TRUMP AGENDA - The Tax Windfall That Wasn't

"The tax windfall that wasn't: A troubling new IRS report suggests many Americans may be giving money right back to the government" by Alex Raskolnikov, Daily News 11/1/2018

Americans like their tax refunds.  Refunds are good for tax administration, too.  Plenty of evidence shows that tax compliance is higher when taxpayers see refunds on their tax returns.

But millions of Americans looking forward to their tax refunds are about to be disappointed, even upset.  They will not see their expected refunds when they file their returns in 2019.  Even worse, many will be required to pay extra taxes.  Why the change?  The Republicans’ push to sell their tax law to the American public is the culprit.

The tax law signed by President Trump in December of 2017 made many changes to the tax code.  The standard deduction increased, but the personal exemptions disappeared.  Business owners got a rate cut but the deduction for state and local taxes shrunk.  Mortgage interest deduction became less generous, but child credit expanded.  Because of all these changes and many others, the withholding form that every American employee filed with his or her employer became outdated when 2018 arrived.

Employers needed new information from employees to keep the refunds roughly the same.  But getting this information would take time.  And Republicans wanted American workers to see tax savings from the 2017 tax law in their paychecks right away, before the 2018 midterm elections — whether these savings were real or not.

So the IRS took a leap of faith, came up with an updated withholding schedule as best it could, and told employers to follow it going forward.  The IRS then tried to convince Americans to do a “paycheck checkup” using its new “withholding calculator” to make sure that the employers’ withholding is not grossly off the mark.

Well-intentioned, but how realistic?

Democrats had doubts about the Republican tax strategy all along.  Ron Wyden (D-Ore) the highest ranking Democrat on the Senate tax-writing committee, warned all the way back in January that “the Trump administration is tampering with Americans’ paychecks, resulting in a whopping tax bill next year.”  The Trump administration dismissed these concerns as “ridiculous.”

At first, it seemed that the rushed implementation of the new tax law was not going to create a big problem.  At Democrats’ request, the Government Accountability Office evaluated the new withholding regime and issued a report in July.  The report concluded that the number of taxpayers who will have to pay extra tax rather than get a refund may increase by 3 million in 2018.  Not chump change, but nothing earth-shattering either given the total of 150 million returns filed.

But last month a new report became public.  This one came from the IRS Information Reporting Advisory Committee.  And this new report drops a few troubling hints.

The IRS decision not to wait until employers obtain the necessary information from the employees, the report explains, “may cause a significant number of taxpayers to be under-withheld when they file their 2018 personal income tax returns.”  The IRS calculator, it turns out, did not exactly catch fire.  “Despite the IRS’s efforts to inform taxpayers to check their withholding and encourage the use of the ‘calculator’ on the IRS website, usage of the ‘calculator’ through completion has been minimal because of the complexity (per IRS comments).”

How concerned is the Advisory Committee about a major increase in the number of “under-withheld” taxpayers who will have to pay extra tax during the filing season?  Concerned enough to officially recommend that the IRS waive penalties for under-withholding.

That’s right, if you did nothing during 2018 about your taxes at all, you may end up owing not just extra taxes, but penalties as well — all because the IRS decided to rely on the old forms that you may have given to your employer years ago.  The idea, of course, was for you to “start seeing a lot more money in your paycheck” as soon as possible, as Trump said.  Unfortunately, all that money can come right out of your bank account in a few months, and then some.

If the IRS Advisory Committee is worried, you should be as well.  So do yourself a favor — check that IRS withholding calculator.  You may need to cut back on your holiday shopping after that.

Raskolnikov is 'Wilbur H. Friedman Professor of Tax Law' at Columbia Law School.