Staffing shortfalls and intricate new policies are complicating efforts at the Treasury Department and IRS to meet President Donald Trump’s tight deadlines for churning out guidance on his multitrillion-dollar tax bill.
Just weeks after Trump signed the legislation into law, taxpayers are clamoring for more information from an Internal Revenue Service hit hard by cuts driven by Elon Musk’s Department of Government Efficiency task force. The agency’s staff shrunk some 25% from January through May.
“It is a perfect storm: complex changes in the tax code, a reduced workforce at the IRS and an increased demand for guidance,” said Jennifer Acuna, a former Senate Finance Committee tax counsel, now national tax principal at KPMG LLP. “With this reduction in workforce it is just unclear how that is going to impact every aspect of the rollout.”
The Treasury’s Office of Tax Policy led by Ken Kies has been insulated from cutbacks, a decision that will help at least on the front end. Yet taxpayers are likely to experience long waits on phone calls and other delays when they have questions about actually complying with the new policies.
Here’s a look at some of the thorniest issues:
A worker checks the bill at a restaurant in New York
Tips and overtime
PwC managing director Mark Prater said the top priority for the IRS will be the president’s campaign pledges of tax cuts on tips, overtime, and for older people and making sure they go smoothly.
“You’re talking about a lot of taxpayers affected by those,” Prater said.
Government officials will have to sort out whether employers adjust their withholding for tipped and overtime employees or if the employees — for whom different situations will warrant different withholdings — should retain records and file for a refund at the end of the year.
Both employers and workers will have to report overtime pay, adding a new wrinkle for those filers.
“There’s a reporting structure in place for tips right now, but there really isn’t for overtime,” said Andrew Lautz, director of tax policy for the Bipartisan Policy Center.
For tips, the issue will be defining who is a tipped worker, said Pete Sepp, president of the National Taxpayers Union.
The IRS has a published list of occupations that “customarily” receive tips and there could be jockeying over whether any new occupations should join the list to qualify for the tax break.
Manufacturing
The bill creates a new tax break allowing businesses to deduct the cost of building new factories, and now it’s up to the Treasury and the IRS to define what types of structures qualify.
“There’s probably going to be a lot of lobbying of the agency to be as expansive as possible,” said Ryan Abraham, a principal at Ernst & Young LLP and part of the firm’s Washington Council.
The provision, estimated to cost $141 billion over 10 years, allows businesses to deduct the cost of constructing a manufacturing plant immediately. Previously, it was spread out over 39 years.
Sepp, of the National Taxpayers Union, said rules regarding renovated property could prove especially tricky.
“If you convert a warehouse to a manufacturing plant, what percentage can you claim?” he asked. For businesses there will be a challenge to figure out whether and how to file amended returns to claim expanded depreciation backdating now two years.
Energy credits
The Treasury and IRS must soon detail how it will wind down Biden administration energy tax incentives by complying with a July 7 executive order requiring strict enforcement of the new restrictions within 45 days.
The political compromise over wind and solar credits created a complex series of deadlines for phasing out the tax credit. In general, projects must be put into service by the end of 2027 to qualify for credits but there’s an exemption for projects that begin construction by next July. The terms involved need to be defined by the Treasury.
“What does it mean to begin construction, is clearing a field enough?” Sepp said.
At the same time, there’s not a lot of existing Treasury and IRS guidance to implement the tougher restrictions on supply chains — particularly those crossing adversarial countries.
“These are pretty complicated new rules that Congress has just created,” EY’s Abraham said. “What kind of guidance can we really expect on such a short turnaround?”
International provisions
The IRS, Sepp said, is still trying to figure out how to implement a corporate alternative minimum tax imposed under the Biden administration and now must navigate how that interacts with provisions redefining how profits on foreign earnings are taxed for companies.
Money transfer services are also eager for guidance on a new tax on remittances.
KPMG’s Acuna said new international provisions will be especially difficult given they also have to interact with Group of Seven “Pillar 2” tax rules for global companies.
“Multinational business structures are by definition complex,” she said.
Newborn savings
Lautz of the Bipartisan Policy Center said there’s “a lot of buzz” in the tax policy community and financial services sector about the tax-advantaged “Trump Accounts” for newborns established by the law.
“You are setting up investment accounts for millions upon millions of newborns,” he said. “A lot of rules need to be written around this one.”
The program allows parents to contribute as much as $5,000 a year to the investment account that the child can withdraw from after turning 18. The Treasury Department will seed each account with $1,000 for babies born between January of this year through 2028.
In particular, tax professionals are on the lookout for what types of investments will be allowed in the account, as well as how distributions are handled from a tax standpoint when a child turns 18.
“Candidly, I have heard different things from different experts,” Lautz said.
