Tax Cuts and Jobs Act: Considerable Progress Made Implementing Business Provisions, but IRS Faces Administrative and Compliance Challenges
According to IRS, the Tax Cuts and Jobs Act of 2017 was the most sweeping tax law change in over 3 decades—with 86 provisions that modified, added to, or repealed business and international taxes.
IRS prioritized and implemented key provisions of the act and provided taxpayer guidance.
But there are challenges to fully implementing the act. For example, tax return data related to some of the new provisions isn’t in a readily usable format. As a result, IRS may not be able to promptly identify and alert taxpayers who aren’t in compliance. We recommended determining which data would be most cost effective to transcribe, and then doing so.
Example of IRS Guidance
Cover of IRS Publication
What GAO Found
The Internal Revenue Service (IRS) has made considerable progress issuing guidance to taxpayers for Public Law 115-97—commonly known as the Tax Cuts and Jobs Act of 2017 (TCJA)—but has additional work remaining to issue all planned guidance, as shown in the figure.
Internal Revenue Service Implementation of Planned Guidance for Public Law 115-97, Commonly Known as the Tax Cuts and Jobs Act of 2017
Notes: IRS refers to regulations and other information that it considers binding on the IRS—including the types in the figure above—as guidance. This figure displays completed and planned guidance at the end of fiscal year 2019.
To improve efficiency of TCJA guidance development, IRS internally collaborated earlier and more frequently than during more routine tax law changes. IRS officials said the benefits of this enhanced collaboration included faster decision-making on time-sensitive guidance, including regulations. IRS officials agreed enhanced collaboration had value but as of December 2019 had not identified the parameters for when this collaborative approach would be warranted.
IRS may face challenges ensuring compliance with certain TCJA provisions because third-party information reporting is not always available. GAO's past work has found that one of the important factors contributing to the tax gap is the extent to which information is reported to IRS by third parties. Without third-party reporting, IRS will have to rely on resource-intensive audits to enforce certain TCJA provisions, which could be challenging given recent trends of declining audit rates and enforcement staff. GAO has recommendations from March 2019 for IRS to take actions to mitigate hiring risks and reduce skill gaps.
IRS was also unable to update all information technology systems prior to the start of the 2019 tax season due to the magnitude of TCJA changes. As a result, IRS was not able to capture certain tax return information in a format that can be easily analyzed to help with compliance planning activities. One IRS division took steps to convert certain tax return data to a more useable format, but efforts to identify other viable opportunities have not been taken. Without appropriate data for analyses, IRS could face challenges enforcing certain TCJA provisions.
Why GAO Did This Study
According to IRS, TCJA was the most sweeping tax law change in more than three decades, with 86 provisions that modified, added to, or repealed business and international taxes, such as the qualified business income deduction. IRS determined it would take significant effort to implement the law given the limited time-frame and magnitude of the provisions.
GAO was asked to review IRS's implementation of TCJA business and international provisions. Among other reporting objectives, this report examines IRS's (1) progress implementing the provisions, (2) processes to provide guidance, and (3) challenges for effectively administering these provisions.
To address these objectives, GAO analyzed IRS documentation on project management, compliance planning, and regulation development. Additionally, GAO interviewed IRS officials and tax practitioners.
GAO is making five recommendations, including that IRS develop and document procedures for continued enhanced collaboration and convert tax return data to a more useable format for compliance purposes. IRS disagreed; however, GAO believes that these recommendations will benefit guidance development and tax administration.
In prior work, GAO recommended that IRS measure which activities are producing desired hiring outcomes and take steps to reduce skill gaps among revenue agents. IRS agreed with these recommendations and, as of December 2019, plans to report on efforts to close skill gaps by December 2021.
Recommendations for Executive Action
|Internal Revenue Service||The Chief Counsel of the Internal Revenue Service, in coordination with appropriate offices, should identify and document parameters and procedures for applying enhanced collaborative approaches to regulation and other guidance development with IRS Business Operating Divisions. (Recommendation 1)||
As of August 2022, we have requested additional information from IRS on what actions, if any, IRS has taken to implement this recommendation. In past updates, IRS continued to disagree with this recommendation and does not plan to take action on it. IRS officials said their Chief Counsel Directives Manual provides sufficient guidance and flexibility to allow for enhanced collaboration when appropriate. However, officials acknowledged that this collaboration was particularly helpful in implementing TCJA provisions and greatly contributed to IRS's successful implementation. By implementing this recommendation, IRS can help ensure that institutional knowledge and beneficial practices from TCJA implementation will be documented and effectively leveraged to support implementation of future time-sensitive or complex tax law changes without restricting IRS's flexibility. Documenting procedures would ensure IRS can retain organizational knowledge and mitigate the risk of having that knowledge limited to a few personnel.
|Internal Revenue Service||The Commissioner of Internal Revenue should develop a process to accurately and thoroughly capture implementation status of ongoing projects in accordance with Standards for Internal Control in the Federal Government. (Recommendation 2)||
As of August 2022, we have requested additional information from IRS on what actions, if any, IRS has taken to implement this recommendation. In past updates, IRS continued to disagree with this recommendation and does not plan to take action on it. IRS officials acknowledged inconsistencies in reports but said these inconsistencies were not detrimental to overall implementation. We maintain that accurately and thoroughly capturing implementation status on ongoing projects would provide accurate information to decision makers and could prevent potential misreporting, mismanagement, or inefficient resource investment in the future.
|Internal Revenue Service||The Commissioner of Small Business/Self Employed should coordinate with appropriate IRS divisions or offices to identify the costs and benefits of retroactively transcribing taxpayer data resulting from TCJA. (Recommendation 3)||
As of August 2022, IRS continues to disagree with this recommendation and does not intend to take action on it. IRS officials said the retroactive transcription of TCJA returns would be a time intensive activity with significant opportunity costs, and that the benefits of retroactive transcription are currently not quantifiable. A high-level analysis of costs and benefits could help IRS management determine what, if any, data would benefit compliance and enforcement efforts. IRS could use readily available existing information (such as the number of returns affected by a certain provision, LB&I and IT cost data on conversion efforts already completed, or the usefulness of past compliance analytics in similar areas) to inform the analysis. In August 2021, LB&I officials said their recent efforts to convert data from PDF forms to a more useable electronic format were resource-intensive and not all the data were usable. However, officials said there are many benefits of having data in a usable format, including having timely data available for analytics and reporting and to develop a compliance strategy. Additionally, IRS staff manually reviewed certain forms associated with one TCJA provision for compliance purposes and SB/SE officials have requested that IRS IT make more information related to this provision available in a more accessible format in the years since TJCA was enacted. IRS could use information from LB&I's effort (e.g., amount of time and any compliance results) to inform a high-level estimate of costs and benefits.
|Internal Revenue Service||Based on the costs and benefits identified in recommendation 3, the Commissioner of Small Business/Self Employed should determine which TCJA provisions' data should be converted into a more useful electronic format for compliance and enforcement purposes and work with the appropriate offices to obtain the transcribed data, as appropriate. (Recommendation 4)||
As of August 2022, IRS does not intend to take action on this recommendation. In August 2021, IRS reported it disagrees with this recommendation and officials said that implementing this recommendation would require identifying the costs and benefits, which they do not plan to take action on. However, IRS officials acknowledged that IRS operating divisions and offices make strategic decisions regarding how best to use TCJA-related return data for compliance and enforcement purposes. We believe that converting data in instances where the benefits outweigh the costs would better position IRS to more effectively and efficiently pursue its mission of ensuring taxpayer compliance. For example, in the case of one TJCA provision, because IRS is not collecting information in an easily accessible format, IRS staff manually reviewed forms to help with compliance efforts. In August 2021, LB&I officials said there are many benefits of having data in a usable format, including having effective selection criteria for compliance efforts and enhancing examining agents' data analysis on cases.
|Office of the Assistant Secretary of the Treasury (Tax Policy)||The Assistant Secretary of Tax Policy should update Treasury's internal guidance to ensure that Treasury's regulatory impact analyses include examination of the distributional effects of revenue changes when regulations influence tax liability. (Recommendation 5)||
As of August 2022, Treasury continues to disagree with this recommendation. Additionally, Treasury officials noted that the administration is examining procedures for reviewing regulations based on the Modernizing Regulatory Review presidential memorandum. This memorandum directs the U.S. Office of Management and Budget (OMB) to "propose procedures that take into account the distributional consequences of regulations, including as part of any quantitative or qualitative analysis of the costs and benefits of regulations." Treasury officials told us that given OMB has not yet released those procedures, it would be premature to comment further at this time. We maintain that decisions Treasury and IRS made when developing regulations to implement TCJA could potentially impact tax liability by billions of dollars per year; however, Treasury's internal guidance dictates that these revenue effects should not be included in its economic analyses of the regulations. In some regulations, Treasury has addressed revenue effects in its analyses, but this has not been done consistently. By adjusting its internal guidance to ensure that distributional effects of revenue changes are consistently reflected in its analyses, it would better inform the regulatory decision-making process, while also providing the public with greater transparency.