IRS, Treasury Facing Challenge of Making New Tax Law Work

Now that President Donald Trump has signed the Republicans' tax bill into law, the Treasury Department and the Internal Revenue Service are facing the monumental task of putting the law and its numerous changes to the tax code into action.

The IRS' most immediate task will be to issue guidance for employers on withholding deductions from Americans' paychecks, with the goal of allowing taxpayers to see changes in their take-home pay by February, reports The Hill.

The sweeping new code poses a "series of challenges," Mark Everson, who served as IRS commissioner from 2003 to 2007, said, adding that it will benefit both IRS and the Treasury Department to move quickly on the new rules, to allow taxpayers to adapt with the new standards.

"The [regulatory] process has got to be thorough but prompt," said Everson, now vice chairman of alliantgroup.

The law that was signed into effect on Friday includes major changes to deductions, pass-through income, and other aspects of the tax code, posing a challenge to the IRS to guide taxpayers and tax preparers through a new set of rules and regulations.

Currently, withholdings are based in part on personal exemptions that have been eliminated under the new law, leaving some payroll and tax experts concerned that employees will need to fill out new W-4 forms in 2018.

The IRS, though, says the guidance is going to be designed to work with the forms employees have already filed, so taxpayers will need to take no further action at this time.

The new law also makes some provisions retroactive to 2017, such as a lower medical expense deduction threshold, but most of the other changes will take effect in 2018, giving the IRS a year to develop new forms and more for the tax filing season in 2019.

Kathy Pickering, executive director of The Tax Institute at H&R Block, commented that the IRS will need "every bit" of that year to get the changes done.

Guidance is also needed for pass-through entities, where small businesses' owners and partners are taxed through the individual tax code, not the corporate one.

According to the new law, there is a 20 percent deduction for pass-through income, including ways to keep taxpayers from trying to reclassify wage income as business income instead.

Gavin Ekins, a research economist with the Tax Foundation, said it is not going to be easy for the Treasury Department to find rules to stop such reclassification of income, marking the "biggest challenge" for the department.

New regulations will also likely be required because of the changes in international tax laws, according to Eric Tolder, co-director for the Urban-Brookings Tax Policy Center, and he predicted those will be difficult to implement.

Meanwhile, Republicans will now find themselves needing to ensure the IRS has the resources needed to implement the new law, just a few years after scandal broke about how the agency was handling conservative groups seeking tax-exempt status.

In addition, in the early part of the decade, Republicans cut the IRS' budget, but experts think the agency will need more funding to deal with the matter.

“They’re going to get a flood of calls into the call centers,” Everson told The Hill. “They’re going to need to staff up the call centers and train those people.”

House Way and Means Committee Chairman Kevin Brady, however, told reporters on Thursday that the assumption should not be made that Congress will be "opening up the pocketbook" to make that happen.

The Texas Republican said he's started to talk with Treasury Secretary Steven Mnuchin about implementing the new bill, and plans to meet with both Mnuchin and acting IRS Commissioner David Kautter about what resources could be needed to put the tax bill to work.

“Under a new acting commissioner, if they can make that case in conjunction with Treasury, we’ll listen,” he said.