Trump administration opts for accuracy in implementing tax law
WASHINGTON: The Trump administration is pushing American businesses to withhold fewer taxes from paychecks by February, aiming to quickly deliver the boost in take-home pay that Republicans promised their tax law would bring.
But the rush could expose millions of workers to the risk of underpaying taxes to the government now, which means they might owe more than they are expecting when they file taxes in April 2019.
Business and taxpayers looking for clarity will be appealing to an Internal Revenue Service that, according to an internal watchdog report Wednesday, is underfunded and ill-prepared to answer basic questions. The national taxpayer advocate, an independent official within the IRS, told Congress that the agency would need at least US$ 495 million in 2018 and 2019 to meet the new obligations created by the GOP tax law.
Funding for the IRS has fallen by about 20 percent, accounting for inflation, since 2010. Before the law’s passage, the IRS expected to be able to answer only 60 per cent of the 100 million telephone calls it receives annually from taxpayers -a burden expected to increase under the new law.
“The IRS will have its hands full in implementing the new law,” said Nina E. Olson, the taxpayer advocate. “The IRS will have a lot of issues to work through, and taxpayers will have a lot of questions.”
The IRS is urging employers to immediately change their tax withholding arrangements, even though doing so will require them to use outdated forms as they figure out how much to set aside for tax payments. The forms, known as W- 4s, were tailored to measure tax payments under the old tax code, which was largely re-written in the new tax law.
In the next few days, the IRS plans to issue guidelines to companies and payroll processors on how to use the old forms to calculate tax payments under the law. But there’s no simple switch- over calculation, and the uncertainty could mean workers severely underpaying or overpaying their taxes by thousands of dollars in 2018 – something that will likely remain unknown until they file their tax returns next year.
The potential discrepancies are a side- effect of the expedited overhaul that the Treasury Department and IRS are seeking to implement, prioritising speed over accuracy as the Trump administration hopes tax cuts will bolster the economy before the midterm elections.
The rapid turnaround puts companies on a squeeze as they attempt to get employees the information they need to file their 2017 taxes – they are legally mandated to finish that process by the end of the month - while also preparing for the year ahead.
“Our view is that would be an extremely tight time frame,” said Eira Jones, leader of Deloitte’s national employment tax practice. “It’s likely there would need to be a greater testing period.”
Jones said March would have been a more practical goal for the paychecks to be adjusted.
The White House and IRS faced several options for implementing the new income tax regime. They could have required all working Americans to fill out new tax forms and provide information that would have allowed employers to more accurately decide how much
The IRS will have its hands full in implementing the new law.The IRS will have a lot of issues to work through, and taxpayers will have a lot of questions. Nina E. Olson, the taxpayer advocate
to withhold. But that process could have taken months, likely delaying any benefit from the tax cuts until much later in 2018.
The law cuts income tax rates at all levels for the next several years, meaning most taxpayers will see at least modest decreases in their federal bills.
But the law also changes the tax code’s complex system of deductions.
It expanded a “standard” deduction taken by many in the middle class and a Child Tax Credit, but the law also put new caps on how much people can deduct for state and local tax payments or for interest paid on a new home mortgage.
The deduction changes mean the tax cuts will vary widely between workers with similar wages, with the size of the relief depending on location, family size and situation.
It is not immediately clear what type of household is at the greatest risk of having a new paycheck that does not match what their tax obligations really are. This will depend on how the IRS and Treasury Department design the new withholding tables.
But a household that earns US$ 150,000 and has several children could end up temporarily overpaying their taxes under the new system because they would qualify for the Child Tax Credit in a way that likely won’t be captured by the old W- 4 forms.
A household earning the same amount in New York or California, who bought an expensive house this year and has no children, could find they did not pay enough taxes in their pay cheques and get hit with a bigger tax bill in 2019.
As they pushed their bill into law, Trump and congressional Republicans repeatedly promised the new tax regime would substantively improve workingand middle- class Americans’ financial outlook - even as Democrats hammered the plan as a giveaway to corporations and the wealthy with little in tax relief left over for anyone else.
How voters feel about the new tax law is expected to play a large role in the November midterms, when Republicans hope to hold on to their majorities in the House and Senate.
But while the new pay cheques arrive well before election days, many workers won’t get final answers on whether those bills are accurate until well after. — WP-Bloomberg