OMB Review
The IRS will also have to contend with a new agency weighing in on its tax regulations, which could further delay guidance. Under a deal announced last week, White House Budget Director Mick Mulvaney won the right to weigh in on any new regulations written by the IRS and Treasury Department with a substantial economic impact, of at least $100 million. The Office of Management and Budget will have 45 days to review new rules, though the Treasury can designate certain regulations for an expedited review of just 10 days.
Mark Mazur, a former assistant secretary for tax policy at Treasury, told Bloomberg Tax that it was difficult to predict how the review process would happen in practice. The change is more likely to affect smaller companies, since larger firms are often in a better position to get informal guidance directly from Treasury, according to Andrew Silverman, a Bloomberg Intelligence analyst.
Even if OMB and the Treasury Department can agree on guidelines, the next challenge those rules are likely to face is in court. Ambiguity in the hastily passed law will make the IRS’s job more difficult. For example, Treasury Secretary Steven Mnuchin moved quickly to plug a loophole for hedge funds in the law, but many experts doubt the government has the legal authority to do so. That could set up a years-long court battle between the IRS and hedge fund managers trying to profit from Congress’s vague language.
‘Punier Organization’
The IRS’s lack of resources could influence how it interprets and enforces the new rules. A loose interpretation could inflate the federal deficit, already expected by the Congressional Budget Office to exceed $1 trillion per year by 2020. However, a tight interpretation could be expensive for the IRS, requiring many more audits and court fights with taxpayers.
Congress recently provided $320 million to the IRS to implement the law. But it also cut $124 million in other funding from the IRS’s $11.4 billion budget. The agency is still 18 percent below its 2010 funding after adjusting for inflation, according to the Center on Budget and Policy Priorities.
“The IRS is a much smaller and punier organization than it used to be,” said Stephen Ziobrowski of the Day Pitney law firm in Boston. “It’s difficult to imagine in the current environment that the IRS would have the resources to police a tight interpretation.”
Under the new tax code, thousands of U.S. companies could end up re-structuring or re-organizing their operations to minimize their tax burdens. Businesses could become corporations to take advantage of the new, lower corporate tax rate. Or they could re-arrange their holdings or payroll to qualify for the pass-through deduction. First, though, they’ll need a better idea of how the IRS is going to interpret the law. CPAs and lawyers are left in an awkward spot when clients ask what to do.
“All you can do is say, ‘This is what we think,’" said Bill Smith, managing director of CBIZ MHM’s national tax office. “I know you want us to know the answer,” he said he tells clients. “But this is the answer: ‘We don’t know.’”
This article was provided by Bloomberg News.