Tax Cuts and Jobs Act: Considerable Progress Made Implementing Business Provisions, but IRS Faces Administrative and Compliance Challenges
Released: 2020-02-25T00:00:00

Letter

Background

Tax Cuts and Jobs Act of 2017

Of TCJA’s 119 provisions, 86 relate to business and international tax law, ranging in scope from tax treatment of commuter benefits to significant modifications to international aspects of U.S. income tax. See table 1 for select examples of tax law changes resulting from TCJA.

While Congress amends the tax code routinely, the time constraints and magnitude of changes within TCJA are less common. According to IRS officials, the last time IRS implemented major tax law changes was in 1986. For TCJA, IRS had a relatively short time frame to implement because the law included many time-sensitive provisions that were either retroactively effective, or immediately effective upon the law’s enactment.

IRS Project Management for TCJA

To implement TCJA, IRS established working groups to provide project management oversight, coordinate the implementation of TCJA provisions across IRS, and identify priorities, challenges, and risks of the new tax law changes. For instance, TRIO was established in January 2018 as a short-term centralized authority to prioritize, oversee, and coordinate implementation of TCJA, as shown in figure 1.

TRIO’s oversight model was based on the working groups convened during IRS’s implementation of Patient Protection and Affordable Care Act. Made up of officials with expertise across IRS, including IRS’s business operating divisions (BOD)—the offices responsible for implementation, oversight, and compliance of tax laws—TRIO was established to temporarily oversee TCJA implementation through the 2019 filing season. TRIO’s objectives for the 2019 filing season included ensuring that taxpayers understood their tax obligations and that IRS could process tax returns, payments, and refunds. In March 2019, TRIO dissolved and transitioned oversight and operations to the BODs.

In addition to the working groups that were established to implement TCJA, IRS also relied on its usual practices for implementation of tax law changes, including developing guidance, training employees, and updating technology systems: Determining appropriate guidance for release. IRS interprets the law and develops guidance using a variety of documents and services to communicate its interpretation to help taxpayers understand their tax obligations.

IRS guidance includes Treasury Decisions (the formal name for final or temporary tax regulations), which are considered the legally binding interpretation of the statute and IRS’s official position on federal tax law. Treasury generally has 18 months after tax law changes to issue final regulations for them to be retroactively effective to the date of enactment, though there is an exception to prevent abuse. In some cases, Treasury will issue temporary regulations—to provide immediate guidance—prior to issuing final tax regulations. Other forms of guidance include proposed regulations—a step in the regulation development process—revenue rulings, revenue procedures, and notices, among other documents, to provide additional official guidance to taxpayers.

IRS also provides taxpayers with a range of other information sources, including frequently asked questions, webinars, YouTube videos, and news releases.

Developing guidance. IRS’s Chief Counsel, in coordination with Treasury’s Office of Tax Policy, drafts tax regulations and also works with IRS BODs and the public. Draft tax regulations are circulated throughout IRS and Treasury for review and approval before being published as a proposed tax regulation in the Federal Register. The public is given the opportunity to provide comments, which are analyzed and incorporated as appropriate into another draft of the regulation. The draft tax regulation is again circulated through IRS and Treasury for review and approval, before being published as a final tax regulation in the Federal Register.

In some instances, once the draft proposed and final regulations have gone through the IRS and Treasury approval process, regulations may be subject to review by OIRA. OIRA reviews tax regulations that may create serious inconsistencies or otherwise interfere with another agency’s actions, raise novel legal or policy issues, or have an annual non-revenue effect on the economy of $100 million or more measured against a no-action baseline.

Conducting stakeholder outreach. In addition to the development of regulations, IRS works with the public to gather feedback, educate taxpayers on published guidance, and inform it of upcoming efforts to provide additional guidance on key areas where IRS and stakeholders require additional clarity.

Developing internal policies and procedures. IRS updates its Internal Revenue Manual (IRM)—the official compilation of instructions to staff on the administration and operation of the IRS—with procedures that inform staff of the steps they should take to correctly complete work and administer new tax law changes.

Training employees. IRS trains employees to understand revisions in the tax code and ensure they have the tools necessary to manage key priorities such as using data and analysis to improve customer service and enforcement efforts.

Modifying Information Technology (IT) Systems. IRS’s Information Technology organization updates the application programs of the tax return intake systems to allow IRS to accept and process tax returns. Generally, IRS captures data from electronically filed (e-filed) tax returns through its Modernized e-File application in a format that can be used for compliance and enforcement purposes.

IRS Prioritized TCJA Implementation Activities and Used Collaborative Practices to Develop Guidance, but Has Not Decided Whether to Continue Enhanced Collaboration

Given the magnitude and short timeline for TCJA implementation, IRS reassessed priorities to implement the law. While some IRS officials said they were largely able to balance TCJA implementation with their other work, other officials from Chief Counsel told us they decreased some field services to taxpayers, and scaled back non-TCJA guidance development. Additionally as a result of TCJA, IRS temporarily postponed some planned work, including some IT work and publication of previously planned taxpayer guidance on health savings accounts, the work opportunity tax credit, and other areas.

To meet statutory requirements and best meet taxpayer needs, IRS prioritized 33 TCJA provisions for initial implementation, including 12 business and international provisions as the highest priorities, as shown in table 2. IRS officials said their highest priorities were to implement retroactive provisions because they affected the tax year beginning prior to January 1, 2018—and entirely new provisions. According to IRS planning documentation, in making these decisions, the agency considered the anticipated amount of public scrutiny, as well as the necessary amount of internal collaboration, external stakeholder coordination, and the extent of IT system modifications required to implement.

IRS Attempted to Address Significant Questions in Early Guidance, but Unresolved Questions Created Challenges for Taxpayers

To help taxpayers understand the new tax law and meet their tax obligations, IRS released various types of guidance. Officials told us they aimed to address the most significant questions through early guidance, before answering secondary questions in subsequent guidance. IRS developed comparisons of TCJA with the previous law to help taxpayers understand changes by topic and conducted public information campaigns targeting specific audiences, such as small businesses, to help taxpayers identify the right information and resources to meet their tax obligations.

According to IRS officials, one challenge with taxpayers needing to rely on guidance when guidance has not been finalized is that unresolved questions can create uncertainty and guesswork for some taxpayers. While some tax practitioners we spoke with said the release of shorter and earlier information was helpful to provide insight into initial IRS positions on provisions that required immediate instruction, other tax practitioners said that the absence of complete information meant that taxpayers had to file their taxes without certainty.

For instance, IRS worked to provide early information to taxpayers on the immediately effective repatriation tax. Repatriation tax payments were due in 2018; however, under the law, taxpayers had the option to pay in installments over 8 years. IRS did not have time to release comprehensive guidance in advance. To provide some early information to taxpayers, IRS instead released three notices (in January, February, and April 2018) and a revenue procedure (February 2018) to help taxpayers understand topics such as whether they were subject to the tax and their tax liability.

In May 2019, the Treasury Inspector General for Tax Administration (TIGTA) reported that the short implementation time frame did not leave taxpayers sufficient time to understand the guidance and comply with their resulting tax liability. TIGTA reported that while IRS made a reasonable effort to inform taxpayers of the requirements under the repatriation tax, some taxpayers overpaid their first-year repatriation tax installment without the knowledge that IRS would not be refunding excess remittances of installments. The initial repatriation tax information issued mid-filing season instructed taxpayers to make two separate payments— one for their income tax liability and one for their repatriation tax liability, language that was later clarified. Subsequently, IRS announced that excess payments would be applied to the unpaid portion of the taxpayer’s liability and that IRS was legally precluded from issuing a refund of any excess remittances.

TIGTA reported that for the 2017 tax year, 115 taxpayers filed repatriation tax refund claims—amounting to $2.8 billion—which, according to TIGTA, indicated that these were unintended overpayments. TIGTA recommended that IRS take steps to inform taxpayers when the next payment is due and how their excess payment was applied to their repatriation tax balance. According to TIGTA, IRS agreed to these recommendations and is taking steps to implement them.

Enhanced Collaboration Was Critical for TCJA Implementation, but IRS Has Not Documented These Practices

Because of the magnitude of the changes and the immediate effective dates of many TCJA provisions, Chief Counsel collaborated earlier and more frequently with IRS BODs to implement TCJA. IRS officials said these enhanced collaborative efforts were best practices and critical to timely TCJA guidance development. Although there are some guidelines in the IRM for intra-agency coordination, IRS has not identified instances when this enhanced collaboration would benefit guidance development or taken steps to document these parameters to assure consistency and accountability.

Based on our analysis, we found that IRS officials leveraged several key practices for implementing collaborative mechanisms to support TCJA implementation, including identifying leadership roles and responsibilities, identifying relevant participants, and using resources to facilitate collaboration, which we identified in prior work. For instance, IRS formed TRIO to manage TCJA implementation and centralize accountability and decision-making. Additionally, Chief Counsel’s earlier and more frequent work with the BODs allowed for participants with appropriate skills and expertise to contribute to guidance development and highlight potential enforcement concerns. This collaboration included weekly, and in some instances daily, meetings for participants to provide implementation status updates. Further, IRS developed joint project documents and leveraged collaborative technologies to track and manage TCJA implementation and facilitate sharing across the agency.

IRS officials stated that there were several benefits to this enhanced collaborative approach, including: more efficient and effective development of comprehensive regulations, for instance guidance for the QBI provision; faster decision-making on time-sensitive regulations; earlier identification of tax administration and enforcement concerns; mitigation of potential enforcement challenges, such as narrowing the definition of specified trades and businesses on the QBI deduction; and ability to begin compliance planning earlier.

Our prior work on interagency collaboration mechanisms and the Standards for Internal Control in the Federal Government identify areas for agencies to improve and sustain collaboration. For instance, we identified that frequent communication can help facilitate working across agency boundaries and that articulating agreement in formal documents that are regularly updated and monitored can strengthen commitment to working collaboratively. In addition, federal internal control standards state that agencies should ensure stakeholders from different parts of an organization communicate to help the agency fulfill its mission.

Chief Counsel officials acknowledged the value of this enhanced collaboration but as of December 2019 had not identified or documented criteria for when this collaborative approach would benefit guidance development and help achieve agency goals. Chief Counsel officials said that the guidelines as written provided flexibility in determining when to collaborate early with other offices during TCJA implementation. In addition, officials said that the value of collaboration depends on the scope and complexity of a tax law change and the decision to use earlier and more frequent collaboration would need to consider tradeoffs and other considerations such as other IRS priorities and the effects of pulling employees away from other activities.

However, IRS officials described the enhanced collaboration used throughout TCJA implementation as unprecedented and key to successful implementation, indicating that identifying the situations when this earlier and more frequent collaboration would make sense and updating relevant documentation to reflect this could benefit IRS guidance development. Documenting the parameters and procedures for enhanced collaboration practices would better position IRS to be prepared to use enhanced collaboration during implementation of complex or time- sensitive changes to the tax code. For example, enhanced collaboration may help to identify and mitigate potential administrative effects of regulatory design decisions, potentially helping IRS identify more cost- effective alternatives within the limits of available resources. These potential benefits are also supported by our past work on regulatory design during the rulemaking process. Specifically, we found that it is important for agencies to consider enforcement and compliance issues during regulation development because different design choices have implications for future enforcement and compliance efforts.

Treasury’s Economic Analyses Omit Key Considerations of Distributional Effects of Tax Regulations

While developing regulations to help implement and administer TCJA provisions, Treasury and IRS made discretionary decisions in the regulatory development process that have meaningful effects on taxpayers’ tax liability and government revenue collection that were not included in their analysis. Changes to tax liability have distributional consequences, as taxes transfer money from taxpayers to the government, but do not directly affect the total resources available to the country. These distributional effects are one element that should be recognized during the regulatory development process, along with costs and benefits of the regulations. While we found that, among the provisions we looked at more deeply, Treasury’s analyses did recognize some costs and benefits related to factors such as administrability, compliance costs, and economic distortions, Treasury’s analyses did not generally assess the distributional effects, including effects on tax revenue collection, the regulations had as a result of changes in tax liability.

As part of the regulatory development process, Treasury and IRS must adhere to Executive Order (E. O.) 12866, which establishes standards for regulatory planning and review. E.O. 12866 instructs agencies to select regulatory approaches that maximize net benefits, including economic, distributive, and equity effects, unless a statute requires another regulatory approach. Any regulation that is determined to be significant must be submitted to OIRA for review, along with an analysis of the costs and benefits of that regulation.

However, until 2018, Treasury’s and IRS’s tax regulations were not regularly subjected to analysis and review under E.O. 12866. In many cases, tax regulations were deemed not significant under E.O. 12866, and as a result, Treasury and IRS did not perform regulatory analyses and they were not reviewed by OIRA. Some tax regulations were also exempt from OIRA review, which was otherwise required under E.O. 12866 based on an agreement between OMB and Treasury. However, E.O. 13789, signed in 2017, instructed the Secretary of the Treasury to reconsider the scope of that exemption, and in April 2018, Treasury and OMB signed a Memorandum of Agreement (MOA) subjecting certain tax regulations to OIRA review.

In accordance with the MOA and the requirements in E.O. 12866, for regulations deemed significant, Treasury is responsible for conducting and producing an analysis of the impact of the regulations, including an assessment of costs and benefits. Tax regulations with an anticipated annual non-revenue effect of $100 million or more are deemed economically significant, and are subjected to this additional analysis. Under the MOA, Treasury was allowed a 12-month transition period to obtain reasonably sufficient resources to meet the additional requirements for economically significant regulations. The transition period expired in April 2019, and any new regulations will be subjected to these additional analyses where applicable.

E.O. 12866 and OMB Circular No. A-4, a guide developed by OMB for agencies to perform regulatory analyses required by E.O. 12866, emphasize that agencies should assess the costs and benefits of proposed regulations. In some cases, regulations may transfer money from one group to another, creating no net costs or benefits to society as a whole, but nonetheless affecting those who have been affected by the transfers. When regulations have this effect, they are said to have a distributive impact on society, and both E.O.12866 and OMB Circular A-4 instruct agencies to consider distributive effects.

Because revenues raised through taxation are transfers and are not costs or benefits to society, OMB Circular A-4 instructs agencies to develop a description of the distributional effects of a regulation that is separate from the costs and benefits. Such an analysis should recognize the effects of the regulation across the population and the economy, divided up in various ways, such as income groups, race, sex, industrial sector, or geography.

Treasury’s and IRS’s significant proposed and final rules used to implement TCJA included a section analyzing the impact of the regulations; however, we found these analyses generally overlooked the distributional effects of the regulations arising from changes in tax liability and revenue collection. The illustrative examples below from TCJA regulations highlight the potential effects of Treasury’s and IRS’s regulatory decisions on tax liability and how those were reflected in Treasury’s analysis.

Eligibility for QBI deduction for real estate and insurance brokers. The QBI deduction provides a deduction of up to 20 percent of QBI, but depending on a taxpayer’s taxable income, a specified service trade or business (SSTB) may not be a qualified trade or business and therefore may not produce QBI. The statute defines SSTBs as trades or businesses within a list of broadly-identified fields. Treasury and IRS determined that guidance clarifying the types of trades or businesses that would be considered to be within the listed fields was needed. As one example, the statute specified that “brokerage services” are considered an SSTB, but Treasury and IRS regulations further specified that “brokerage services” was limited to securities brokers, while other brokerage services, including real estate brokers and insurance brokers, were explicitly excluded from the definition of “brokerage services.” The choices Treasury and IRS made when providing additional guidance on SSTBs will significantly affect the tax burden and revenue collected from certain businesses.

In its analysis of its decisions regarding the definitions of SSTBs, Treasury stated that articulating which business activities were or were not considered SSTBs would provide clarity to taxpayers and prevent similarly-situated taxpayers from behaving differently, which could potentially create economic inefficiencies. Treasury did not address the fact that decisions about which business activities would be considered SSTBs would affect eligibility for a 20 percent deduction, and would affect the distribution of resources between certain taxpayers and the federal government.

According to data from IRS’s Statistics of Income on sole proprietorships—one of several business structures that can earn a QBI deduction—categories representing insurance agencies and brokerages, and offices of real estate agents, brokers, property managers, and appraisers recorded more than $35 billion in net income in 2016. The precise effect of not being categorized as an SSTB depends on the specific circumstances of the individual businesses, but given the magnitude of their annual net revenue, excluding real estate and insurance brokers from the definition of SSTB could lower their collective tax burden by billions of dollars annually. This could result in a reduction in federal tax revenues compared to the regulatory alternative of considering these sectors to be SSTBs.

End date for opportunity zones. An investor who invests capital gains in a Qualified Opportunity Fund, and maintains that investment for at least 10 years, is eligible to make an election at the time of sale that would render such gains no longer taxable. TCJA’s statutory language did not specify an end date for investors to make this election, or a point at which taxpayers must dispose of investments in opportunity funds and recognize future capital gains to be taxed. IRS’s October 2018 proposed regulations for opportunity zones stated that investors will have until December 31, 2047, to dispose of investments and make this election. The decision to set an end date of December 31, 2047, was one of four approaches discussed in the proposed regulations. The other options considered were to offer no further guidance on this issue, to specify no end date to elect the gain exclusion, and to allow the election until December 31, 2047, but without disposition of the assets.

In its analysis of this decision, Treasury considered how providing clarity would help taxpayers make more efficient investments in opportunity zones. Treasury also considered how forced dispositions could lead to economic inefficiencies, while a longer time horizon could lead to greater investment, but more administrative costs. Treasury did not, however, assess how the different decisions would influence the ultimate tax liability of investors. The determination of a disposition date can have a potentially large effect on tax liability. For example, if a taxpayer invested $1 million into an opportunity fund in 2019, and that grew at a 7 percent rate, it would be worth approximately $2 million after 10 years, $3.9 million after 20 years, and $6.6 million in 2047. Under Treasury’s and IRS’s regulations, such capital gains—$5.6 million in this example—would be exempted from taxation.

We found that in the course of developing regulatory impact analyses for TCJA regulations, Treasury generally excluded any analysis of distributional effects due to changes in tax revenue collection. In the examples above, Treasury’s decisions would significantly affect tax liability for certain taxpayers, which were not reflected in Treasury’s analyses of the regulations.

Treasury officials did not conduct distributional analyses related to revenue effects because in their view, the MOA instructed them to focus only on non-revenue effects and superseded E.O. 12866. This view is reflected in Treasury’s guidance to staff on how to conduct regulatory analyses. Specifically, Treasury’s internal guidance instructs staff to conduct distributional analyses, describing how benefits, costs, and transfers are distributed among subpopulations. This guidance further states that staff should not include transfers of revenue to the government, and Treasury officials told us that they did not think they should include any analysis of these effects in their regulatory impact analyses.

However, Treasury’s understanding that revenue effects should be excluded from its analyses is inconsistent with the MOA and OIRA’s position. While Section 1 of the MOA between Treasury and OMB excludes revenue effects for the purposes of determining whether or not a regulation is economically significant, and thus subject to OIRA review, that limitation does not appear elsewhere in the MOA, and the MOA does not state that revenue should be excluded from all analysis. OIRA officials told us that that all agencies, including Treasury, are subject to the same requirements of E.O. 12866, and that outside of the MOA, OIRA had no agreements with Treasury that would otherwise modify the requirements.

OIRA officials we spoke with reiterated that all agencies, including Treasury, should generally analyze the distributional impact of their regulations, and OMB’s guidance identifies changes in tax revenue as an example of a transfer that would have a distributional impact. OIRA officials stated that they recognize conducting these analyses was a new procedure for Treasury, and that Treasury officials were still learning how to apply the analytical framework in Circular A-4.

Treasury’s internal guidance for conducting regulatory impact analyses is inconsistent with the standards in E.O. 12866 and OMB Circular A-4 that all agencies are expected to follow. Considering distributional effects related to tax revenue in the analyses would improve transparency surrounding how decisions made by Treasury and IRS affect various groups across the population. Robust analysis ensures that regulatory choices are made after appropriate consideration of the likely consequences, and provides transparency to the public and policymakers. Our prior work emphasizes the importance of transparency in the rulemaking process, and specifically that a regulatory impact analysis consistent with E.O. 12866 and OMB Circular A-4 provides a systematic framework for identifying and assessing the economic tradeoffs associated with alternative regulatory choices.

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. Further, the consequences of Treasury and IRS decisions and the tradeoffs they considered are not transparent to the public without an acknowledgement of the distributional effects of tax revenue changes. A lack of full information may also inhibit OIRA’s ability to effectively review the regulations and limit decision makers’ understanding of the effects of a law.

IRS Data on TCJA Implementation Were Not Consistently Reliable, but Publicly- Available Information Indicates IRS has Made Considerable Progress in Some Areas Reliability of Data on TCJA Implementation Status Could Be Improved

Data-reliability issues in IRS’s documents for tracking implementation of TCJA’s business and international provisions made it challenging to characterize both the scope and status of implementation activities. However, based on IRS data we corroborated with publicly-available information (e.g., published guidance), we determined that IRS has made considerable progress in implementing many of TCJA’s business and international provisions through issuing guidance, updating IT systems, and training IRS staff. Given the magnitude of changes and near immediate effective dates, tax professionals we interviewed generally spoke favorably about IRS’s pace in developing TCJA guidance and the quality of the guidance developed.

We found errors and inconsistencies in IRS’s documentation used to track TCJA implementation. While we did not find errors and inconsistencies in the majority of IRS’s TCJA implementation tasks, we did identify multiple instances of inaccurate recording of the task status, conflicting information in separate tracking documents, and several other miscellaneous errors. Examples include:

Seven TCJA provisions and six updates to the IRM were inaccurately identified as complete in the tracking document for the responsible BODs, potentially delaying work on implementation.

IRS had cancelled IRM updates for five IRM sections for one provision, but tracking documents across multiple BODs did not accurately capture this fact, which could result in a misallocation of staff and resources.

IRS officials could not verify whether all tasks included in TRIO’s Enterprise Integrated Project Plan (EIPP) tracking document had been carried over to the new tracking documents following the dissolution of TRIO, increasing the risk of previously planned tasks mistakenly being left incomplete.

At least 22 unique identifiers used to track tasks across iterations of TRIO’s EIPP tracking document were inconsistent between updates, limiting IRS’s ability to accurately track changes in guidance planning over time.

The lack of consistency and accuracy across IRS’s tracking documentation is not in accordance with Standards for Internal Control in the Federal Government. These standards direct management to use quality information to make informed decisions and evaluate the entity’s performance or efficiency in achieving key objectives and addressing risks.

Changes in IRS’s method of monitoring TCJA implementation status contributed to the data-reliability issues we identified. Early TCJA implementation efforts involved close coordination among multiple internal organizations. When TRIO was responsible for coordinating implementation efforts, it maintained a unified tracking system as part of its coordination management. However, when TRIO was disbanded, BODs and other IRS organizations used several different methods of tracking implementation status. According to IRS officials, in some cases, these new methods were not compared with TRIO’s documentation to ensure all necessary tasks were carried over. Additionally, the implementation tracking tools used by these organizations were not uniform in data included, format, or the frequency with which they were updated. These issues may impede the ability to coordinate internally and to monitor overall implementation status.

IRS officials stated that these inconsistencies did not pose obstacles to implementation, and that the IRS organization with overall responsibility for a given task was accurately tracking implementation status. While IRS officials said the inconsistencies did not impact implementation, developing a process or modifying the existing process to accurately and consistently track the implementation status of provisions could improve IRS’s ability to prioritize resources and coordinate implementation efforts. For example, such tracking could help prevent misunderstandings regarding the implementation status of a provision that could lead management to reallocate resources away from ongoing implementation tasks. Further, it could help ensure IRS’s implementation efforts are efficient, as each BOD would have the same information to help coordinate prioritization efforts.

While TCJA implementation is a one-time effort, IRS officials stated that efforts will extend beyond a decade into the future, as some provisions (such as opportunity zones) may require further guidance as key deadlines are reached. Additionally, IRS has identified the need for further guidance or implementation tasks as implementation has progressed, and the timeline for full implementation may be extended as IRS receives new information or observes changes in taxpayer behavior.

Further, IRS is implementing provisions of a new law reforming aspects of the agency and may face similarly extensive implementation projects in the future. The Taxpayer First Act, signed into law on July 1, 2019, calls for several IRS reforms, including changes to rules related to enforcement as well as modernizing IRS structure and technology, among other things.

Management may be able to identify issues with, or improvements to, the implementation process using quality information on implementation status. By improving the ability to monitor and evaluate implementation progress, IRS will be better equipped to evaluate existing implementation processes. IRS also will be better positioned to effectively implement significant tax law or organizational changes in the future.

IRS Made Considerable Progress by Publishing Approximately Half of Total Guidance for High-Priority Provisions, but Has Significant Work Remaining

IRS has attempted to determine the amount of guidance required for TCJA implementation throughout the implementation process, but the amount of guidance has fluctuated for several reasons. For instance, in July 2018 IRS planned to issue 40 proposed regulations and 35 final regulations by December 2021 to implement the 86 business and international provisions. But by the end of the 2019 fiscal year, IRS planned to issue 53 proposed regulations and 51 final regulations by February 2022. According to IRS officials, they initially expected to issue less guidance than now planned, but as work progressed, they discovered they would need to issue more guidance or issue some guidance through multiple regulations to address taxpayer comments and inquiries. Conversely, in some cases IRS determined that some guidance initially planned was no longer necessary after further consideration.

As of the end of fiscal year 2019, IRS Chief Counsel reported that it had issued 90 pieces of guidance and was developing another 43 to implement the 86 business and international provisions of TCJA. Overall, as of the end of fiscal year 2019, IRS publicly issued approximately half of planned official guidance. As shown in figure 2, for the 12 provisions that IRS identified as high-priority, the agency issued 13 of 19 planned proposed regulations and three of 18 planned final regulations.

IRS missed internal target dates for issuing 10 guidance documents initially targeted for publication by the end of the fiscal year, including three final regulations. According to IRS officials, several factors affected IRS’s ability to issue guidance within planned time frames:

Ambitious project planning. Scheduled completion dates for some tasks were “aspirational” and developed early in the implementation process. Officials stated that they understood from the beginning of implementation that their planned dates might change, and that they did not expect there to be any impact on taxpayers.

Revised regulatory review process. As discussed earlier in this report, beginning in April 2018, OIRA began subjecting more tax regulations to further review as agreed to in the MOA between OMB and Treasury. Based on our analysis, from July 2018 to September 30, 2019, OIRA took an average of about 38 calendar days to review 25 TCJA business and international regulations. See appendix III for a table of all TCJA regulations relating to business and international provisions reviewed by OIRA and associated review times.

Partial lapse in appropriations. According to IRS officials, a partial lapse in appropriations from December 22, 2018, through January 25, 2019, contributed to implementation delays. For example, IRS officials estimated that the issuance of final regulations for the qualified business income deduction and repatriation tax was delayed 1 to 2 weeks. While IRS was generally able to continue working on TCJA implementation tasks, it had to allocate some resources towards unplanned administrative tasks during this period. During a lapse of appropriations, the Antideficiency Act generally restricts agencies from continuing operations funded by annual appropriations. However, Congress passed a separate 2-year appropriation for IRS to perform TCJA implementation activities.

Some IRS personnel that would otherwise have been furloughed were instead able to continue TCJA implementation work through the use of this special appropriation. Additionally, IRS had to develop justifications for the Federal Register to publish TCJA regulations during the lapse in appropriations that it would not have had to do in the absence of a partial lapse in appropriations, which reduced available resources for implementation tasks.

IRS officials also stated that they faced issues working with partners at Treasury and OIRA. Treasury’s Lapse in Appropriations Plan states that Office of Tax Policy staff could work on policies to restore appropriations and developing revenue estimates for pending appropriations negotiations, but does not include work on TCJA. Further, while OIRA continued regulatory review in certain circumstances, approximately 67 percent of OMB’s staff was furloughed.

Of the remaining guidance, IRS plans to issue 13 of the remaining final TCJA regulations related to business or international provisions by December 31, 2019. IRS plans to issue 12 final regulations in 2020, three in 2021, and one in 2022. It has not determined publication dates for 14 final regulations.

To implement TCJA, IRS has provided a substantial amount of written guidance. Between TCJA’s enactment and the end of fiscal year 2019, IRS published 1,383 pages of guidance related to TCJA’s business and international provisions in the Internal Revenue Bulletin, out of a total of 4,064 pages published during that period. By comparison, from 2013 to 2015, IRS published approximately 2,000 pages of guidance annually. IRS also issued more than 115 pieces of business- and international- related products, including news releases, frequently asked questions, virtual webinars, YouTube videos, and targeted publications, such as the example in figure 3.

Tax practitioners we spoke with were generally favorable about IRS’s pace in developing TCJA guidance and the quality of the guidance developed. For example, they generally stated that IRS’s multi-pronged approach to providing both official guidance and other information sources was helpful and allowed practitioners to understand of the likely impacts of tax reform prior to the release of final regulations better. Additionally, Tax Notes—a well-regarded publisher of a collection of professional tax products—named the IRS’s tax reform regulatory team as Person of the Year for 2018 for issuing many TCJA regulations in less than a year.

IRS Prioritized TJCA IT Efforts over Other IT Activities Prior to the 2019 Filing Season, and Plans to Complete Additional Activities before the 2020 Filing Season

According to IRS officials, IRS’s Information Technology organization completed all TCJA tasks that the organization agreed to complete prior to the opening of the 2019 filing season, including updates to electronic forms and the underlying technology IRS uses to receive returns. According to IRS officials, they completed these tasks by prioritizing TCJA work over other tasks and modifying its routine processes for implementing IT changes.

IRS’s Information Technology organization also worked with the BODs to determine which data were most important to have in Extensible Markup Language (XML) format, which is more accessible than data in Portable Document Format (PDF) format. While BOD officials requested programming for TCJA-related requirements that would necessitate that the Information Technology organization enable forms in XML format, IRS’s Information Technology organization ultimately determined that it could not deliver updates for all TCJA affected forms in advance of the 2019 filing season, and forms where IT could not deliver updates in XML format would be implemented in PDF format. For example, according to IRS officials, they prioritized having tax year 2018 XML data for the repatriation tax because this tax was immediately effective for tax year 2017, had a short-lived time frame, and presented challenges for monitoring. BODs requested that all affected forms be converted for the 2020 filing season.

To further facilitate the implementation of TCJA-related IT tasks, IRS officials told us that they designed a framework to streamline communication between the Information Technology organization, subject matter experts, and the IRS BODs. These sessions enabled staff to work through and identify IT requirements in real time, rather than requiring Information Technology organization staff to wait until the BODs submitted a work request to begin work.

As of October 2019, IRS’s Information Technology organization had identified an additional 124 TCJA-related tasks for the 2020 filing season. Officials expected to complete these tasks prior to the filing season. According to IRS documentation and officials, these tasks include updating underlying programming of IT systems to capture tax return information in a way that can be more easily used for compliance purposes, updating critical IT systems, and implementing error resolution codes to correct some mistakes on submitted returns. While the Information Technology organization had not yet approved all work and some TCJA requested work was pending analysis or approval in its work tracking spreadsheet, according to Information Technology organization officials, they are aware of the work and proceeding with implementation for the Modernized e-File application, the system used to file returns electronically.

IRS Began Larger Scale In-Person Training at End of Fiscal Year 2019 and Will Continue Training Efforts in 2020

According to IRS documentation, the agency has begun training staff on several TCJA provisions, including high-priority provisions, and plans to deliver additional training in 2020. According to IRS, workforce training is a critical component of tax law implementation to ensure that the workforce is equipped to identify and address potential audit issues associated with the new tax law provisions as well as to provide the appropriate level of taxpayer service.

According to IRS documentation and officials as of the end of fiscal year 2019, the agency delivered training for business and international TCJA changes in multiple formats, including virtual and in-person training. These sessions have addressed at least 28 of the 69 business and international provisions identified as requiring training. IRS began larger scale in-person training in August 2019 and is developing content for further training in fiscal year 2020. The in-person training primarily addresses high-priority TCJA provisions such as QBI deduction, opportunity zones, the repatriation tax, the limitation on the interest deduction, the tax on global intangible low-taxed income, and the base erosion and anti-abuse tax. IRS officials said that their training efforts have been a major undertaking and that they focused their training efforts on high priority provisions and provisions that affected a large number of taxpayers. Some of these training sessions will culminate in an interactive risk assessment exercise. IRS planned to train about 8,500 employees in these sessions.

IRS plans to continue TCJA training in 2020 as IRS finalizes regulations. According to SB/SE’s implementation tracking documentation, it plans to complete training by the end of 2020. According to LB&I documentation, it plans to hold virtual training in March, May, and June 2020 addressing, among other things, some high priority provisions, including the repatriation tax and base erosion and anti-abuse tax.

Aspects of TCJA Present Compliance Challenges for IRS and Taxpayers

Lack of Final Regulations Create Uncertainty for Taxpayers and Enforcement Challenges for IRS

Treasury did not issue all planned final regulations within the 18 months the agency generally has to issue regulations retroactive to the date of a law’s enactment or before taxpayers were required to file tax returns, which has the potential to be significant for both taxpayers and IRS. Specifically, of the 51 planned final regulations to implement TCJA business and international provisions, Treasury issued five within the 18- month time frame. Treasury also issued one temporary regulation within this time frame. Treasury did not release any final regulations for eight of its 12 priority provisions.

As discussed earlier in this report, taxpayers and other stakeholders appreciated the supplemental information Treasury provided in the absence of final regulations. According to IRS Chief Counsel officials, however, a significant effect of relying on proposed regulations rather than final regulations is uncertainty. In instances where Treasury has yet to issue regulations or any other guidance, taxpayers must rely on the statutory language to understand the law. For example, LB&I officials said that taxpayers may not be able to correctly calculate tax for foreign branch losses because IRS included limited information on related forms as final guidance had not yet been issued.

Similarly, tax practitioners we interviewed cited several provisions in need of additional guidance and identified challenges associated with those provisions that have the potential to affect taxpayers’ ability to comply with the law. Challenges identified by tax practitioners we interviewed included confusion regarding and challenges related to the definitions of “related party” and “interest” in the proposed regulations for the limitation on the deduction for interest and difficulty for individuals and corporations to understand and comply with international changes given the interdependence of several of the international provisions. A September 2019 Treasury Inspector General for Tax Administration (TIGTA) report also raised concerns related to taxpayers’ ability to comply with the international provisions.

Further, proposed regulations are subject to change when Treasury finalizes them, which could create additional burdens for taxpayers. For example, Treasury’s proposed rule—issued in August 2018—for determining whether a foreign corporation’s earnings are subject to the repatriation tax was modified from a 5-percent threshold for application of the special attribution rules relating to partnerships and trusts to a 10- percent threshold under the final regulations—issued in February 2019. Because the repatriation tax was immediately effective, taxpayers needed to pay their tax liability, or make installment payments towards that liability, before IRS was able to finalize its regulations.

Some taxpayers who would have been subject to the tax had the proposed regulations been finalized without change may not be subject to this tax because of changes between the proposed and final regulations, and any payments towards repatriation tax liability would no longer be needed. According to IRS officials, taxpayers who initially made repatriation tax payments but are not subject to the tax under the final regulations will need to file an amended return to receive a refund of their repatriation tax payments.

The lack of finalized guidance can also create challenges for IRS in the agency’s efforts to ensure compliance with the new law. For example, LB&I officials told us they have identified form changes needed related to at least one TCJA provision for which Treasury had yet to issue final regulations, but they need to be mindful when proposing form changes because final regulations could require additional form changes and could require rework. Further, in September 2019, TIGTA reported that the lack of final of final guidance delayed training for LB&I staff, which could hinder LB&I’s ability to respond to emerging compliance risks.

According to IRS Chief Counsel officials, if IRS believes that a rule articulated in proposed regulations under a statutory provision is correct, it may proceed to enforce that interpretation of the statute in the absence of final regulations. However, in the event of litigation, the interpretation set forth in the proposed regulations would not carry the same weight as final regulations.

IRS may also face additional challenges administering the law in instances where the agency has yet to issue proposed regulations. Treasury can issue final regulations that are retroactively effective to the proposed regulations. As of the end of fiscal year 2019, Treasury had not issued 27 planned proposed regulations for business and international provisions. Generally final regulations not issued by the end of calendar year 2019 would not be effective until 2020. According to TIGTA, if IRS makes substantial changes to the proposed regulations, Treasury and IRS may decide not to apply those revisions retroactively to the date of the proposed regulations.

While Treasury was unable to issue all final regulations within the 18- month time frame and before taxpayers needed to begin filing tax returns affected by TCJA changes, IRS took actions to mitigate the potential impact of the lack of final guidance. According to IRS officials, they prioritized which regulations needed to be issued to be retroactively applicable to the date of the law’s enactment. For example, Treasury’s QBI deduction regulations included anti-abuse rules to prevent taxpayers from being able to engage in transactions that will artificially increase their deduction. Treasury’s repatriation tax regulations also included rules preventing taxpayers from being able to take actions to reduce their repatriation tax liability. Further, in one instance, Treasury issued a temporary regulation in a situation where Treasury did not have time to issue proposed and final regulations to prevent abuse of TCJA changes related to a deduction for dividends received from certain foreign corporations.

IRS May Face Challenges Verifying Taxpayer- Reported Information for Some Provisions

We identified 11 business and international provisions where TCJA’s statutory language either required or authorized additional information reporting to administer and enforce them. These include the QBI deduction, repatriation tax, and base erosion and anti-abuse tax. TCJA changes also enabled IRS to address a prior reporting gap related to foreign branch activity that will help with compliance and enforcement efforts, according to LB&I officials.

As shown in the examples below, in some instances, the statute did not include an information reporting framework to enforce provisions, and IRS has taken some steps to mitigate information reporting gaps.

Limitation on interest deduction. Tax practitioners we interviewed told us that they doubted that IRS would be able to verify information related to controlled foreign corporations that are subject to the limitation of business interest expense because there are limitations on information reporting from other countries. According to IRS officials, the statute made substantial changes to this code section and did not correspondingly include a framework for IRS to require information reporting.

IRS is taking mitigation actions to help ensure compliance despite the lack of information reporting framework. For example, according to officials, IRS has the authority to require information from taxpayers and developed a new form to collect information needed to ensure taxpayer compliance with this change. In addition, IRS is planning to make changes to another form to help with compliance efforts.

Opportunity zones. While the statute did not grant IRS specific authority to require information reporting for opportunity zones—a tax expenditure that is intended to spur economic growth in low-income areas—IRS has general authority to require information reporting and plans to require and use information reporting to ensure compliance with this provision. As shown in table 3, IRS plans to use information reported on four forms.

Taxpayers who invest in qualified opportunity funds may qualify for potentially large benefits that are time dependent. When taxpayers initially invest eligible capital gains in qualified opportunity funds, they can defer the tax due on those gains until the earlier of 2026 or when taxpayers dispose, in whole or in part, of (e.g., sell or exchange) those investments. Specifically, taxpayers receive an increase in the basis of their investment in the qualified opportunity fund if they hold the investment at least 5 years and an additional increase in their basis if they hold their investments an additional 2 years.

Taxpayers who hold investments at least 10 years can elect to have their investments valued at the fair market value when they dispose of the investments, and thus would not need to pay taxes on any gains on their initial investments.

IRS plans to use taxpayer-reported information and possibly some fund-reported information on the forms listed above in table 3 to identify taxpayers who have invested in qualified opportunity funds to confirm eligibility for tax benefits for investing in and holding those investments in qualified opportunity funds.

In other instances, third-party information is not available for IRS to corroborate taxpayer-related information. For example, above certain income thresholds only businesses engaged in an eligible trade or business qualify for the QBI deduction and this information is self- reported.

Our 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. For example, according to 2011–2013 IRS data, for income types where there is little or no third-party information reporting (e.g., business income), taxpayers misreported more than half of this income.

Without reliable information reporting, IRS will likely need to conduct labor-intensive audits, such as correspondence or face-to-face audits, to ensure compliance with certain TCJA provisions.

The potential need to conduct labor-intensive audits could create challenges for IRS given recent trends in audit rates and staffing reductions. Specifically, IRS audit rates of large corporations with assets of $10 million or greater declined from 17.7 percent in fiscal year 2011 to 7.9 percent in fiscal year 2017. We previously reported that IRS’s staffing has declined each year since 2011, and has significantly reduced enforcement activities. In September 2019, TIGTA reported LB&I had difficulty hiring personnel with the skills needed for TCJA implementation. This could limit IRS’s ability to conduct correspondence or face-to-face audits to ensure taxpayer compliance, including TCJA provisions.

LB&I and SB/SE officials expressed their confidence in IRS’s ability to audit TCJA provisions sufficiently. SB/SE has developed compliance plans for TCJA provisions identified as having the potential for fraud. SB/SE officials said TCJA work will be prioritized and SB/SE can use some filtering to help identify noncompliance. For example, regarding the QBI deduction, they said IRS may be able to identify returns that need further review based on tax return data. According to LB&I officials, they planned to hire an additional 600 staff, including about 300 revenue agents by the end of fiscal year 2019, and as of the end of the fiscal year, LB&I had selected 430 applicants to hire to help with compliance and enforcement efforts.

Revenue agents are of particular importance to IRS’s enforcement efforts as they conduct audits of tax returns. In March 2019, we reported that IRS has skills gaps within its revenue agent workforce, and the agency was taking action to address those gaps. For example, the agency established communications with revenue agents to increase awareness about detail and developmental opportunities, and was developing a plan for more effectively including revenue agents in management training. We recommended that IRS take actions to reduce skills gaps among revenue agents, including developing schedules for skills assessments and reporting on agency efforts to close those gaps. IRS agreed with our recommendation and, as of December 2019, IRS plans to report on efforts to close skills gaps among revenue agents by December 2021.

Limited Data Accessibility Creates Compliance Challenges for IRS

Because IRS had not yet updated all systems prior to accepting tax year 2018 (filing season 2019) returns, IRS was not able to capture all return information in XML format—a format that allows for greater accessibility and analysis. According to IRS documentation and officials, the agency was unable to obtain Extensible Markup Language (XML) data for 11 provisions that LB&I and SB/SE had requested for tax year 2018, including certain high-priority provisions. Instead, according to IRS officials, the agency captured this information in PDF, which is challenging for officials to use for data analytics and trend analysis. According to IRS officials, examiners will be able to view the PDFs and use that information if the return is selected for audit. Officials also told us they have other ways to select returns for audit in the absence of XML data.

While the agency does not have any agency-wide plans to retroactively convert PDF data to XML data, which could help with compliance analytics and planning, IRS is capable of conducting this work. For example, IRS staff could transcribe, or manually enter, selected information from returns filed on paper into IRS’s IT systems to process these returns. Additionally, Information Technology organization officials told us they could develop a program to convert PDF forms to an XML format, if the effort is deemed a high priority.

Converting data into usable formats for compliance purposes would be consistent with IRS’s strategic plan and Standards for Internal Control in the Federal Government. IRS’s strategic plan includes a strategic goal to advance data access, usability, and analytics to inform decision-making and improve operational outcomes. Specifically, IRS is to use analytics to improve enforcement efforts and maximize learning from tests and data. According to Standards for Internal Control in the Federal Government, agencies should use quality information to achieve their objectives. As part of this, agencies should obtain data and process these data into quality information.

LB&I officials said they are taking steps to convert their PDF data into useable data for compliance purposes. According to LB&I officials, they identified which provisions’ data would be useful to retroactively transcribe and they are coordinating with other parts of IRS to complete the transcription. They identified the data on forms related to certain new TCJA provisions as a higher priority for transcribed data. According to officials, they then coordinated with various IRS offices, including the Office of Research Applied Analytics and Statistics, that have the capability to use optical character recognition technology to convert certain forms for these TCJA sections into a more useable format. Statistics of Income, a division within the Wage and Investment Division, is providing clerical staff to perform data validation on the converted data. According to LB&I officials, LB&I plans to use this information to help develop filters and compliance models and it will enable them to conduct analysis earlier than planned because they had not expected to have access to this data.

Unlike LB&I, SB/SE had not reviewed the costs and benefits of converting PDF forms for their provisions to determine which PDF forms, if any, would be a good use of IRS resources to convert to XML format to help with compliance planning. According to SB/SE officials, they did not know IRS had the capacity to retroactively convert PDF data to XML format and were unaware of LB&I’s efforts to convert select TCJA PDF forms to useable data.

Assessing the costs and benefits of converting PDF data to a more useable format, such as XML format, would be consistent with OMB guidance on using cost-benefit analysis to support agency planning efforts. OMB provides guidance to agencies for conducting economic cost-benefit and cost-effectiveness assessments that promote efficient resource allocation through well-informed decision-making. These assessments should consider different alternatives to meet program objectives along with a discussion of costs and benefits.

For provisions where IRS does not have XML data, IRS may not be able to adequately identify both intentional and unintentional compliance risks and may be missing opportunities to better ensure compliance with and enforce TCJA provisions. For example, we previously reported that without comprehensive transcribed data, examiners cannot immediately access and review all data reported on tax returns, which burdened taxpayers as well as made examiners less efficient in doing their jobs. According to IRS officials, retroactively transcribed data would be helpful to SB/SE for compliance planning and enforcement efforts, especially for at least one TCJA provision. Further, taxpayers may think they are in compliance and may not be alerted to their errors until IRS has data stored in a format that can be analyzed more easily. Similarly, in October 2011 we reported that IRS said that having more tax return information available electronically, such as through transcription, would reduce burdensome examinations for compliant taxpayers, as well as facilitate enforcement efforts, make case resolution faster, and increase compliance revenue.

However, without an analysis of the costs and benefits of retroactively converting PDF data to XML data, SB/SE cannot determine which PDF forms would likely yield benefits that would outweigh the costs of this effort. Management also cannot make an informed decision as to which PDF data would benefit SB/SE if converted to XML format without this information. While IRS may not have complete data on the potential benefits of converting PDF data to XML data, high-level analysis could show whether the potential benefits outweigh the costs. In instances where IRS finds that potential benefits outweigh the costs, SB/SE and IT could provide this information to management to inform its decision as to whether the work is cost effective. Using this information, management could determine if the work should be conducted, and if it should be a high priority for SB/SE and the Information Technology organization.

Conclusions

As of the end of fiscal year 2019, IRS made considerable progress implementing TCJA, however, much work remains, and IRS has publicly issued approximately half of planned official guidance.

Given the magnitude and immediate effective dates for many TCJA provisions, Chief Counsel collaborated earlier and more closely with IRS BODs which enabled the agency to more efficiently and effectively develop guidance that accounts for tax administration and enforcement concerns. Moving forward, IRS can leverage the lessons learned from this enhanced collaboration. By identifying situations when this earlier and more frequent collaboration would benefit IRS’s guidance development process and by updating any relevant policies or procedures to document beneficial collaboration practices, IRS will be better prepared to implement the next set of complex or time-sensitive changes to the tax code.

In developing regulations for TCJA provisions, Treasury 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. The distributional effects of tax liability changes from regulations can be significant; updating Treasury’s internal guidance to include analysis of these effects in the rulemaking process would provide greater transparency to the public, and would better inform decision makers who must determine which regulatory alternative is the best to adopt.

Addressing data reliability issues in IRS’s tracking documentation could better ensure that further TCJA implementation work is performed in an efficient and timely manner and better enables IRS to identify opportunities for improvements to their implementation process. Additionally, this could enable IRS to better complete and evaluate existing TCJA implementation processes, as well as be better equipped to improve those processes for future application.

SB/SE’s ability to analyze tax return data and efficiently plan compliance efforts is impeded by the lack of easily accessible and useable data for certain TCJA changes. Taking steps to obtain these data in instances where the potential benefits outweigh the costs would help the agency identify return filing trends and potential noncompliance to help the agency improve audit selection. It would also help SB/SE fulfill IRS’s goals of improving operations using data analytics and would also help the agency be able to effectively ensure compliance with and enforce TCJA provisions.

Recommendations

We are making a total of five recommendations, including four to IRS and one to Treasury. Specifically: 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)

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)

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)

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)

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)

Agency Comments and Our Evaluation

We provided a draft of this report to the Commissioner of Internal Revenue, the Secretary of the Treasury, and the Director of the Office of Management and Budget for review and comment. In its written comments, which are summarized below and reproduced in appendix IV, IRS disagreed with the four recommendations addressed to that agency.

The Director of Treasury’s Office of Tax Analysis did not comment on the merits of the recommendation directed to Treasury and provided other comments by email, which are summarized below. In addition, IRS, Treasury, OMB also provided technical comments, which we incorporated as appropriate.

IRS disagreed with our recommendation to identify and document parameters and procedures for applying enhanced collaborative approaches to regulation and other guidance development (Recommendation 1). IRS stated it believes that its Internal Revenue Manual provides sufficient guidance and flexibility on when such enhanced collaboration is appropriate and that establishing specific criteria is likely to reduce the flexibility and independent judgement that presently exists. Additionally, IRS said that this type of collaboration is not needed for more routine tax law changes.

We are recommending that IRS document the collaboration procedures that were cited as critical for implementing TCJA for use in specific instances—such as during complex or time-sensitive tax law changes. As discussed in the report and acknowledged in IRS’s letter, this collaboration was particularly helpful for TCJA implementation and had many benefits, such as faster decision-making and identifying enforcement concerns earlier in the guidance development process.

We believe that 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.

For our recommendation that IRS develop a process to accurately and thoroughly capture implementation status of ongoing projects in accordance with federal internal control standards (Recommendation 2), IRS disagreed that a new process is needed and said that inaccurate reporting of implementation status did not harm IRS implementation of any TCJA provision.

As we acknowledge in this report, IRS officials told us implementation was not impeded by data inconsistencies. However, 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. For example, our ability to use these data to inform Congress of TCJA implementation status was impeded because we deemed the data unreliable for this purpose. Our recommendation does not require IRS to develop a new process for capturing and tracking implementation status. If deemed appropriate, IRS could, instead, update or modify existing processes in ways designed to ensure data reliability.

IRS disagreed with our recommendations to identify the costs and benefits of retroactively transcribing certain taxpayer data and then to implement transcription based on this determination (Recommendations 3 and 4). IRS stated that retroactively transcribing data is a resource- intensive, manual process.

We disagree with this assertion. LB&I is using optical character recognition to convert PDF data into a more useable format, which is a semi-automated process. Further, as also stated in this report, IRS IT officials we interviewed told us they had the capability to develop a program that would convert PDF data to a more useable format if IRS management deemed it a priority.

In its response, IRS also states that the benefits of converting data to a more useable format are unknown. We do not expect IRS to conduct a complex and detailed cost-benefit analysis. Rather, as acknowledged in this report, 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 implemented, or the usefulness of past compliance analytics in similar areas) to inform the analysis.

IRS also states that the potential noncompliance costs are unknown until the agency completes audits of TCJA provisions. As we reported, conducting audits is labor-intensive and IRS’s audit rate and enforcement efforts have declined since 2011. Further, senior IRS officials we interviewed stated that a limitation of taxpayer information in the PDF format is that it is not easily analyzed. Therefore, 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.

In an email, the Director of Tax Analysis indicated that Treasury generally did not agree with the report’s findings regarding its economic analyses.

The Director did not specifically comment on the merits of our recommendation that Treasury update its guidance for conducting regulatory impact analyses (Recommendation 5), but stated that the analyses underlying Treasury’s tax regulations have fully complied with the MOA established with OMB, which in Treasury’s view focuses on non- revenue effects.

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.

Amending Treasury’s guidance to ensure that impacts on tax revenue and liability are included would make the guidance consistent with E.O. 12866 and OMB Circular A-4, which underlie the MOA and instruct agencies to analyze the distributional consequences of regulations. Including these effects of tax regulations, as we recommended, is necessary in order to provide greater transparency to the public and better inform decision makers, who must determine which regulatory alternative is the best to adopt.

We are sending copies to the appropriate congressional committees. We are also sending copies of the report to the Commissioner of Internal Revenue, the Secretary of the Treasury, the Director of the Office of Management and Budget, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-9110 or lucasjudyj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

This report (1) examines the Internal Revenue Service’s (IRS) processes that it has in place to provide guidance to taxpayers on Public Law 115- 97, commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA) business and international provisions; (2) assesses the economic analyses Department of the Treasury (Treasury) conducted as part of the regulatory development process; (3) evaluates IRS monitoring of implementation of these provisions and describes implementation status; and (4) examines any challenges that could affect IRS’s ability to effectively administer these provisions. We defined business and international provisions as provisions assigned to IRS’s Large Business & International (LB&I) Division or Small Business/Self-Employed (SB/SE) Division.

To examine IRS’s processes to provide guidance to taxpayers, we analyzed IRS documentation, such as prioritization records, guidance development records, and actual regulations and other guidance documents (e.g., notices and news releases) and interviewed IRS officials. Specifically, we reviewed IRS’s documentation of prioritization of TCJA provisions and interviewed IRS officials in the Tax Reform Implementation Office (TRIO) and the Office of Chief Counsel (Chief Counsel) to examine the criteria IRS used to prioritize TCJA provisions for implementation. We also reviewed IRS documentation on internal coordination and interviewed IRS TRIO and Chief Counsel officials to examine IRS’s strategy for and process of guidance development and IRS’s plan to provide taxpayers with timely information. We used criteria from Standards for Internal Control in the Federal Government and our key practices for collaboration to determine the extent to which IRS’s process for providing guidance to taxpayers was consistent with these standards and best practices.

To assess the economic analyses Treasury conducted as part of the regulatory development process, we analyzed IRS, Treasury Office of Tax Policy (OTP), and Office of Management and Budget (OMB) documentation detailing the regulatory development and decision-making processes. We also interviewed officials from IRS TRIO, Chief Counsel, OTP, and OMB Office of Information and Regulatory Affairs (OIRA). Specifically, to identify the factors Treasury and IRS considered when analyzing trade-offs presented by different regulatory options to decide which regulatory options to select, we analyzed underlying regulatory development documentation and interviewed relevant officials. For example, we examined issues lists, internal memorandums, emails discussing regulatory alternatives and their tradeoffs, and early drafts regulations with internal comments.

We also analyzed TCJA published regulations and interviewed OIRA and Treasury OTP officials to determine the extent to which Treasury OTP and IRS included discussions of regulatory alternatives and cost-benefit and economic analyses of these alternatives in the published regulations. We used criteria from OMB regulatory guidance for executive branch agencies to examine Treasury’s development and analyses of regulatory alternatives. This guidance includes the Memorandum of Agreement (MOA) between Treasury and OMB prescribing OMB review of tax regulations under Executive Order 12866; Executive Order 12866, Regulatory Planning and Review; and OMB Circular A-4, Regulatory Analyses, to determine the extent to which Treasury’s analyses met OMB guidance for developing regulations.

To describe the implementation status of business and international TCJA provisions, we analyzed IRS project management documentation, such as IRS’s Enterprise Integrated Project Plan (EIPP) for TCJA implementation and publicly issued guidance and met with IRS officials. Specifically, we analyzed EIPP to determine which tasks were guidance or training related based on description, and developed keywords to limit our dataset to only relevant tasks. We interviewed IRS TRIO officials to ensure we accurately interpreted the description and status of the identified implementation tasks. We monitored for progress on guidance tasks by regularly reviewing IRS’s tax reform website and the Federal Register, as well as SB/SE and LB&I’s implementation trackers and Chief Counsel’s guidance planning documentation. We reviewed Chief Counsel, LB&I, and SB/SE documentation (e.g., implementation trackers) and met with those officials to understand their internal tracking mechanisms for TCJA tasks and implementation status. To monitor training tasks, we used the EIPP to establish which provisions would require training and reviewed training documentation (e.g., training schedules and materials) from LB&I and SBSE. To describe and monitor information technology (IT) implementation status, we analyzed IRS’s Information Technology organization’s TCJA implementation documentation and met with IRS Information Technology organization officials. We reviewed IRS’s IRM website to determine whether IRS had updated its IRM sections as planned in its EIPP and other planning documents.

While we identified potential data reliability issues with the EIPP, LB&I’s implementation tracking documentation, and SB/SE’s implementation tracking documentation (including inaccurate recording of the completion status of multiple categories of tasks, inconsistent use of unique task identifiers across tracking documentation, and potential errors introduced in the transition from the EIPP to the subsequent tracking documentation), we determined that the data were sufficiently reliable for the purpose of reporting the status of guidance releases, training, and overall TCJA IT tasks. We did not find the data sufficiently reliable to report on the status of IRM updates. We were also unable to report on the number of IT tasks specific to business and international provisions as a subset of overall TCJA IT implementation because IRS’s IT organization did not track work by TCJA section.

To assess the reliability of the EIPP, we met with TRIO officials to understand how the EIPP was created and updated, as well as verified information from outside sources, including the Federal Register and IRS’s tax reform website. After identifying potential discrepancies in LB&I’s and SB/SE’s TCJA tracking documentation, we followed up with SB/SE and LB&I to determine whether the status of our selected tasks was accurate and complete. SB/SE and LB&I provided responses and statements indicating that the status of some tasks was not accurately recorded. For example, we identified an instance where LB&I’s tracking documentation had a provision’s final regulations listed as issued in July 2019, when IRS had yet to issue the guidance. Based on these discrepancies and inconsistencies, we used criteria from the Standards for Internal Control in the Federal Government to evaluate IRS’s project management activities.

To identify the impact of OIRA’s effect on the status of TCJA implementation, we analyzed information available on the agency’s public website to determine the length of time of OIRA review of regulations. We compared the length of time of OIRA’s review to agreed-upon time frames for OIRA review of tax regulations in the Memorandum of Agreement, Review of Tax Regulations under Executive Order 12866 (MOA) between Treasury and OMB to determine the extent to which OIRA met the MOA’s 10- and 45-day time frames.

To examine challenges that could affect IRS’s ability to effectively administer these provisions, we analyzed TCJA and IRS documentation. Further, we interviewed TRIO, LB&I, SB/SE, IT, Chief Counsel officials, and outside tax practitioners. We analyzed TCJA’s statutory language to identify instances where the law included compliance safeguards, such as anti-abuse provisions or information reporting requirements. We reviewed IRS documentation (e.g., SB/SE compliance plans) and interviewed IRS officials to understand IRS’s views on the opportunities, challenges, and risks to administering and ensuring compliance with the new law. We also interviewed and subsequently analyzed statements from seven randomly selected tax practitioners who had submitted public comments on IRS’s proposed regulations for the qualified business income (QBI) deduction, opportunity zones, and the repatriation tax (see below for discussion of provisions we further analyzed) to identify outside perspectives on challenges for IRS administration and enforcement.

We downloaded the public comments on these proposed regulations on April 9, 2019. For the QBI deduction, the open comment period was from August 16, 2018, to October 1, 2018, and as of the time we downloaded comments, there were 340 comments. For the repatriation tax, the open comment period was from August 9, 2019, to October 9, 2019, and as of the time we downloaded comments, there were 188 comments. For opportunity zones, the open comment period was from October 29, 2018, to February 8, 2019, and as of the time we downloaded comments, there were 185 comments.

We also interviewed tax practitioners from two of the four “Big Four” tax firms and one outside tax practitioner to which we were referred to describe some outside opinions’ on challenges for IRS administration and enforcement. The views expressed in these interviews are not necessarily representative of those of other tax practitioners, or tax practitioners as a whole, and the views of the tax practitioners we interviewed are being used as illustrative examples throughout our report. We examined these challenges and risks and subsequently followed up with IRS to examine the extent to which IRS was aware of them and planning mitigating actions to address them. We used IRS’s strategic plan and to Standards for Internal Control in the Federal Government as criteria for identifying any gaps between mitigation efforts and overall agency-wide goals and priorities.

As part of our work, we further analyzed three provisions—the QBI deduction, opportunity zones, and the repatriation tax—to gain specific insights into the decision-making process for prioritizing and developing guidance and regulations and factors that may affect IRS’ ability to effectively administer these provisions. We selected these three provisions for closer examination based on a number of factors, including (1) IRS designating them higher priority for implementation and identification, and (2) IRS, the National Taxpayer Advocate, and other knowledgeable stakeholders identifying them as especially challenging or complex to implement, administer, or enforce. Further, these three selections ensured we were able to examine at least one provision impacting domestic taxpayers managed by SB/SE division and at least one provision impacting foreign, or multinational, taxpayers managed by LB&I.

We conducted this performance audit from August 2018 to February 2020 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Implementation Status of Tax Cuts and Jobs Act of 2017 (TCJA) Business and International Provisions

Appendix III: Office of Management and Budget Review of Tax Cuts and Jobs Act of 2017

We found that, as of September 30, 2019, on average, the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) completed its review of 25 Tax Cuts and Jobs Act of 2017 (TCJA) regulations in about 38 calendar days, as shown in tables 5 and 6. While according to the Memorandum of Agreement between OMB and the Department of Treasury, OIRA has 45 calendar days to review tax regulations, OIRA agreed to consider an expedited review of 10 business days for TCJA regulations. As of September 30, 2019, OIRA agreed to review three regulations in an expedited fashion and OIRA completed two of these reviews in 10 business days and the third in 12 business days.

Appendix IV: Comments from the Internal Revenue Service

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Brian James (Assistant Director), Dawn Bidne (Analyst-in-Charge), Michael Bechetti, Justin Bolivar, Tara Carter, Jacqueline Chapin, Nina Crocker, Robert Gebhart, Thomas Gilbert, Travis Hill, Naomi Joswiak, Mark Kehoe, Shelbe Klebs, Daniel Mahoney, Regina Morrison, Benjamin Moser, Sabine Paul, Bradley Roach, Erin Saunders-Rath, Jerome Sandau, Andrew J. Stephens, Rachel Stoiko, Jennifer Stratton, Peter Verchinski, and Sarah Wilson made key contributions to this report.

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