as for the 1986 act—could be a challenge for the IRS given that the implementation work is “massive,” Gibbs said. Immediately after enactment, the IRS and Treasury will have to do several big tasks, including quickly issuing guidance on the new law; updating withholding tables; training employees; and revising forms, instructions, and computer systems, according to Gibbs and others who worked at the IRS in 1986.
The agency will have to do all this on a much tighter budget than it had more than 30 years ago. The IRS has lost more than $900 million in funding since 2010 and is facing further cuts under appropriations legislation pending in the House and Senate.
“If that happens, then you’ve got another budget cut at IRS and therefore you’re going to have fewer resources to try to do more work” in an agency that has been stretched thin in recent years while implementing the Affordable Care Act and the Foreign Account Tax Compliance Act, Gibbs said.
An IRS spokesperson referred Bloomberg Tax to Treasury regarding questions about implementing new tax legislation. Treasury didn’t respond to a request for comment.
Issuing guidance will be one of Treasury and the IRS’s most pressing tasks.
The government will need to prioritize projects, with guidance on the international and pass-through changes likely taking precedence, said Donald L. Korb, IRS chief counsel from 2004-08, who in 1986 was the assistant to the commissioner responsible for planning implementation of the Tax Reform Act.
The deemed repatriation measures in the House and Senate bills will be especially important to address early on, Daniel M. McCall, deputy associate chief counsel (International-Technical) in the IRS Office of Chief Counsel, said Dec. 7 at a Practising Law Institute conference in Los Angeles. The House bill calls for deemed repatriation of currently deferred foreign profits at a rate of 14 percent for liquid assets and 7 percent for illiquid assets; the Senate version would set the rates at 14.5 percent and 7.5 percent, respectively. (For a road map of where to find key provisions and compare the House tax reform bill ( H.R. 1) with the Senate bill ( amended H.R. 1), read Bloomberg Tax’s analysis.)
To address the immediate need for guidance in 1986 and 1987, the IRS issued informal “truncated guidance,” Korb, now of counsel at Sullivan & Cromwell LLP, said. “In other words, instead of putting out proposed regulations, temporary regs, all of that stuff, we would put out notices that would basically say, ‘Here’s what the regs are going to say. You can rely on this until the regs come out,’” he said. “You could get that out fairly quickly and then a year or two years later, you could actually put out the regs.”
Gibbs said this informal guidance sometimes took a question-and-answer format.
Heightened interest in the Administrative Procedure Act—a law that requires stringent review of federal regulations—may complicate the government’s ability to take the same approach this time, Korb said.
In 2015’s Altera Corp. v. Commissioner, the U.S. Tax Court court ruled that the IRS didn’t live up to the APA because the agency gave taxpayers the chance to comment on regulations but rejected many of the recommendations without explaining why they weren’t adopted. This taxpayer victory opened the door for other challenges to agency regulations that don’t follow formal procedure. The case is on appeal at the Ninth Circuit; oral arguments were heard in October.
Assuming a tax reform bill is enacted, the IRS will have to prioritize forms, instructions, and tables dealing with withholding.
“High priority should be given to changes that individuals and employers will need immediately in order to adjust withholding on wages,” Catherine E. Livingston, a partner at Jones Day LLP, said in an email.
“Given the number of individuals who may want to get the benefit of a tax cut rapidly, and the responsibility that employers have for adhering to the employee’s Form W-4, there is likely to be keen demand,” said Livingston, a former health care counsel in the IRS Office of Chief Counsel where she served as principal legal adviser to IRS senior leadership on all aspects of the Affordable Care Act.
The Form W-4, Employee’s Withholding Allowance Certificate, “that employees use to request withholding will have to be substantially redeveloped if the personal exemption is eliminated as proposed under both the House and Senate bills,” Livingston said.
An increase in the standard deduction, as proposed in both bills, and changes to the income tax brackets would also affect withholding. The House plan would reduce the current seven income brackets to four, and the Senate plan would retain seven brackets but reduce rates.
Scott Mezistrano, IRS representative for industry stakeholder engagement and outreach, said Dec. 7 that the agency wouldn’t issue 2018 percentage-method withholding tables and Forms W-4 until tax reform legislation is resolved. After a final bill is signed into law, there will be a transition period in which employers continue using the 2017 withholding tables up to a deadline that would be specified by the IRS, the official said during a monthly IRS payroll industry teleconference.
Most provisions in the House and Senate tax bills are effective in 2018, so they won’t affect the upcoming filing season, Lisa M. Zarlenga, a partner with Steptoe & Johnson LLP, told Bloomberg Tax.
For measures taking effect in 2018, the IRS should have until about August or September to update its computer systems so it is ready for the 2019 filing season, Korb said. But the agency will want to issue draft forms, instructions, and publications sooner than that, “so people can use them throughout the year,” he said.
In addition to adjusting systems, forms, and instructions, the IRS will need to undertake a “a massive re-training” of its employees to educate them on the new law, Korb said.
Kirsten Wielobob, IRS deputy commissioner for services and enforcement, said Nov. 30 at a conference sponsored by George Washington University Law School, Treasury, and the IRS, that the agency will have to revise about 800 forms and publications, and make substantial programming changes to Form 1040, U.S. Individual Tax Return—the linchpin of the filing season.
While the IRS and Treasury will have lag time to deal with most changes, there are some that will require immediate attention because they have effective or measuring dates before 2018, Korb and Zarlenga, a former Treasury tax legislative counsel, said.
Deemed repatriation is one such area. The House plan’s tax is based on the greater of the aggregate post-1986 accumulated foreign earnings and profits as of Nov. 2, 2017, or Dec. 31, 2017. The Senate plan’s tax is based on the greater of accumulated foreign E&P as of Nov. 9, 2017, or Dec. 31, 2017.
Because the repatriation is deemed to occur in 2017, “the IRS will need to focus on it right away,” Korb said. Even though the big multinationals subject to the provision don’t have to file their returns until Sept. 15, 2018—on extension—they will have had to pay 90 percent of their expected tax liability by March 18, 2018, he said.
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