IRS faces challenges with business tax provisions of TCJA

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The Internal Revenue Service is confronting challenges with administering and ensuring compliance with the business provisions of the Tax Cuts and Jobs Act, although it has made a considerable amount of progress in implementing them, according to a new government report.

The report, from the Government Accountability Office, noted that the 2017 tax overhaul was the most sweeping tax law change in more than 30 years, with 86 provisions that modified, added to, or repealed business and international taxes. The IRS prioritized and implemented the main provisions of the law and provided taxpayer guidance, but there have been many challenges in fully implementing the new tax law. For example, tax return data related to some of the provisions still isn’t in a readily usable format, so the IRS might not be able to promptly identify and alert taxpayers who aren’t complying with the law.

The IRS could also face challenges with ensuring compliance with some of the TCJA’s provisions because third-party information reporting isn’t always available. One of the primary factors contributing to the tax gap is the extent to which information is reported to IRS by third parties, the GAO has found. Without third-party reporting, the IRS will need to rely on resource-intensive audits to enforce certain provisions of the TCJA, which could be challenging given recent trends of declining audit rates and enforcement staff at the IRS. The GAO included some recommendations from a report last March for the IRS to take actions to mitigate its hiring risks and reduce skill gaps at the agency.

The IRS was also unable to update all of its technology systems prior to the start of the 2019 tax season due to the magnitude of TCJA changes. As a result, the IRS wasn’t able to capture certain tax return information in a format that could be easily analyzed to help with compliance planning activities. One IRS division took steps to convert some of its tax return data to a more usable format, but so far efforts to identify other viable opportunities have fallen short. Without the right data for analysis, the IRS could face even more challenges enforcing some of the TCJA’s complex provisions.

To improve the efficiency of developing guidance for the TCJA, IRS officials and employees worked together earlier and more frequently on the 2017 tax overhaul than after more routine tax law changes. IRS officials said the benefits of this greater collaboration included faster decision-making on time-sensitive guidance, including regulations. While the enhanced collaboration was helpful, IRS officials still haven’t identified the parameters for when such a collaborative approach would be warranted.

The GAO made five recommendations in its report, suggesting the IRS develop and document its procedures for continued enhanced collaboration and convert its tax return data into a more usable format for compliance purposes. The IRS disagreed with all the GAO’s suggestions, but is still working on some of the GAO’s recommendations in an earlier report on reducing the skills gap among revenue agents.

“While enhanced collaboration is appropriate in the context of complex changes to the Tax Code, as was done with the TCJA, the Affordable Care Act, the partnership rules under the Bipartisan Budget Act of 2015, and the Foreign Account Tax Compliance Act, more routine changes in the law may not need that level of collaboration,” wrote Sunita Lough, deputy commissioner for services and enforcement at the IRS, in response to the report. “Establishing specific criteria for enhanced collaboration is likely to reduce the flexibility and independent judgment that presently exists.” Converting tax return data into another format would likely require expensive time-consuming manual processes with an unclear benefit, she noted.

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