The government’s partial shutdown now enters its third week as the White House continues to hold out for a spending deal that includes $5 billion for a wall along the southern U.S. border. Your clients might be starting to wonder how this closing of the federal tap impacts the looming tax season.
Thousands of Internal Revenue Service employees have been furloughed. The shutdown, the 21st since the modern federal budgeting process began, came as taxpayers and preparers readied to deal with the massive changes in tax law from the Tax Cuts and Jobs Act passed late last year.
The IRS is not shut “but it is significantly scaled back,” said Jeff Fosselman, a CPA/CFP and J.D. and senior wealth advisor for Relative Value Partners in Northbrook, Ill.
During the shutdown, the IRS will process original electronic and paper filed returns and accept payments. It will not issue refunds nor answer calls from preparers or taxpayers. Taxpayers will still be expected to file and pay taxes on time.
“I think there are no immediate problems. High-net-worth individuals file as late as possible,” noted Mary Kay Foss, a CPA in Walnut Creek, Calif. “High-net-worth clients need not rely on tax refunds. Forms 1099s are also still not available until February, shutdown or not.”
Tax preparers have been unable to access some information from the IRS that used to be available, and “a delinquent return will be even more delinquent if income information is not available,” Foss said. “Some people are [also] in a hurry to file returns to have a document to show a potential lender. The IRS is asked to verify some tax return numbers; that isn’t going to happen.”
The IRS also will not process 1040X amended returns during the shutdown. “Typically wealthy individuals are the ones filing amended returns,” Fosselman said. “Any individual involved in lending that requires tax return transcripts for underwriting will be impacted as well, as the issuance of transcripts is limited during the shutdown to requests related to disaster relief.”
Also shuttered: IRS conducting of audit or exam functions other than those where the agency will protect the statute of limitations. “We received a phone call from the IRS examiner for a corporate tax audit [saying] that he’d be unavailable for a while,” Foss said. “This was just before Christmas, and he didn’t know when he’d next be available. The client thought this was a break, but not really. The client might have more time to get some requested information together but the time to come to an agreement with the IRS isn’t extended.”
The longer the shutdown, the worse it might get for the IRS. For a refund delayed more than 45 days after a return’s acceptance, for instance, the IRS must pay interest. And the need for audits isn’t just disappearing. “While an individual wouldn’t be off the hook for an audit, what remains to be seen is how the shutdown will impact the ability to identify returns to be audited,” Fosselman added. “Many audits are initiated electronically by the IRS system, but the standards for that system may be modified to reduce the volume of ongoing audits. This potentially has a severe compounding effect on the IRS.”
Clients might also not know how state tax filings might be affected. Many state returns start with federal numbers even if the state doesn’t conform to the new federal tax law. “Delays in federal filings will delay state filings—and especially receipt of state refunds,” Foss said.
“Some states require proof that a federal amended return has been approved by the IRS before the amended state return will be accepted,” Fosselman added. “An individual who is filing an amended return right before the statute of limitations expires may be unable to file the amended state return unless the state makes some sort of exception.”