Although the 2019 tax filing season officially started on time — one day earlier than the 2018 filing season, in fact — the effects of the government shutdown and the changes wrought by the Tax Cuts and Jobs Act will continue to be manifest in the weeks ahead.
“The forms weren’t finalized, so both the software companies and practitioners were waiting for most of the forms generated by the TCJA,” said Ryan Losi, executive vice president of Virginia-based accounting firm Piascik. “Once that’s done, the software companies will roll out their Version 2.0 or 3.0. Many states are making their decision now as to whether they will conform or not to the TCJA changes. Some made the decision last year, while others are toying with the idea now in their general assemblies, so there’s a delayed tax season. There will be a lot of extensions, particularly at the state level but at the federal level as well.”
In fact, filing season stats through midnight on Friday, Feb. 8, 2019 (the latest date available as we went to press), showed 73,523 extensions, compared to 61,258 extensions through midnight on Friday, Feb. 9, 2018, a 20 percent jump.
“We’re going to see more extensions by the end of filing season because of all the changes and the confusion taxpayers have,” said Chuck McCabe, president of Peoples Income Tax and The Income Tax School. “And many people didn’t adjust their W-4s to take into consideration the new lower rates, so they underwithheld. They’ll get a smaller refund than they expected, or will have to pay. The IRS is encouraging taxpayers who can’t pay what they owe to request a payment plan and pay on an installment basis. The taxpayer indicates how much he can pay on a monthly basis, and the IRS generally accepts it if it is reasonable.”
There will also be more procrastination this year, predicted McCabe: “Many taxpayers might try to do it on their own, and then decide to get some help when they see that they owe.”
Areas of uncertainty
“Who knows how aggressive the service will be on examinations and auditing of corporations and passthrough returns?” Losi said. “So many new definitions were added and so many new regulations issued. Also, some areas have yet to be corrected. For example, we thought there would be a correction regarding qualified improvement property in the last Congress, but it didn’t happen.” (A drafting error in the TCJA excluded improvement property investment from 100 percent bonus depreciation.) “Will the IRS let the next year or two slide, and start hardball enforcement in 2020? The majority of taxpayers will take a year or more to get comfortable with these rules. We’re hoping that 2018 will be a test year and they won’t really start enforcement until 2019 or 2020 returns.”
Losi sees potential trouble ahead for 199A filers: “For those that have a simple small business and are under $315,000 on their married-filing-joint returns, it won’t be that complicated, but for taxpayers with multiple real estate properties, making the decision on each one will be very fact-specific. There’s no form to do it, just supplemental worksheets.”
And the postcard-size Form 1040 is more complicated now. “It’s gone from two pages to eight pages. If a self-preparer couldn’t handle the regular 1040, the 2018 return will be a real learning curve,” he said. “I expect that overall there will be a lot of errors in tax compliance, not just in the law but in placement — where does everything go?”
Nevertheless, Losi sees opportunities for CPAs who know what they’re doing. “We’ll find a lot of errors on preparer-prepared returns after this year, and pick up clients based on the mistakes. The first thing to look at are Schedules C and E — how many for qualified business income [under the Section 199A pass-through deduction] and see if the calculations are correct. If not, we’ll say that we can amend and get you a refund.”
Tom Wheelwright, chief executive of WealthAbility, a CPA network, agreed. “This filing season could be a disaster,” he said. “What I’m finding is that practitioners are struggling with trying to understand the new law, and are giving bad advice. The danger is reading someone’s opinion about the law instead of reading the law itself. Reading an article about the QBI deduction is not the same as going through the law and regs. Even the IRS website is not completely up to date for the new law. We’ve run into situations this week where we saw someone’s mistake and the CPA said, ‘It’s on the IRS website.’ But the IRS website is not the law.”
“One of the little-known changes made as part of the TCJA is the opportunity for small retailers to deduct their inventory when they buy it,” Wheelwright observed. “The act allows retailers with gross annual sales of less than $25 million to treat their inventory as ‘non-incidental materials and supplies.’ The Treasury regulations that came out with the ‘repair regs’ in 2014 say that non-incidental materials and supplies that are under $2,500 per line item of cost can be currently deducted under the de minimis rule. This is confirmed by the explanation by the staff of the Joint Committee on Taxation — the ‘Blue Book.’”
Thus, instead of waiting until inventory is sold, the retailer may be able to deduct the inventory when they purchase it, he explained: “The problem is that few tax preparers are aware of this new rule. In addition, the IRS prior to 2017 had allowed very small retailers, under $1 million in sales, to treat their inventory as materials and supplies and specifically said that even though this was allowed, they couldn’t deduct it under the $2,500 de minimis rule. However, with the 2017 change in the law, it’s now clear that this deduction is available. It’s very complex and requires a special form to be filed with the retailer’s tax return — Form 3115. Plus, the retailer has to elect to be taxed on the cash receipts method of accounting instead of the accrual method.”
The view from the other side
The IRS will get through the filing season because the filing season is always their first priority, said Mark Everson, former commissioner of the IRS and currently vice chairman of alliantgroup.
“Most people interact with the IRS once a year, and are satisfied with the interaction,” he said. “But the reality is that human resources at the IRS have been drawn down to dangerously low levels as a direct result of underfunding and the fallout of congressional desire in 2014 to punish the IRS. There’s been an erosion in the ability to do systems work. They suffered a systems failure last year. It was a good thing it happened on the last day of filing season. Add to it the very real programming demand for the new tax law — the fact that this is the first real run-through for the new tax law would make this a challenging season for the IRS for any reason. But the shutdown, even though temporary, can only make matters worse.”
From an investment fund perspective, the shutdown delayed clarifications that potential investors in Qualified Opportunity Zone funds were hoping for, according to John Lore, managing partner of Capital Fund Law Group, a New York-based law firm focusing on real estate and private equity funds.
“A lot of momentum was building up with the expectation that some key clarifications would be made,” he said. “There are two main ones that would make QOZs more attractive for fund managers. The first is the ability of OZ funds to cycle through their investments by liquidating positions in the fund prior to the statutory period, allowing investors to hold for the full five, seven or 10 years.”
“The second clarification needed is in the definition of a Qualified Zone company,” he added.
