The IRS and Treasury has issued Notice 2018-13, providing additional guidance on the deemed repatriation provision in the new GOP tax law.

The notice announced the IRS and Treasury’s intention to issue further regulation on rules to address the calculation of earnings under the transition tax, among other things.

The notice also:

  • Makes a modification to the prior notice issued on Dec. 29, 2017, regarding the repatriation of earnings subject to the transition tax.
  • Issues guidance regarding difficulties with measurement dates (Nov. 2 or Dec. 31, 2017)
  • Clarifies the allocation of hovering deficits
  • Provides taxpayers targeted relief from certain unintended regulatory and reporting consequences arising from a change to existing stock attribution rules in the 2017 Tax Act.

The IRS and Treasury have requested public comments to the notice and on what additional guidance should be issued to assist taxpayers in computing the transition tax. No deadline was specified.

In conjunction with its annual report to Congress, the National Taxpayer Advocate released a new document – the “Purple Book” – containing 50 legislative recommendations to improve taxpayer rights and tax administration. The Purple Book, modeled after the Treasury Department’s “Green Book” of revenue proposals, is intended to help steer Congress as it considers IRS reform legislation in 2018.

Key suggestions from the purple book include the following:

  • Codify both the Taxpayer Bill of Rights and the IRS mission statement as Section 1 of the Internal Revenue Code.
  • Provide an annual report from the IRS to taxpayers with a receipt of how their tax dollars are being spent.
  • Authorize the income tax assistance grant program.
  • Establish minimum competency standards for federal income tax return preparers.
  • Extend the time limit for taxpayers to sue for damages for improper collection actions.
  • Require at least one appeals officer and one settlement officer to be located permanently in each state, D.C., and Puerto Rico.
  • Limit re-disclosures and unauthorized uses of tax returns and tax return information.

The Purple Book also examines a range of other tax administration issues, including the IRS’s private debt collection program, its implementation of a recent law that would revoke or deny passports of taxpayers with delinquent tax obligations, and its move towards online services.

National Taxpayer Advocate (“NTA”) Nina Olson released her annual report to Congress, focusing on the implementation of the new GOP tax law. In her report, Olson warned that a 20 percent reduction in the agency’s budget in FY 2010 has challenged the agency’s ability to perform the basic tasks of administering the tax system.

“As the National Taxpayer Advocate, I see daily the consequences of reduced funding,” Olson wrote. Budget reductions have rendered the IRS unable to: (1) provide acceptable levels of taxpayer service; (2) update its technology to improve its efficiency and effectiveness; and (3) maintain compliance programs that protect taxpayer rights.  Olson concluded that “shortcuts” have become the norm, and this is incompatible with high-quality tax administration.

Despite pushing for additional funds for the IRS, Olson also expressed concerns that the agency at times has been too quick to cite funding constraints as a basis for inaction.  “Limited resources cannot be used as an all-purpose excuse for mediocrity,” Olson noted. Despite the agency’s limitations, there are still steps it can take to improve taxpayer service through creativity and innovation.

In the coming months, the IRS will face major tax reform-related implementation challenges. This includes:

  • programming and systems updates;
  • answering taxpayer phone calls and providing other taxpayer services;
  • drafting and publishing new forms and publications;
  • revising regulations and issuing other guidance;
  • training employees on the new law and guidance; and
  • developing systems to verify compliance with new eligibility and documentation requirements.

The IRS has initially estimated that implementing the new tax law will require an extra $495 million in funding for 2018 and 2019. At the time it developed this preliminary cost estimate, the IRS had identified 131 filing season systems that will be impacted by the new tax law. Specifically, the systems must be modified to reflect:

  • new individual and business tax rates;
  • inflation-indexing changes for deductions and credits;
  • phase-out changes for certain tax benefits;
  • repeal of certain tax benefits; and
  • changes that will require updates to the IRS’s fraud-detection filters.

It remains unclear as to whether the GOP will adequately fund the IRS in FY 2018. Several former GOP lawmakers have joined the chorus of voices warning Congress that if it doesn’t increase funding, the IRS may be in dire straits.

On Jan. 11, the IRS announced the appointment of seven new members to the Internal Revenue Service Advisory Council (“IRSAC”).

Established in 1953, the IRSAC examines various issues in tax administration; provides the IRS commissioner with relevant feedback, observations, and recommendations; and publishes an annual report to the agency at a public meeting in November.

The following individuals were appointed to serve three-year terms on the council beginning in 2018:

  1. Ben Deneka is an industry operations liaison with H&R Block in Pittsburgh, PA.
  2. Diana Erbsen is a tax partner at DLA Piper in New York, NY.
  3. Antonio Gonzalez is a certified public accountant and is founder and co-owner of Sydel Corporation in Coral Gables, FL., which is both an accounting and information technology consulting firm for multiple organizations.
  4. Charles Read is a certified public accountant and the founder and CEO of Custom Payroll Associates Inc. in Lewisville, TX, where he has been preparing business and individual tax returns since 1991.
  5. Martin Rule is a certified public accountant and senior manager with Deloitte Tax LLP in Chicago.
  6. Jeffrey Schneider is an enrolled agent and a vice president with SFS Tax & Accounting Services in Port St. Lucie, FL.
  7. Patricia Thompson is a certified public accountant and tax partner with Piccerelli, Gilstein & Company, LLP in Providence, RI.

 

HR and legal departments have likely confronted the unpleasant situation of having to inform a departing employee that in addition to no longer being employed by their company, they also have a rather limited period to repay an outstanding 401(k) plan loan.  With what money am I supposed to do that?!? So goes the common refrain.

In a move that may be helpful in these situations, the 2017 Tax Act (the “Act”) provides additional relief for retirement plan participants in such a situation.  Specifically, the Act extends the period in which participants with outstanding loans may repay owed amounts before the loan goes into default, triggering income inclusion and potential additional taxes for those under age 59 ½.  Loan balances may now be repaid up to a participant’s due date (including extensions) for personal tax filings.

From a participant’s perspective, this change should be welcome relief as it:

  • provides a longer period to repay outstanding retirement plan loans – the typical default deadline is the end of the calendar quarter following the quarter in which separation occurs; and
  • contemplates that repayment may be made to a subsequent employer’s retirement plan or an IRA.

On the employer side; however, there are a few items that merit consideration. For instance:

  • Consider reviewing and updating existing loan policies and employee communications in light of the extended repayment period.
  • Determine whether your retirement plan will accept loan repayments for incoming employees with outstanding balances from a prior employer’s plan.
  • Consider how, from a process perspective, to administer predecessor employer plan loans – what information is needed / how to obtain it.

All in all, extending loan repayment periods seems like a good idea.  It helps participants in need avoid incurring additional income/penalties, while promoting keeping retirement benefits in the “retirement system”.  Still, there may be significant administrative burdens associated with accepting loan balances from prior employer retirement plans that may make such process undesirable for employers.  Perhaps, the ability to repay loan balances into an IRA may be the solution for those participants.

On Jan. 16, the House released a copy of its continuing resolution (or “CR”) that would extend government funding through Feb. 16, 2018. The temporary funding measure includes a six-year reauthorization of the Children’s Health Insurance Program, as well as the following tax relief provisions:

  • Two-year delay of the medical device tax
  • Two-year delay of the Cadillac tax
  • One-year delay of the health insurance tax

The House and Senate convene today at noon and 4:30 p.m., respectively.

Lawmakers will have to take up yet another continuing resolution (“CR”) to avoid a government shutdown. The previous stopgap is set to expire Jan. 19. Despite weeks of negotiations, a long-term spending deal is still out of reach. The sticking points remain the same: discretionary spending levels, DACA, and border security. Republican leaders are reportedly considering a CR through Feb. 16 — it is unclear, however, whether Democrats will get behind another temporary funding patch.

The following tax and financial services bills will be taken up on the House floor this week:

  • H.R. 4279 – the Expanding Investment Opportunities Act would direct the SEC to revise any rules necessary to enable closed-end companies to use the securities offering and proxy rules that are available to other issuers of securities.
  • H.R. 4318 – the Miscellaneous Tariff Bill Act of 2017 would modify certain rates of duty temporarily.
  • H.R. 2954 – the Home Mortgage Disclosure Adjustment Act would exempt a depository institution from certain records and disclosure requirements: (1) with respect to closed-end mortgage loans, if the depository institution originated fewer than 1,000 such loans in each of the two preceding years; and (2) with respect to open-end lines of credit, if the depository institution originated fewer than 2,000 such lines of credit in each of the two preceding years.

Although it’s not officially on the House floor schedule, House Energy and Commerce Chairman Greg Walden (R-OR) is trying to get the chamber to take up a six-year CHIP reauthorization bill this week. It remains to be seen whether CHIP will hitch a ride with the CR.

Over in the Senate, members will resume consideration of S. 139, a bill that would extend the government’s surveillance powers under the Foreign Intelligence Surveillance Act. A cloture vote is scheduled for 5:30 p.m. today.

This Wednesday…

  • House Financial Services Committee will mark up a series of bills dealing with community financial institutions, the Volcker Rule, and FSOC, among other things. See the full list here.
  • Senate Finance Committee is set to vote on the nomination of Alex Azar to be the next HHS secretary.
  • Senate Banking Committee will vote on the nomination of Jay Powell to be the chair of the Federal Reserve.

High-tax blue states are scrambling to circumvent the new limit on deducting state and local taxes imposed by the Republican tax bill. Under the 2017 Tax Act, taxpayers may only deduct up to $10,000 in income, sales, or property taxes. The average deduction is $16,000 to $22,000 in some states.

Given the hyper-partisan nature of tax reform, Democrats are eager to stick it to Republicans by gutting a major revenue raiser in the new tax law. With the 2018 elections looming, lawmakers are raring to pen a fix that they can tout during campaign season. Democrats from California, New York, and New Jersey (i.e. high-tax blue states) have been considering a few creative options to work around the limit:

  1. Prepay property taxes in 2017, so they can still be deducted: The IRS issued a Dec. 27 advisory, stating that taxpayers may prepay and receive a deduction for property taxes assessed in 2017.
  2. Charitable contributions: States would set up charitable funds to pay for police, schools, and other services. In lieu of paying property taxes, residents would contribute to the charitable fund and take a deduction on their federal tax returns. No limits were placed on charitable deductions in the GOP tax bill.  According to some legal experts, many states already have similar programs. For example, Arizona has a “School Tax Credits for Individuals” program. Taxpayers making contributions to this program may take a federal charitable contribution deduction and receive a dollar-for-dollar credit against state income tax liability. Interestingly, according to the IRS, the dollar-for-dollar credit is not viewed as “quid pro quo” and does not reduce the deductible portion of the federal charitable contribution deduction. Of course, conservative outlets have pointed out that the IRS is unlikely to view these shenanigans favorably, given existing restrictions on charitable deductions to stop taxpayers from gaming the system.
  3. Tax swap – payroll for property: States may shift the tax burden from property to payroll taxes. This would require states to repeal property taxes, replace them with employer-side state payroll taxes, and offset the employee-side with fully refundable wage credits. Employer-side state payroll taxes are still deductible under federal law. Much like the charitable contribution workaround, the payroll tax proposal will be met by strong logistical headwinds. Several companies have already expressed concerns with regards to the mechanics of this proposal.

Reactions to the workarounds have been mixed – while some would like to see one of these solutions implemented, others are critical of state efforts, noting that instead of trying to circumvent the tax law, local governments should focus on spending cuts.

House Ways and Means Chairman Kevin Brady (R-TX) has announced the following new subcommittee assignments:

  • Rep. Vern Buchanan (R-FL) will be taking over the Ways and Means Tax Policy Subcommittee, a position that was previously held by Rep. Peter Roskam (R-IL).
  • Rep. Roskam will now be taking over the Health Subcommittee, due to the impending retirement of Rep. Pat Tiberi (R-OH).
  • Rep. Lynn Jenkins (R-KS) will be the new chairwoman of the Oversight Subcommittee, a position that previously belonged to Rep. Buchanan.

The House Ways and Means Committee also welcomed Rep. Darin LaHood (R-IL), who is replacing Rep. Pat Tiberi (R-OH). Tiberi is leaving Congress on Jan. 15 to serve as the head of the Ohio Business Roundtable.

Here is a full list of the new GOP subcommittee assignments at Ways and Means:

Health Human Resources Oversight Social Security Tax Policy Trade
Chairman Peter Roskam (IL) Chairman Adrian Smith (NE) Chairman Lynn Jenkins (KS) Chairman Sam Johnson (TX) Chairman Vern Buchanan (FL) Chairman Dave Reichert (WA)
Sam Johnson (TX) Jackie Walorski (IN) David Schweikert (AZ) Vern Buchanan (FL) Peter Roskam (IL) Devin Nunes (CA)
Devin Nunes (CA) Carlos Curbelo (FL) Jackie Walorski (IN) Mike Kelly (PA) Dave Reichert (WA) Erik Paulsen (MN)
Vern Buchanan (FL) Mike Bishop (MI) Carlos Curbelo (FL) George Holding (NC) Jim Renacci (OH) Mike Kelly (PA)
Adrian Smith (NE) David Schweikert (AZ) Mike Bishop (MI) Jason Smith (MO) Kristi Noem (SD) Pat Meehan (PA)
Lynn Jenkins (KS) Darin LaHood (IL) Darin LaHood (IL) Tom Rice (SC) George Holding (NC) Tom Reed (NY)
Kenny Marchant (TX) Dave Reichert (WA) Tom Reed (NY) David Schweikert (AZ) Pat Meehan (PA) Kristi Noem (SD)
Diane Black (TN) Jason Smith (MO) George Holding (NC)
Erik Paulsen (MN) Tom Rice (SC) Tom Rice (SC)
Tom Reed (NY) Kenny Marchant (TX)
Mike Kelly (PA)

On the other side of the Capitol, the Senate Finance Committee Democrats are adding Sen. Sheldon Whitehouse (D-RI) to the committee roster, narrowing the GOP majority on the tax-writing panel to 14-13. Whitehouse is also a member of the following Senate committees: Budget, Judiciary, and EPW.

As the GOP celebrates its tax victory, the IRS is gearing up to carry out and enforce the changes to the tax code. As the agency processes millions of 2017 tax returns, it will simultaneously have to interpret and implement a new system for 2017.

In the coming months, the agency will have to explain new statutes and changes in current law to businesses, individuals, and tax preparers. Before the start of filing season, it will have to update tax forms, which is a monumental undertaking due to the agency’s outdated technology. During tax filing season, the IRS will have to answer questions from taxpayers and practitioners about the changes to the tax code. This task will be difficult without adequate personnel and funding,

In addition to dealing with the new tax law, the IRS must balance other priorities, including the president’s May 2017 executive order mandating all federal agencies to meet certain cybersecurity requirements. Due to funding shortages, the IRS may not be able to meet its deadlines to update internal systems and implement other changes to existing infrastructure.

Prior to leaving the agency, former IRS Commissioner John Koskinen warned that years of cuts to the agency’s budget will make it difficult for the IRS to carry out its mission. Since 2010, the IRS’ budget has been cut by $900 million and its staff has been reduced by 23 percent.

The Senate’s FY 2018 Financial Services spending bill would provide $11 billion for the IRS. Of the new topline amount for the agency, approximately $5 billion would be for enforcement, another $4 billion would go towards operations support, and $2 billion is reserved for taxpayer services.

The FY 2018 funding levels reflect a $120 million cut from FY 2016 funding levels, which was the last time Congress passed an appropriations bill.

With a spending bill looming, congressional Republicans must now decide whether it will increase funding for an agency that many in the party have criticized for years. If Congress fails to increase funding for the agency, the consequences may be catastrophic. The IRS has warned that without additional funding, the agency could be vulnerable to a major security breach or failure during tax season.