IRS and tax pros gird for filing season amid congressional uncertainty

The Internal Revenue Service and tax professionals are preparing for the start of tax season Monday, hoping for a smooth filing season like last year, although last-minute tax law changes are possible thanks to a deal working its way through Congress to revive tax breaks like a more generous Child Tax Credit.

Any changes could put pressure on the IRS. "There's a lack of understanding on Capitol Hill of the difficulty of implementing retroactive tax legislation," said Dave Kautter, a former acting commissioner of the IRS and assistant secretary of the Treasury for tax policy who is now a partner and federal specialty tax leader at RSM US. "It's essential to have conversations between Capitol Hill and the IRS on this type of retroactive legislation that's going through Congress."

The Government Accountability Office reported Thursday that last year, the IRS's taxpayer service showed improvement, with "tax filers experiencing faster processing times, shorter wait times for phone service, and more in-person options for getting tax help." However, it acknowledged the agency fell short of some of its goals for processing tax returns on time. The IRS was able to use a faster hiring process known as Direct Hire to bring on more staff members to support tax filers.

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The IRS expects more than 128.7 million individual tax returns to be filed by the April 15 deadline, according to the National Treasury Employees Union. Using funds provided by the Inflation Reduction Act of 2022, the IRS was able to augment the workforce responsible for answering taxpayer questions over the phone and in person to help taxpayers who are dealing with changes to the Tax Code. 

"This year there are more IRS employees standing ready, around the country, to help individuals and businesses navigate the 2024 filing season, which is only possible because Congress and the Biden administration have focused on rebuilding the IRS workforce," said NTEU national president Doreen Greenwald in a statement Friday. "NTEU is proud to represent the frontline IRS workers who are dedicated to serving taxpayers during the filing season and year-round." 

On Friday, the IRS once again held its annual EITC Awareness Day awareness campaign in an effort to bring more attention to the Earned Income Tax Credit, which can help low-income families with refundable tax breaks.

"The IRS and our partners across the nation urge people to look into this frequently overlooked tax credit that can help millions of taxpayers," said IRS Commissioner Danny Werfel in a statement. "On EITC Awareness Day and throughout the filing season, the IRS and our partners work hard to reach eligible taxpayers and provide useful information and resources to help people determine their eligibility and how to properly claim this valuable credit. Even people who don't normally file might still be eligible for the Earned Income Tax Credit, which can be thousands of dollars."

Werfel attended a special EITC Awareness Day event Friday in Baltimore sponsored by the CASH (Creating Assets, Savings and Hope) Campaign of Maryland. 

Approximately 23 million workers and families received about $57 billion in EITC for tax year 2022, and the average amount of EITC received was about $2,541, although the IRS estimates that about one in five of EITC eligible taxpayers don't claim the credit.

However, uncertainty lingers over the tax extenders bill that was introduced earlier this month. The Tax Relief for American Workers and Families Act includes not only a scaled back version of the enhanced Child Tax Credit that was part of the American Rescue Plan Act of 2021, but also provisions related to disaster relief, the Low Income Housing Tax Credit, faster write-offs of research and development expenses, 100% bonus depreciation, interest expensing, a tax agreement with Taiwan and more. Much of the $78 billion cost of the bill would be paid for by ending the fraud-plagued Employee Retention Credit program on Jan. 31 and imposing increased penalties for fraud.

However, after the House Ways and Means Committee voted to advance the bill last week by a strong bipartisan vote of 40-3, the bill is facing opposition from some Republicans that is putting pressure on House Speaker Mike Johnson, R-Louisiana, especially when it comes to making the Child Tax Credit more generous. The Senate too may make some changes if there's a markup in the Senate Finance Committee, or the bill could get fast-tracked so the changes happen more or less at the start of tax season. But with new rifts opening up in Congress, it may not get passed until mid-season, if at all.

"Any hope to get it before the tax season opens on Monday is probably gone," said Todd Simmens, tax policy and legislation technical practice leader at BDO USA, who formerly worked as a legislation counsel on Congress's Joint Committee on Taxation. "I don't think that's going to happen for Monday."

He noted that the bill's proposed Jan. 31 end date for the Employee Retention Credit is coming up soon, which would mean if the bill passes in February, it would mean a retroactive ending of a credit provision. "I don't know that that's very favored, so we might be looking at a new date for that," said Simmens. "So those two dates, I think, are going to come and go, and then we get into February. At least the Senate, if not both houses, are out for probably a couple of weeks. That slows everything down. And then we're into March, and then we've got appropriations matters to attend to also."

Thanks to the current bipartisan support, he is giving the legislation a 60% chance of passing Congress and becoming law. But a Senate markup could complicate matters. 

"The problem is the Senate now wants to do a markup and amendments, and that risks time," said Simmens. "It also risks support, depending on what these amendments look like."

If the bill passes in the midst of tax season, the IRS may need some extra provisions as well. "Does the IRS need any enabling legislation to effectively implement the changes as intended by Congress?" said Kautter. "That can relate to either processing, or it could relate to transition. That would ease the burden for the IRS and taxpayers as they tried to implement the legislation."

Republicans on the House Ways and Means Committee sought to dispel some of the fears on Friday by saying the legislation instructs the IRS to update its systems and process any additional tax refunds on an expedited timeline. "The text of the legislation includes a requirement that the IRS process any adjustments that might be needed to already-filed tax returns 'as expeditiously as possible,' and the IRS has confirmed its intention to make necessary systems updates by around six weeks after the date of enactment," said the committee. It claimed that changes to the Child Tax Credit within the legislation, as passed by the committee, would affect a small subset of taxpayers within certain income ranges, and on a bipartisan basis, Congress has already engaged with the IRS so updates to its systems would be streamlined and taxpayers would not have to file amended returns to account for the Child Tax Credit changes in the bill. It said the IRS has received advance notice of the forthcoming changes, giving it additional time to initiate its system update process.

Amended returns could be a big problem for the IRS. "The fewer amended returns that are generated out of this legislation, the better," said Kautter. "That's for both the IRS and the taxpayers. The second is making sure that payments can be made on an expedited basis, so you don't want a lot of amended returns. On the other hand, you want the payments to get out pretty quickly."

He noted that some provisions are effective for 2023, such as the Child Tax Credit and for disaster relief, while others are effective prior to 2023, such as the business tax provisions for R&D and interest expensing. "For 2023, there's a greater sense of immediacy or urgency because you have the potential to avoid amended returns," said Kautter. "For the 2022 changes, like R&D and 163(j), you really don't have much of a potential to avoid the amended returns, unless you provide transition rules that allow the adjustments to be taken into account in later years."

He believes the IRS will be able to meet the challenge. "They've got a great attitude," said Kautter. "It's hard to believe when you're on the outside, but inside the IRS is a very positive, collaborative, can do culture. That's the first benefit they've got. The second benefit they have is experience. They've done this before. That's why I think there's not an appreciation for how challenging this can be because Congress has done this to the IRS before and the IRS has figured out how to deal with it."

"To the IRS's credit, they seem to be able to manage," said Simmens. "They're going to have little choice, but if something does happen in the next several weeks, they're going to have to respond and adapt."