With 2017 almost behind us, it seems useful to look at the significant developments in the tax area as we start to focus on 2018. In 2017, Congress was focused on health care repeal-and-replace and tax reform for most of the year. The Trump administration, frustrated somewhat by a lack of congressional action, focused on regulatory relief. Behind all of these headline developments, a number of other significant issues also emerged that will impact 2018 and beyond.
Although as we wrote this, the final tax reform bill had only just been passed in the Senate, the early details and the tax reform proposals point to some common themes for 2018 and later years.
Multinational corporations will be looking at potential changes in the relative tax cost of operating in the U.S. as compared to operating overseas. Companies with significant unrepatriated earnings will be weighing the possible alternative uses of those funds once tax reform has removed the reasons they were built up overseas in the first place.
Businesses in general will be weighing the impact of new lower tax rates, expensing provisions, interest deduction limitations, and loss of business deductions and credits moving forward. Pass-through entities and their owners will be re-evaluating choice of entity decisions and active versus passive activity as they try to maximize advantages from the new legislation.
Individuals will be dealing with changes in the tax advantages of home ownership, charitable giving, residence in states with high taxes, gift and estate planning, structuring divorce settlements, moving, and borrowing for education expenses.
A Tax Code that has been engineered over many years to stimulate certain behaviors on the part of taxpayers is likely to significantly alter those behaviors when the tax law is significantly changed. Although some individual taxpayers may see simplification from tax reform due to the increase in the standard deduction, for most other individuals and businesses, tax reform will not look very much like tax simplification.
While Congress failed in its efforts to repeal and replace the Affordable Care Act in 2017, repeal of the individual mandate is likely to have a significant impact on health care going forward. If the young and healthy stay away from purchasing health care due to the elimination of the penalty for doing so, the not-so-young and not-so-healthy are likely to have to pay more for health care and, according to projections, increasing numbers would once again be priced out of the market for health insurance.
We know the Internal Revenue Service had stated that, for the first time, they would require health insurance status to be addressed on 2017 tax returns filed in 2018. At press time, they had not made any statements regarding the impact of the rescinding of the individual insurance mandate.
The regulatory review required by the Trump administration during 2017 resulted in the Treasury and the IRS withdrawing two proposed regulations and partially withdrawing others, including some regulations that had recently been finalized. That review also identified over 200 additional regulations that might be considered for revocation in the future. The coming year could see further efforts at eliminating deadwood regulations from the inventory.
Of course, in many instances, tax practitioners are seeking additional regulatory guidance to help clear up ambiguities in the Tax Code. With the emphasis on regulatory reduction, some of those new regulatory projects may not see the light of day, particularly as the IRS continues to suffer from budgetary restrictions.
IRS Budget Restrictions
For several years now, Congress has been either taking the ax to the IRS budget or granting much smaller increases than requested. While tax reform might not have too much impact on the 2018 tax filing season, since relatively few provisions are retroactive back to 2017, IRS budget issues could have a significant impact on the service’s ability to respond in a timely fashion to tax reform changes for 2018 and also its ability to clear to-do items from its guidance plans for 2018. Some of the more complicated tax reform proposals, such as the new approach to taxing pass-through entities, expressly direct the IRS to come up with the details to make it work, which will require further diversion of IRS resources.
Partnership Audit Rules
The new partnership audit rules take effect Jan. 1, 2018. These rules change the way that audit adjustments are imposed on the partnership and its partners and replace the old tax matters partner with a partnership representative with expanded powers. Elect-out provisions are also available to smaller partnerships. Partnerships and their partners, if they have not done so already, will need to review partnership agreements to address these issues. Failure to take action could result in surprise liabilities for current partners.
The Gig or Sharing Economy
As more and more taxpayers become sole proprietors of small businesses as they supplement their income by hiring out their vehicles, their homes or their time, many more taxpayers face the additional complexity of segregating business activity from personal activity on their tax returns. The IRS is starting to focus on this area to educate these new entrepreneurs on the tax documentation necessary for a business in order to avoid compliance problems in the future. It is also a potential growth area for accountants as these taxpayers seek out help for their more complicated tax lives.
While it was sometimes possible for the small entrepreneur to hide under the table from IRS scrutiny in the past, these new entrepreneurs often work with major online facilitators that report payments made to these entrepreneurs to the IRS, creating a clear audit trail if the tax return does not match what has been reported by the facilitator.
Scams, Hacking & Ransomware
While the IRS seems to be getting a better handle on fraudulent claims for refunds by more closely monitoring patterns in filed tax returns and better coordination with tax software providers, the fraudsters have been moving on to other techniques.
We have witnessed a growth in fraudulent calls and e-mails pretending to be the IRS demanding quick payment of past due taxes. We have witnessed hacking attempts on the databases of tax return preparers seeking confidential client data or even money to restore access to the return preparer’s files, referred to as ransomware. The IRS may have facilitated the targeting of tax return preparers through public access to PTIN records (though as we went to press, it was announced that the service would no longer make preparers’ e-mail addresses available). Tax return preparers need to protect themselves as well as their clients by taking steps to keep their confidential client data as secure as possible.
With tax reform enacted, 2018 could be a brave new world of tax planning for almost every category of taxpayer. Even aside from tax reform, there are the usual number of interesting developments to keep tax planners busy for the coming year.