About Those 2018 Tax Cuts. . .
Hiring a quality tax professional is becoming increasingly important. Most informed taxpayers are aware that the Tax Cuts & Jobs Act, which went into effect in 2018 cut Treasury’s revenue by billions of dollars. Given that over 90% of the federal government’s revenue is generated by the IRS, and that government expenditures only appear to keep increasing due to the pandemic and other reasons, that lost revenue has to be made up somehow.
How is the IRS making up for all that lost tax revenue from the Tax Cuts & Jobs Act?
My theory, from what I am seeing as a professional, directly from clients and prospective clients, and in continuing education that I attend to maintain my Attorney and CPA licenses, Treasury’s strategy for the revenue shortfall appears to be increasingly targeting non-compliant taxpayers. Noncompliant taxpayers generally are:
- those who fail to file returns,
- those who owe large balances and have not made arrangements with the IRS to address their tax debt, and
- those who file problematic returns (such as returns that are filed with underreported income or anomalies with respect to reported deductions).
What are the IRS tactics that generate revenue from their increased targeting of non-compliant taxpayers?
More than ever before in my career, I am seeing:
- increased inquiries from prospective clients with regards to obtaining representation to address tax notices that they have received,
- increased inquiries from prospective clients with regards to obtaining representation for IRS audits, and
- more aggressive collections procedures employed by revenue officers in comparison with those that I have seen in past years.
Additionally, through continuing education that I attend, frequently in which the IRS is presenting to practitioners, I have become aware of an increased focus by the IRS to identify and punish taxpayers (both civilly and criminally) who engage in fraudulent filings or willfully fail to file or pay tax, and those who engage in abusive tax shelters and aggressive tax planning tools (syndicated conservation easements and micro-captive insurance companies have become two popular targets). Most ordinary taxpayers are not engaged in micro-captive insurance companies, syndicated conservation easements, or other highly sophisticated tax planning tools such as these until they are introduced to them by a “promoter”. It is very important for taxpayers to thoroughly research any tax planning tool that may sound too good to be true or those that result in significantly more deductions than the amount of cash that they have invested in the strategy.
So, knowing all this, would you opt for those Tax Cuts if you knew it would result in more headache down the road?
In my personal experience as a practitioner since the TCJA has passed, I have seen some clients who have really benefited from the legislation, some who have had only a marginal benefit from the bracket shifts, and others who have been very negatively impacted by the legislation. I work primarily with small business clients (those with revenue of up to $10 million), and because my practice is virtual, it is interesting to see the impact that the state where the client lives has on the effects of the legislation for them.
The $10,000 cap on the State and Local Tax (SALT) deduction has negatively impacted several of my clients in New York and California who pay high state income tax rates and property taxes on real estate, to a significant degree, but simultaneously, those who may have evaluated their entity classification and elected C Corporation tax status with a flat tax rate of 21% may have reduced their tax liabilities significantly. My overall opinion on the legislation from my view assisting small business clients is that the legislation is generally the most beneficial for my most well-off clients who live in states without an income tax, and the least beneficial for my clients who are considered to be in the middle class in states with high tax rates, and those who work as employees for a business that they do not own.
I would also opine that the legislation as advertised, once regulations and interpretations were issued, was not nearly as beneficial as what was touted when Congress passed the legislation. So, all politics aside, if I was a member of Congress, would I vote for the legislation if I knew then what I know now? I would hedge my bets and say “parts of it” or alternatively, I may vote for the original version that was advertised to the American people before the regulations came out and took away much of what originally made the legislation potentially appealing.
At any rate, the bottom line is that the government expenditures are not going down, especially in the midst of COVID-19. So, the shift we are experiencing is that some taxpayers will pay less taxes in exchange for more potential hassle for those same or other taxpayers with regard to dealing with additional IRS notices, inquiries, and audits. But things are sure to change in the near future now that we have newly elected representatives, and it will be more important than ever to engage with your CPA or Tax Attorney to discuss how the changes—that are sure to result—will impact you.
If you would like to discuss the impacts that the 2018 Tax Cuts and Jobs Act has had on your tax situation and potential areas where you may be able to reduce your taxes, feel free to contact me.