As vice president–taxation of the AICPA, Ed Karl advocates for CPAs’ interests in Congress and the IRS and Treasury. As the 2019 legislative season draws to a close and a tax preparation season in the new year looms, he assesses current legislative goals and their potential effect on tax practitioners and their taxpayer clients.
What you’ll learn from this episode:
- Why some tax provisions are temporary (“extenders”), the current prospects for extending them going forward and/or retroactively authorizing those that lapsed as far back as the end of 2017, and the effects on taxpayers and tax professionals.
- “Glitch fixes,” or technical corrections of the legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. Nearly two years on, what prevents Congress from making the corrections?
- Tax season compression: A 35-day federal government shutdown in December 2018 and January 2019 delayed early tax refunds and impeded the IRS’s operations and preparedness. Could it happen again?
Play the episode below:
To comment on this podcast or to suggest an idea for another podcast, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com.
Paul Bonner: Extenders, technical corrections, and a continuing resolution. In this Journal of Accountancy podcast, we’ll discuss the tax-related items of unfinished business in Washington and what they mean for CPA tax professionals and their clients, plus a bit of 2020 foresight, if you will, on the start of the tax preparation season in the new year to come.
Hello. I’m Paul Bonner, a senior editor at the Journal of Accountancy. With me today is Ed Karl, the AICPA’s vice president–Taxation, to talk about the near-term legislative and administrative tax environment and what’s at stake. Ed is a CPA and former tax practitioner who directs the AICPA’s Tax Policy and Advocacy Team, which advocates in Washington at the federal level, both with the IRS and Treasury and with Congress, on behalf of AICPA members, for clear and administrable tax law and regulations. Welcome, Ed, and thank you.
Ed Karl: Thank you, Paul. Nice to be here.
Bonner: To start out, for listeners who might not know, Ed, what are extenders, and why do they matter?
Karl: We typically use the term “extenders,” but they’re temporary tax provisions that expire over a period of time, typically two years when they’re initially enacted. You could have, for example, certain energy-related temporary provisions designed to kick-start a particular industry or help an industry through an economic depression, if you will. They’ll provide incentives or credits, rapid write-offs, those types of things.
They’re intended, as I said, for a kick-start, and so Congress will have them sunset or expire after one or two or three years. Part of the reason, and maybe even the main reason, is because of the cost of enacting tax legislation. It has to be paid for. So if it sunsets within a short number of years, then it’s a lot more manageable for Congress to deal with it.
Bonner: I see. These extenders, I would think, being temporary, taxpayers would rely on them, but the problem being that they don’t know how long they can rely upon them or whether they’ll be renewed, right?
Karl: I think the mindset becomes that they’re permanent and they’re not really temporary, even though they were designed to be temporary. So what happens is sometime before — or even, what we’re dealing with right now, after — they expire, taxpayers are pushing their legislators, and legislators have some kind of a vested interest in trying to extend them for another period of time. Even though everyone knows they were enacted for a temporary amount of time, when push comes to shove, everyone wants to continue them. Or, as now we refer to them, extend the period for which they are working, and we get the term “extenders.” And it’s year after year after year. We have many provisions that get extended for another short period of time. Then they expire again, and we extend them again.
We’re actually now in a period that is a little bit more unusual in that we’re coming up on three years’ worth of extenders. Those that expired 12/31/17, 12/31/18, and in just a few short weeks at the end of 2019, we’ll have several more provisions that expire.
Bonner: Yes. Some of those that — for example, if I were a homeowner and I’d been in a home that I couldn’t pay for and had an underwater mortgage, I’d be very interested in whether, for example, there’s an extension to Sec. 108(a)(1)(E). That is the exclusion from gross income of forgiven home mortgage debt, for example. That’s one example of an extender, isn’t it? What are some others?
Karl: As I mentioned, there are a number of energy-related credits for nonbusiness energy, property credits for alternative fuel vehicles, biodiesel, and renewable diesel incentives. You mentioned the residence. There are others, like an above-the-line deduction for qualified tuition and related expenses.
We even see at the end of 2019, there’s this temporary reduction in the medical expense deduction floor. That was raised as part of TCJA tax reform. But that’s going to go down. You can even look to TCJA, at the end of 2025, virtually all of the individual provisions sunset.
Bonner: In a sense, they’re all extenders, I guess.
Karl: Yeah. Exactly.
Bonner: What does this mean for taxpayers and their CPA preparers? Uncertainty?
Karl: More than uncertainty, I think it has caused a lot of anxiety, probably. We heard from a lot of our members, a lot of CPAs wanting to know what would happen with extenders. It becomes a barrier. If you look back — I mentioned those provisions that expired 12/31/17 have to be reflected on returns that were filed in ’18, and you couldn’t do it. So, to the extent that Congress fixes these expired provisions and makes them retroactive, then CPAs would have to file amended returns.
I think it really goes to a good communication process that CPAs have with their clients to explain to them what it all means. The last thing you would want a CPA to do is to go back to a client and say, “Congress retroactively reinstated a provision that provides a benefit for you, and I have to amend your return if you want to take advantage.”
That process is not clear to some clients, to some taxpayers. They might not understand why the CPA didn’t take advantage of it initially. Why is it that the CPA wants to charge them — which they should do, rightfully — charge the client to amend the return?
If you’ve never had a conversation with a client about a provision that potentially benefits them and that it would sunset and then potentially retroactively reinstated — if you’ve never had that conversation, having it again now or having it for the first time may be a little bit odd to the client and not understand what’s going on. So we’ve encouraged our members to have ongoing conversations with their clients about expiring provisions.
Bonner: I imagine so, and especially being mindful of those particular clients who have tax items that could be affected by those extenders. I suppose, too, once something is retroactively extended, as you say, then there has to be a trade-off between the costs of filing an amended return and the actual tax benefit from doing so, right?
Karl: Yeah. Exactly.
Bonner: Let’s talk also for a bit here about technical corrections. By technical corrections, I think we mean those to a particular bit of legislation that you’ve alluded to already, which is the law known as the Tax Cuts and Jobs Act, which is P.L. 115-97, also known as the TCJA. This was the big tax reform package that passed at the end of 2017.
I’ve heard some things about the need for correction of something called the “retail glitch,” for example. What is that, and what are some other technical corrections needed? And what are the barriers to fixing them? It seems like Congress has had considerable time now to have done so, but apparently hasn’t. They seem fairly straightforward.
Karl: I’ll answer your last question first: The barrier is politics. I’ll explain what that means. Let’s go back to the first question. You referred to the retail glitch. The retail glitch — well, let me pause for a second and explain what a technical correction is. A technical correction means that when Congress passed — for example, we’re talking about TCJA — when they passed TCJA in December of 2017, they had intent for each of the provisions.
And then the Congressional Research Service has to write the actual legislation. When that legislation is written, and there’s a lot to it — this was a massive, massive bill, and everyone is trying to review what was done — sometimes the drafting of the legislation isn’t exactly in line with the intent. A technical correction is intended to fix a technical glitch or error in the drafting, knowing what the intent was. That’s a technical correction.
Let me compare it to just an actual error. Sometimes you discuss legislation. The legislation is drafted. It’s passed. It’s signed into law. After it’s in the law and professionals such as CPAs work with the law, they say, “What about this? It doesn’t cover this.” The tax writing committees say, “Oh, my gosh. We never thought of that. That’s a good point, but we never thought of that.”
You can’t say that the intent was to cover it, when they never thought of that. That’s not a technical correction. That is purely a fix that has to be enacted separate from the legislation, TCJA in this case. That’s the distinction of a technical correction.
The reason technical corrections are not moving, as I said, is because of politics. The Democrats, who now control the House of Representatives, who did not control the House when TCJA passed, have said, “We were not in the room when TCJA passed. We were not part of the conversation. How are we supposed to know what the intent of the legislation was, to decide whether or not it should be a technical correction?”
And so they have held a number of hearings since the law passed, or since they’ve been in power, I should say. For this year, there were a number of hearings that they’ve had on technical corrections, but they have not made final decisions. So it is wrapped up in politics.
The other thing that it’s wrapped up in is having a legislative vehicle, because the odds of technical corrections moving and passing on its own are not so great. It needs to get over the political hurdle, and it needs to find a vehicle to move it through Congress.
Bonner: The retail glitch I think has to do with 15-year depreciable property status for qualified improvement —
Karl: Right. It does. It gets its name from the one technical correction that did pass in March of 2018 and that was called the “grain glitch.” It had a catchy name, the grain glitch passed.
Then Congress realized there was another glitch to the law, and it dealt with restaurants and retailers that should have been allowed a one-year write-off of qualified improvement property, but it’s not right now because of the glitch, and so it has to be written off over an extended number of years.
There seems to be bipartisan support for fixing this problem, but, again, politics and a vehicle are getting in the way of fixing this one item. There are some others — there are several others, but it looks like they’re all wrapped up together, at least at this point.
Bonner: I see. So is there any hope of those being resolved before the end of the year, do you think?
Karl: Let’s talk about, very quickly, what that vehicle might be. We’ll have to go back to the summer a little bit. There were two pieces of legislation that were signed into law, one in August called the Bipartisan Budget Act of 2019 and one in the end of September leading up to the government’s fiscal year end, which is Sept. 30, the second piece of legislation called the Continuing Appropriations Act of 2020 and the Health Extenders Act of 2019. It’s one piece of legislation.
Basically, what these two pieces of legislation did was give Congress the authority to temporarily fund government operations for the fiscal year starting Oct. 1. They did it on the basis of a continuing resolution or what’s known as a CR. A continuing resolution funds the government based on the last actual appropriations bill that was passed.
In essence, a CR means you’re going to fund government at the same level as it was the prior year. This temporary CR expires the 21st of November, just a week before Thanksgiving. Basically, it’s the last day that both houses of Congress are in session before the Thanksgiving break.
I think what’s going to happen, if I take a look at my crystal ball, is that by Nov. 21, Congress will pass another short-term CR, bringing us to the middle of December, which is when Congress is scheduled to break before the end-of-the-year holidays. They have an opportunity in those several weeks in that second CR to pass appropriation bills. Those appropriation bills could possibly be the vehicle to pass extenders or technical corrections.
As I look at things, it’s possible — or what I would suggest would happen — again, there’s a CR until Nov. 21, I think Congress will pass a second CR until the middle of December. And I think that’s when Congress will decide what to do. Will they pass permanent appropriation bills? They have to pass 12 of them. Will they attach anything to them, or will they intend that they be what they call “clean,” with no extraneous measures attached to them?
Frankly, I think the big wildcard here is what’s going on with all of the impeachment proceedings against the president. Will Congress come together to pass appropriation bills? Will they consider extenders and technical corrections? Will the president sign what Congress does, or will this all go to the possibility of a third CR? Or is it possible that the president and Congress will let the spending bills lapse, which means government will shut down?
I think that’s what you were alluding to when you talk about filing season opening up. We just had CPAs finish with the extended filing season on Oct. 15, and we’re already bringing up next filing season in the discussion because of spending issues, CR, technical corrections, and we could go into January with some kind of a shutdown. And that potentially could delay the start of the next filing season, which usually opens up end of January.
Bonner: So if it were later than January, people would be waiting to file their returns — CPAs, preparers would be waiting to file the returns into February, which would have what effect on filing season as a whole?
Karl: The question is, will IRS have the resources? They typically get additional resources if there has been a shutdown. We’ve had that over the last several years where there was a shutdown going into January. We, frankly, had the longest shutdown we’ve had in history, recently, but IRS was able to manage getting ready for filing season. I think they’re already looking at revising the 1040 from what they had this past filing season, making some changes to that.
It’s a question mark. We just don’t know, Paul, whether or not it will have an impact. I’m just raising the question, that it’s something that we’ll look at very closely and try to be part of the conversation. Hopefully, IRS will be able even with a shutdown to get everything ready for the end of January. It’s possible that there could be a few days’ delay. That means that it will just compress the period until April 15 a little bit more. And certainly, we know CPAs really don’t want to see any more compression than there already is. It’s bad enough as it is.
Bonner: One thing is certain, I’m sure: April 15 is fixed.
Karl: April 15 is fixed. What we’ve been a part of the last several years is asking for the waiver of penalties when you don’t have guidance or when you have shutdown and there’s a compressed filing period — more compressed than even is normal.
Any kind of challenges, we try to work with the IRS to be lenient on asserting penalties, that type of thing. You have the ability to extend returns beyond March 15 or beyond April 15, but it just becomes a challenge when you lose even a few days.
Bonner: I’m sure. Thank you, Ed. I appreciate your insights into these bits of unfinished business in the current tax world and looking forward to 2020.
Karl: Thank you, Paul. These are important conversations for CPAs and for our members to listen to because it impacts their day-to-day lives.
Bonner: Great. Thank you again.
Karl: Thank you.