The 2019 filing season: Refunds, extensions, technical corrections and regs
How the 2019 tax return filing season is going seems to depend on who you talk to. The Internal Revenue Service reports that all is normal. After an initial report of slower and smaller refunds, the next week the IRS reported that refunds had caught up to the pace of the prior year. A report from the Taxpayer Advocate indicates that responses on the IRS taxpayer hotline are fewer, slower, and less accurate. Tax practitioners indicate that it is a challenging tax filing season with many changes that their clients did not fully anticipate, and the pace of filing for extensions is expected to pick up as taxpayers and their advisors need to address these new uncertainties.
What happened to my refund?
When the IRS first indicated that refunds were slower and smaller than in the past, various theories were suggested to try to explain the trend. First, the new lower withholding tables reflecting lower tax rates and the higher standard deductions had increased take-home pay during 2018, but taxpayers had not revised their W-4s to reflect loss of deductions.
Second, while most taxpayers are projected to get some tax benefit from the Tax Cuts and Jobs Act, some taxpayers who have several children may find that the loss of personal exemptions is not fully offset by the increase in the standard deduction and the Child Tax Credit. Also, some taxpayers may find that the lower tax rates do not fully offset the loss of certain itemized deductions, particularly the $10,000 cap on state and local taxes.
It is not clear what anomaly may have caused the initial IRS reports of smaller and slower refunds, followed by a report that the size and number of those refunds had returned to normal levels. As evidenced by the IRS first indicating that the government shutdown could result in a delay in refunds, followed by bringing back furloughed employees without pay to ensure refunds got processed in a timely fashion, the IRS appears to be under some pressure to paint as positive a refund picture as possible. While there have been a number of anecdotal complaints about lower refunds this year, it remains to be seen what the total picture will look like when the tax filing season is over. If the main effect is just that larger paychecks resulted in smaller refunds, that is probably on the whole a good thing.
The Government Accounting Office did project that a higher percentage of taxpayers will owe taxes this year and potentially be subject to penalties for underpayment of estimated taxes. In response to this concern, the IRS has lowered the required pre-payment threshold to avoid the penalty from 90 percent of the taxes due on the return to 85 percent to the extent that the underpayment is attributable to Tax Cuts and Jobs Act changes. Some are asking the IRS to be even more generous on penalty relief, but the IRS is expressing concern about rewarding taxpayers who have a history of underpayment.
Extenders and technical corrections
Adding to the confusion this year is that the law that applies to 2018 tax returns could still be changed. Congress is still working on legislation that extends retroactively to 2018 around 30 tax breaks that expired at the end of 2017. Many of the tax breaks are energy-related or related to specific industries, but a handful are individual tax breaks, such as the tuition and fees deduction, the exclusion for forgiveness of mortgage debt, and the deduction for mortgage insurance premiums. Taxpayers hoping for one of these tax breaks may have to file for an extension or file an amended return if these extenders are enacted.
Also included in the Senate Finance Committee version of the tax extenders legislation are a variety of disaster relief provisions similar to what Congress has enacted for past disasters. Some of these provisions could also have an impact on 2018 tax returns, if enacted.
Congress also has before it a significant package of technical corrections to the Tax Cuts and Jobs Act that could also impact 2018 tax returns. Although many of the corrections are relatively minor, some, such as those affecting the write-off of qualified improvement property and the treatment of net operating losses, are potentially very significant. Technical corrections have in part been held up because Democrats in Congress are reluctant to help clean up the errors in tax legislation from which they were largely excluded, both in the drafting and enactment process.
The status of guidance
With the Tax Cuts and Jobs Act passing in the middle of December 2017 and for the most part effective as of Jan. 1, 2018, the IRS has been really under the gun to try to get out guidance on the extensive and far-reaching changes to the tax law.
Continuing shortfalls in funding the IRS have not helped. The TCJA introduced many new concepts to the tax law, especially with respect to the qualified business income deduction and several new concepts in the international area, but also complications with respect to expensing of business assets and limits on business interest deductions. The Treasury and the IRS are still cranking out proposed regulations on the TCJA during the 2018 tax return filing season.
Only a few of those regulations have been finalized. One of the most complicated issues affecting individual taxpayers, the QBI deduction, was just finalized in mid-January 2019, with additional proposed regulations included with that package. The regulations were so late in being finalized that the Treasury and the IRS decided to give taxpayers a choice of either applying the proposed regulations or using the final regulations for 2018 tax returns.
While this appears to be good news for taxpayers, it adds more uncertainty, both in having to make the choice and in determining what that choice means. For example, if the final regulations address an issue on which the proposed regulations are silent but indicate that the position is dictated by the statutory language, can that guidance be safely ignored if the taxpayer chooses to rely on the proposed regulations?
Even those regulations that have been finalized have left taxpayers and their tax advisors with many questions about new provisions of the TCJA unanswered.
In spite of assurances that the tax return filing season is progressing as normally as possible, it is likely to prove to be far from a normal tax filing season in the end. The uncertainties created by the far-reaching TCJA changes and possible further congressional action are likely to make the 2019 tax filing season one that will be remembered for a long time. Expect the focus on the tax filing season to extend well beyond April 15 through the summer to October 15, as extensions are processed and further guidance from the IRS and legislation from Congress become available.