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Although only 12% of IRS employees are working, the IRS said it will nevertheless begin accepting and processing tax return filings on January 28, 2018. And according to statements on January 7, 2018, the office of Management and Budget has reversed guidance from previous government shutdowns and authorized IRS to pay refunds due.
IRS has begun recalling some of the estimated 20,000 additional employees who will be needed to implement the filing season. However, it is not unlikely that some disruptions will occur despite the agency’s best efforts. This is the first filing season under the Tax Cuts and Jobs Act (TCJA), which made numerous changes to tax rules applicable to individuals, and the shutdown has caused a delay in implementation of new IRS protocols designed to take those changes into account.
Tax practitioners worry that despite the availability of refunds, many return filers are badly unprepared for changes to those refunds. Because the withholding tables were substantially changed during 2018, and new Forms W-4 were provided, many taxpayers undoubtedly received more take-home pay during the year and will be surprised when they have a smaller refund, or actually owe tax, if they did not take the changes into account. According to an H&R Block survey, 47% of taxpayers think the TCJA will result in larger refunds, although 45% did not know what information they needed to determine their correct withholding allowances and 27% thought revised Forms W-4 were sent to the IRS rather than to employers. Unfortunately, not only are refunds likely to be smaller than expected, there will be some taxpayers who not only get no refund, but owe substantial taxes. These problems will likely be exacerbated by the unavailability of IRS assistance through telephone and walk-in services during the shutdown, and by the fact that IRS professional and public communications are also shut down.
As a result, Worldwide ERC® members should expect a substantially higher incidence of questions from transferees about taxes, their W-2’s, and their gross-ups.
The IRS has also reopened its income verification service, which allows financial institutions and their customers to obtain tax transcripts necessary to process mortgage and other loan applications. But it remains unable to engage in many other activities, including audits, appeals, and collections. Correspondence from taxpayers is simply piling up because IRS is unable to respond during the shutdown.
Nothing about the shutdown changes due dates for payroll filing activities. Forms W-2 will remain due to employees and Forms W-3 must be sent to Social Security by the end of January, for example, and gross-up calculations will therefore need be completed as usual. Employment tax returns also remain due by that date. Most Forms 1099 must also be provided to individuals by January 31.
An open question being asked by many practitioners is whether there will be any penalty relief for late or incorrect tax filings due to the confusion of the first filing season under the TCJA combined with the problems created by the shutdown. As yet, neither Treasury nor IRS has commented. However, there is some expectation that applicable penalties will be waived or sparingly applied.
If the shutdown continues into the filing season, numerous additional questions and problems will undoubtedly arise. Worldwide ERC® is following this situation closely and will keep its members apprised.
With the suspension of the moving expense deduction and other individual tax changes Worldwide ERC® members can expect numerous questions and concerns about tax liability and gross-ups from transferees. Changes to withholding will significantly reduce the refunds for many, or cause some to owe taxes. The government shutdown makes many IRS services to taxpayers unavailable, which will increase the likelihood that companies will be asked for advice and assistance. Companies must still prepare payroll forms on the usual dates but should expect a somewhat disruptive tax filing season.
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