Tax Overhaul Leaves Little Time for Adapting to the Changes

The extensive rewrite of the U.S. tax code leaves little time for government agencies, businesses and individuals to adjust to its wide-ranging changes, many of which take effect in a matter of days.

Major pieces of legislation, such as the Affordable Care Act and the Dodd-Frank financial overhaul, often weren't effective immediately, giving rule-writers and outside experts time to interpret the laws and offer guidance.

In this case, the Treasury Department and Internal Revenue Service have little time to adapt. The law sets most of the new tax rules in place starting Jan. 1, before the IRS has had much time to interpret the law.

Complicating matters, it is uncertain when President Donald Trump will sign the legislation. He may wait until after the new year to avoid mandatory spending cuts associated with the tax bill and budget rules. The timing of his signature affects how businesses account for some of the tax code changes.

Taken together, the short turnaround time and uncertainty about when the bill will be signed could leave taxpayers and their advisers struggling to adapt, raising the risk of errors and disruptions, tax policy experts warn.

The legislation, which Congress passed Wednesday, provides deep tax cuts for corporations and lower rates for many individuals. It also includes a significant overhaul of business taxation and international tax rules, and scales back key tax breaks.

"The implementation costs here are massive," said Bryan Camp, a law professor at Texas Tech's School of Law and former lawyer in the IRS chief counsel's office. "I don't think anyone probably has thought through all the different administrative ramifications of the bill."

Treasury officials have acknowledged the challenges in implementing the law, and have begun coordinating with the IRS and seeking feedback from trade groups on provisions requiring immediate action or guidance.

For example, the American Payroll Association, the largest payroll-industry trade group, warned lawmakers in a letter this month that its members were starting to panic over the prospect of changes to the W-4 form, which employers and employees use to determine how much tax to withhold from paychecks.

Millions of employees could need to file new W-4 forms, but it isn't clear when new ones will be ready.

The IRS is in the process of updating the tax withholding tables, according to a senior Treasury official. But the agency said last week that changes likely won't be reflected in workers' paychecks until February.

Gary Cohn, director of the White House National Economic Council, said Wednesday Mr. Trump may wait until early next year to sign the legislation if lawmakers don't separately pass a provision to waive certain budget rules related to it.

That wouldn't affect the rollout of the new withholding tables, but would have significant consequences for many businesses.

If the president signs the bill before the end of December, companies that follow a calendar-year schedule would have to reflect much of the effect in their fourth-quarter financial statements, which many begin releasing between mid and late January. If the law isn't signed until January, however, businesses generally wouldn't have to reflect the effects in their financial reports until spring.

"For the tax accountants and the tax directors and people doing financial reporting at companies, they're going to be pretty busy the next few weeks," said Bob Herz, a former chairman of the Financial Accounting Standards Board, which sets U.S. accounting rules.

For the most pressing issues, companies will want whatever interpretive help is required within the next few weeks, said Pam Olson, the U.S. deputy tax leader at PricewaterhouseCoopers and former assistant Treasury secretary for tax policy during the Obama administration.

"It's one thing if all you're doing is changing rates or changing brackets, but there are a lot of new and novel provisions in these bills, " Ms. Olson said. "There's going to be a need for more interpretive guidance in order for companies to understand what their tax payments are going to be, what their filing obligations are going to be."

That process will likely take place in waves over the coming months, as the Treasury and the IRS prioritize which changes are most critical to explain, and which ones can wait.

Not all business groups are concerned. While many asked lawmakers to include transition rules in the law that would help them navigate the changes, they expect Congress to make technical corrections later as needed.

"Yes, there are going to be growing pains in the short term, but to get a pro-growth tax code that looks more like our global competitors is worth it," said Caroline Harris, vice president of tax policy at the U.S. Chamber of Commerce.

It isn't unusual for the Treasury or the IRS to provide quick guidance in response to changes to the tax code, such as expiring tax provisions -- or provisions that Congress chooses to extend late in the year. In some instances, the IRS has been forced to delay the filing season until new forms or guidance are in place.

The changes about to be implemented in the GOP tax plan, however, are much more complex and wide-ranging, and could take years to fully flesh out.

"It's just completely unrealistic to have all these fundamental changes go into effect right away and have taxpayers not have any idea how to comply with them," said Lily Batchelder, a New York University law professor and a former tax adviser to President Barack Obama. "Where there are gaps in the law, you're going to see taxpayers go to their tax advisers and get very different advice."

In anticipation of the increased workload from the new bill, the Treasury has also reached out to Capitol Hill seeking more money in 2018 for the IRS, the senior Treasury official said. The agency has grappled in recent years with funding cuts and staffing shortages.

The additional resources may be too little, too late, Mr. Camp said.

It can take years of training to bring new employees up to speed on the service's policies and procedures, Mr. Camp said, so new employees won't be especially helpful. Meanwhile, the IRS will train thousands of existing employees to help draft new forms and write guidance, which must then be reviewed by the agency's lawyers.

That will likely require shifting certain employees from one division to another. For example, an agent who might normally conduct audits or exams will be temporarily tasked with writing new guidance. Diverting resources from the IRS's compliance enforcement could mean the agency would cut back on efforts to catch tax cheaters, Mr. Camp said.

"I would not be at all surprised if...the consistent denial of resources to the service over the past eight years has weakened the agency's ability to respond to this kind of demand," he said.

--Theo Francis contributed to this article.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

December 20, 2017 17:09 ET (22:09 GMT)