Acting Internal Revenue Service commissioner David Kautter told lawmakers Thursday that the tax season has gone well and described how the IRS is preparing to release draft versions of tax forms, instructions and guidance for the new tax law over the next few months.
“I am pleased to report that the 2018 filing season, which began on January 29, has gone well in terms of tax return processing and the operation of our information technology systems,” Kautter said during a Senate Finance Committee hearing. “As of March 30, the IRS received more than 94.1 million individual returns. We have issued more than 73.3 million refunds for more than $212.3 billion. About 80 percent of returns filed so far claimed a refund, with the average refund totaling approximately $2,900.”
After initially holding tax refunds on returns claiming the Earned Income Tax Credit and the Additional Child Tax Credit for additional scrutiny, in accordance with the PATH Act, the IRS began releasing 9.4 million EITC and ACTC refunds, totaling approximately $46.9 billion, after Feb. 15.
He noted that the IRS began implementing the Tax Cuts and Jobs Act, the most sweeping change to the tax laws in more than 30 years, shortly after the legislation was signed into law last December. The IRS also had to work to implement the tax-related provisions in the Bipartisan Budget Act that Congress enacted in early February, shortly after the filing season started. The legislation included dozens of tax extenders for various tax breaks that had expired in 2016 and made them retroactive for 2017.
“The IRS began work immediately after passage of the legislation to reprogram its processing systems to handle more than 30 individual and business tax benefits that had expired at the end of 2016,” said Kautter. “This was the first time the IRS had ever been required to implement retroactive tax extensions this late in a filing season. Thanks to the extraordinary efforts of IRS employees and assistance from the nation’s tax community, by late February we had completed system reprogramming for the three benefits that were most likely to be claimed on tax returns early in the filing season. We estimate that approximately 7 million taxpayers are eligible to claim those three benefits.”
Those benefits are the exclusion from gross income of discharge of qualified principal residence indebtedness; the treatment of mortgage insurance premiums as qualified residence interest, generally claimed by low- and middle-income filers; and the deduction for qualified tuition and related expenses.
“Since then, the IRS has completed reprogramming its systems, and has updated forms and instructions, to accommodate the other extender provisions in the Bipartisan Budget Act,” said Kautter. “They include extensions for several energy-related tax incentives: a credit for non-business energy property; the alternative motor vehicle credit; and credits for qualified plug-in electric drive motor vehicles and certain two-wheeled vehicles.”
Senate Finance Committee Chairman Orrin Hatch, R-Utah, asked Kautter about the IRS’s progress in implementing the Tax Cuts and Jobs Act, and specifically about when guidance would be available on Section 199(A) , the complicated pass-through deduction that has puzzled many business owners.
“Immediately upon enactment of the Tax Cuts and Jobs Act, we started to approach tax reform in a disciplined, project-managed approach,” said Kautter. “We built a roadmap of what needs to be done. We’re constantly adjusting that roadmap. We’ve sought out stakeholder input as part of the process. We’ve mapped out at this point all the forms that need to be amended, all the instructions that need to be updated, the publications that need to be changed. At this point our estimate is that we’ll need to amend as many as 450 tax forms, instructions and publications to fully implement the tax reform act. We expect to have new forms drafted by the end of April for the most part. We expect to have most new instructions drafted by the end of May, and our plan is to release those forms and instructions over the summer for taxpayers and tax advisors to review and comment on. Also this month we will begin programming our new systems. There are about 140 integrated, interrelated tax programming systems that need to be updated.”
He thanked Congress for approving an additional $320 million for the IRS for implementing the tax reform law in the recent omnibus appropriations bill. Kautter estimated that approximately three-fourths of the cost of tax reform implementation will be the cost of changing technology.
“We estimate about 19 percent of the cost will relate to guidance in terms of education of the taxpayers, education of the IRS workforce, outreach and so forth,” he added. “About 4 percent will relate to regulations and frequently asked questions and another 4 percent is for the forms and publications. So we’re off to a good start. I’m confident at this point that we’ve got a good plan. We’re executing on the plan. I think the timeline is aggressive. We don’t really have a choice. We need to get this done, and we’re focused on it. You mentioned, Mr. Chairman, Section 199(A). With respect to that, I would estimate we’ll have some guidance out by early summer.”
Sen. Ron Wyden, D-Ore., the ranking Democrat on the Finance Committee, noted that the provision was confusing many small-business owners. “First, small businesses are increasingly stuck in a bureaucratic twilight zone,” he said. “There is rampant confusion about how the new tax law works — untested policies, sloppy legislative drafting, and outright mistakes in the law. On top of that, a Trump Cabinet turf battle has been adding to the uncertainty and lengthening the time that small businesses are going to be in the dark about how the tax rules apply to them.” He was alluding to reports of disputes between Treasury Secretary Steven Mnuchin and Office of Management and Budget director Mick Mulvaney over who will ultimately have the last word on guidance for the new tax law.
Hatch noted that the House Ways and Means Committee passed bipartisan legislation this week to reform the IRS, and he plans to take up the package in the Senate (see Ways and Means Committee advances IRS reform package).
“It’s high time that we work together, as Republicans and Democrats, to help the IRS modernize itself and meet the challenges of the 21st century,” said Hatch. “We need to do this to promote bipartisanship, but also to keep the IRS accountable and moving on the right track to best serve hard-working American taxpayers. That is why, this week, I am watching the House Ways and Means Committee as they mark up legislation to reform several aspects of the IRS.”
Hatch asked Kautter what he thought of the reforms in the bills, and Kautter expressed his support, while adding his own suggestions. “One thing I would require is mandatory electronic filing of business returns,” he said. “I would require the IRS to establish online taxpayer accounts to move the IRS forward. It’s on the road, but I would encourage the IRS to establish accounts online for all taxpayers, and I would codify the IRS mission with a focus on service.”
In terms of the new tax law, Kautter noted the IRS set up a Tax Reform Implementation Office, or TRIO, in January to coordinate the agency’s efforts. “The TRIO is responsible for interacting with our business divisions and our Office of Chief Counsel to ensure a smooth roll out of everything needed to implement the law,” he said. “Where there is overlap in responsibilities, the TRIO will ensure IRS divisions collaborate to get the job done. The TRIO has a broad portfolio: it is responsible for identifying areas of impact, establishing and monitoring implementation action plans, ensuring communication with external and internal stakeholders, and making sure we address any risks that arise in our work.”
One of the critical areas the IRS identified early on was income tax withholding. “The IRS moved quickly to begin revising the withholding system to take into account various changes made by the statute, such as increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions and changing the tax rates and brackets,” said Kautter. “This issue affects literally every taxpayer who receives a paycheck. We started in January by issuing updated withholding tables for employers to use. These tables were designed to produce the correct amount of tax withholding for taxpayers with simple tax situations. Then at the end of February, we released an update to our Withholding Calculator on IRS.gov, to help employees adjust their withholding amount based on their particular financial situation. This will be especially helpful for taxpayers with more complex tax situations. Through March 8, the Withholding Calculator page on IRS.gov had been viewed more than 1.2 million times.”
In February, the IRS issued a revised Form W-4, "Employee’s Withholding Allowance Certificate," to more fully reflect the new law. “This form takes into account such provisions as the changes in available itemized deductions, increases in the child tax credit, the new dependent cred it and the repeal of dependent exemptions ,” said Kautter. “The IRS is continuing efforts to encourage taxpayers to check their withholding, and do so as soon as possible. For example, in late March we conducted a ‘Paycheck Checkup’ public awareness campaign to get the word out to taxpayers about what they can do to make sure the correct amount of tax is being withheld from their pay. The activities during this special weeklong campaign included the release of an IRS YouTube video series and several online Tax Tips. These were designed to walk taxpayers through what they need to know about withholding, and help them navigate complex issues that might affect how much should be withheld from their pay.”
The Treasury Department and the IRS also updated their Priority Guidance Plan with 18 new guidance projects related to tax reform.
“There are many other areas of the law that will require additional guidance, given that, overall, there are 79 explicit grants of regulatory authority in the tax reform statute,” said Kautter. “While much of the guidance we are developing will take time, there were certain areas we needed to address quickly. In late December, we released initial guidance to help corporations begin complying with the transition tax imposed on untaxed foreign earnings of foreign subsidiaries of U.S. companies under new Code Section 965, which became effective upon enactment of the new law. We followed that up with additional notices, and last month released a set of FAQs with information to assist taxpayers filing their 2017 tax returns, including how to report Section 965 income, and how to report and pay the associated tax liability. Another area where we are working to issue guidance as soon as possible involves the deep reduction in the corporate income tax rate to 21 percent. We know there is much guidance needed in regard to this change, and there are several projects underway. We realize the need for guidance is especially acute for fiscal-year filers, so we are making that a priority. Those are just a few of the actions the IRS has taken so far in its ongoing efforts to implement the new tax law.”
Kautter also discussed the progress the IRS has been making on taxpayer service and combating identity theft. The level of services on its toll-free phone lines is around 80 percent. For the second year in a row, the IRS is offering the ability to make appointments at its in-person Taxpayer Assistance Centers, which dramatically cuts wait times for visitors. The IRS also began rolling out in 2016 access to online accounts where taxpayers can check on the balance they owe. In terms of fighting identity theft, Kautter reported a 57 percent reduction in tax returns with confirmed ID theft from 2015 to 2017, along with a 65 percent reduction in filings of ID theft affidavit forms with the IRS.
In addition to being acting commissioner of the IRS, he is also the assistant secretary of the Treasury for tax policy. President Trump has nominated tax attorney Charles Rettig as the next IRS commissioner. Hatch hopes to begin confirmation hearings on the nomination soon. "It’s time we get Mr. Kautter back to his other full-time day job as the assistant secretary for tax policy," said Hatch. "As such, I am looking forward to the Finance Committee processing the nomination of Chuck Rettig ... as well as the nomination of Michael Desmond to be chief counsel of the IRS. As soon as the committee receives their paperwork, we will begin processing the nominations."