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CARES Act Means Crunch Time for IRS and Treasury

Posted on Apr. 2, 2020

The IRS and Treasury were close to wrapping up major guidance on the Tax Cuts and Jobs Act, and then the pandemic hit. Now, regulators and tax practitioners are starting to feel the squeeze all over again.

“For those of you who thought we were seeing the light at the end of the tunnel with respect to the implementation of the Tax Cuts and Jobs Act . . . well, we’re in for a bumpy ride,” said Lisa M. Zarlenga of Steptoe & Johnson LLP.

Already the IRS has issued a slew of both official and unofficial new guidance on the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) in the form of notices, FAQs, press releases, and webpages, Zarlenga noted in an April 1 webinar hosted by Tax Analysts. The IRS will likely continue to do so at a fast clip to deal with pressing concerns about the current filing season and the recovery rebates for individuals, she said.

Fortunately, the guidance writers at the IRS and Treasury shouldn’t have their efforts hampered too badly by the shift to remote work, as opposed to others like IRS audit staff, who will likely experience choke points in the coming weeks and months, according to Zarlenga.

“The guidance machine — the lawyers and stuff — they can work remotely pretty well,” Zarlenga said. “I think we'll keep seeing them crank out this guidance on an almost daily basis, at least for the next few weeks.”

Into the Weeds

Once the dust settles on the initial guidance push, the IRS and Treasury will still have their hands full tackling a wide range of technical issues with the CARES Act.

The IRS and Treasury will need to direct their attention to tricky matters about how the new law’s tax provisions interact with the rest of the tax code, Zarlenga said. For example, the provisions on net operating loss carrybacks and the interest deduction limitation will affect many aspects of the tax code that rely on the computation of taxable income as either a starting point or a limit, she said.

Zarlenga said she’s also received many questions about how the CARES Act’s tax provisions interact with its nontax provisions, particularly the new loan programs. “So while you thought maybe you are a tax lawyer, you're having to get up to speed a little bit on these [Small Business Administration] loan provisions and the other loan provisions that are in the legislation,” she added.

One thing the IRS and Treasury ought to address, Zarlenga said, is a timing issue between the new SBA loan program, which provides loans to small businesses that can be forgiven if employees are kept on their payroll, and the employer payroll tax deferral provision, which allows employers to postpone paying their share of payroll taxes for the rest of 2020, before paying it back in installments in 2021 and 2022.

The CARES Act stipulates that employers cannot benefit from both the employer payroll tax deferral and the SBA loan forgiveness of indebtedness, but that prohibition doesn’t apply until a taxpayer has received loan forgiveness, Zarlenga noted. “So that means you can go and apply for the loan and even anticipate that you’re going to get forgiveness, but the disallowance doesn’t kick in until the amounts are actually forgiven,” she said.

An employer that is unsure whether it will receive that loan forgiveness might miss an employment tax payment deadline, but then the government may try to claw back those amounts or impose penalties and interest for the missed payment, according to Zarlenga.

Most of the provisions in the CARES Act that are mutually exclusive are done that way to prevent double dipping, Zarlenga continued, but that’s arguably not the case here, because the SBA loan forgiveness excludes payroll taxes. “Nonetheless, the statute does disallow that deferral,” so guidance on how those provisions interact in practice will be needed, she said.

Round 4?

Lawmakers have already given the IRS and Treasury plenty of new coronavirus-relief tax provisions to sift through, but more may be on the way. However, what that next relief package will look like — if it ever materializes — remains to be seen.

“What we don’t want is a lot of partisan politicking where everybody’s getting in their favorite provision, trying to ride this next bill,” Tax Analysts’ chief economist, Martin A. Sullivan, said on the webinar. Instead, lawmakers should closely monitor the new programs they’ve just created to see which ones work and which ones don’t, he said.

“We may need to adjust these programs as we move forward,” Sullivan said.

Alan D. Viard of the American Enterprise Institute likewise said it would be a mistake to develop big, new government programs from scratch all over again. “We don’t need another set of complex provisions,” he added.

Zarlenga predicted that a future relief package would be made up of more targeted provisions aimed at evening out the spread of program benefits. Many industries could have trouble meeting the requirements for various relief programs, and while some of them are turning to Treasury for direct relief, others will need help from lawmakers, she said.

That in turn will likely result in smaller relief targeted to specific industries or particular code provisions, according to Zarlenga.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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