A prolonged federal government shutdown could throw into turmoil the implementation of the new tax law by the IRS and disrupt the start of the tax-filing season.
A contingency plan released by the Treasury Department on Friday doesn’t mention activities on implementing the new tax law as exempt from a shutdown, but some tax season planning would continue.
The revenue agency already faces a slew of operational challenges every day, given steady drops in staffing and funding over the better part of the past decade. As it stands now, the agency’s budget is on track to decline to about $11.1 billion without any extra funding from Congress, down from about $12.5 billion in 2010 when not adjusted for inflation.
So if the federal government shuts its doors at the end of Friday, the blow could be harder at the IRS than at many other agencies.
“If Congress would like the IRS to be able to implement the massive tax reform they just did, there have to be people there doing it,” said Jennifer MacMillan, an enrolled agent in Santa Barbara, California, who chairs the Government Relations Committee of the National Association of Enrolled Agents.
“Congress has asked for quite a bit out of the IRS, and if they shut them down it’s just going to delay things,” she said.
The massive tax law requires the IRS to draft dozens of rules and procedures for changes to the corporate and individual sides of the tax code.
Government funding will lapse after Friday unless lawmakers pass another short-term spending bill. That means lawyers figuring out how to put new tax rates and rules into effect could be sent home. Audits would stop. And while the agency would probably keep accepting checks, refunds would stop going out the door.
But prep work for 2019 tax forms could continue, as would law enforcement and work on litigation. OMB Director Mick Mulvaney suggested Wednesday that the tax form work could include implementation of the tax law, and played down the implications of a short-term shutdown.
“But again, the bottom line is if there is a shutdown and it would impact the implementation of the tax bill, it would be very temporary in nature,” he said on Fox Business Network’s “Varney & Co.” “Those folks simply wouldn’t be allowed to work on it for the day or two the government is shut down. So writ large, the impact on the overall tax bill would be negligible, if not zero.”
Only 43.5 percent of the agency’s 80,565 officials and employees, those designated as essential, would stay on the job. Everyone else would be sent home and barred from working there.
The chief counsel’s office, which MacMillan said plays a key role in interpreting the new tax law, would stay open, but its “primary responsibility during a lapse is to manage pending litigation, the time-sensitive filing of motions, briefs, answers and other pleadings related to the protection of the government’s material interests,” according to the plan.
Mark Mazur, a former Treasury Department official who now directs the Urban-Brookings Tax Policy Center, said in an interview before the contingency plan came out that disrupting planning for the new tax law would hit taxpayers, from individuals to major corporations, who want to know the new rules of the road to comply or decide how to organize their business.
“Everything gets pushed back in time, and that is not a good way to run things,” said Mazur, who was the Treasury Department’s assistant secretary for tax policy during the last shutdown, in 2013.
A shutdown this year would deliver “a gut punch” to the IRS considering the constraints already straining implementation and tax-filing season demands, National Treasury Employees Union President Tony Reardon, said in a statement earlier this week.
“However, it’s crucial to understand that those most harmed in this scenario would be the American taxpayer, businesses, and the tax preparer community who all need to be able to be in contact with the IRS,” he said.
The 2013 shutdown lasted 16 days. During that time many automated processes continued at the IRS, which accepted returns and processed payments over the course of the shutdown, but refunds weren’t issued while the doors were closed.
Operations at the IRS didn’t return to normal for a while afterward, as it took several days for returning employees to fully resume their regular duties and reactivate systems, said Karen Hawkins, who ran the IRS Office of Professional Responsibility when the last shutdown happened.
A shutdown lasting only a couple of days would prove less problematic for rulemaking and tax filing, said Ed Karl, vice president of taxation for the American Institute of CPAs. But the specter of shutdown threats resurfacing deeper into tax filing season if Congress can’t agree on a long-range funding plan would cause disorder, he said. Taxpayers have until April 17 to finish their taxes this year.
Even normal conditions at the IRS are anything but smooth these days, Hawkins said.
“Under the best of circumstances, that agency is pulled in 12-plus directions a day in accommodating Congress’ demands for information, the public’s need for guidance, their mission requirements to collect the right amounts of tax and to get into disputes when people disagree with what the right amount of tax is,” she said. “They’ve got an enormous amount of activity in the normal course.”
IRS personnel will do their best to be prepared ahead of the Jan. 29 start of tax filing, said Hawkins, a tax lawyer who said she was offering her personal opinion and not speaking in her role as chair of the American Bar Association’s tax section. Agency employees’ public commitment means they’ll bend over backward to make that starting date happen, she said.
GOP lawmakers on Capitol Hill are hoping to strike a deal that would avert all of this, at least for now, but their solution appears temporary yet again and isn’t assured of passage. The proposed short-term fix would only patch funding needs for another four weeks.
The current funding extension to Jan. 19 is the result of the last short-term remedy from a month ago. Lurching along a month at a time presents its own problems, Mazur said.
“Even if there is no shutdown, it’s incredibly disruptive because you’ve taken people from the finance office and the management office and operations to figure out who has to come in next Monday if we don’t have funding,” Mazur said. “That’s time you never get back.”