GAO report details challenges of implementing Trump tax law

The Government Accountability Office (GAO), a watchdog that provides information to Congress, released a report this week that detailed some of the challenges relating to the IRS’s implementation of President Trump’s tax-cut law.

“The Internal Revenue Service (IRS) has made considerable progress issuing guidance to taxpayers … but has additional work remaining to issue all planned guidance,” GAO said.

The report came at the request of Senate Finance Committee ranking member Ron Wyden (D-Ore.), who had asked the watchdog to review the implementation of the tax law’s business and international provisions. Trump’s tax law, enacted in 2017, made a number of changes to how businesses are taxed, including a cut to the corporate tax rate and a 20-percent deduction for income from noncorporate businesses known as “pass-throughs.”

GAO said that the IRS had issued about half of its planned official guidance related to the business and international provisions by the end of fiscal 2019.

“Tax practitioners we spoke with were generally favorable about IRS’s pace in developing [tax law] guidance and the quality of the guidance developed,” GAO said.

But GAO also highlighted some issues it has with the guidance process and areas where there are challenges for taxpayers and the IRS.

GAO said that in developing regulations, the Treasury Department and IRS “made decisions that could potentially affect tax liability by billions of dollars per year, which would have distributional effects on the economy, but these effects were not included in their regulatory analyses.”

For example, the Treasury Department said in regulations that high-income owners of real estate and insurance brokerages aren’t explicitly barred from taking the new pass-through deduction. This could allow those brokers to lower their collective tax burdens by billions of dollars and also could reduce federal tax revenue compared to regulatory alternatives. However, the Treasury Department didn’t consider the fact that certain decisions would affect the distribution of resources between taxpayers and the federal government, GAO said.

“By excluding analyses of distributional effects due to changes in tax liability, including effects on tax revenue collection, Treasury and IRS risk making regulatory decisions that have significant economic effects without fully understanding the consequences of their decisions,” GAO said.

GAO recommended that Treasury Department ensures its regulatory analyses take into account the distributional effects of revenue changes made by regulations. Treasury did not specifically comment on the merits of this recommendation to GAO but told the office that it has fully complied with a memo with the Office of Management and Budget.

The Treasury Department’s view is that the memo instructs the department to focus on non-revenue effects, but GAO said that the Treasury Department’s understanding was inconsistent with the memo.

Wyden highlighted GAO’s finding about the lack of distributional analyses in his statement about the report.

“Importantly, GAO … notes that the Treasury Department excluded important analyses of how much money was lost from lax regulations and who reaped the benefits,” Wyden said. “The result is billions in additional handouts to the wealthy and corporations and an even greater revenue loss than the original $1.5 trillion price tag.”

Wyden and other congressional Democrats have expressed concerns in recent weeks that the Treasury Department’s regulations implementing Trump’s tax law are overly generous to corporations as a result of lobbying by businesses. But Treasury Secretary Steven Mnuchin has defended the regulations, saying that decisions about the rules have been based on legislative intent rather than lobbyists’ influence.

GAO also noted that there are some areas where the IRS has yet to issue final regulations, which creates uncertainty for taxpayers and some administrative challenges for the IRS. And the watchdog said that the IRS could face challenges verifying taxpayer-reported information relating to some provisions in the GOP tax law.