David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week, filing season check-in. As the U.S. tax filing season is now underway, we thought it'd be a good time to take a look at how things are going in the first round of tax filings under the Tax Cuts and Jobs Act. Here to guide us through what we know, and what we're still waiting to learn, is Tax Notes Today Senior Reporter William Hoffman. Bill, welcome to the podcast.
William Hoffman: Good afternoon, Dave.
David Stewart: I guess where we should start is, this filing season got underway under unusual circumstances. The federal government was closed. Has the shutdown had effects on this filing season?
William Hoffman: The shutdown definitely had effects on the preparations that the IRS was able to make the 35 days prior to the opening of the filing season. And you'll recall that those 35 days bumped right up to the last few days before the filing season opened. Those are important days for the IRS to finish programming its computers, testing its systems with various partners like payroll service companies, and otherwise prepare for the questions that are going to be coming from taxpayers through the various toll-free phone lines and practitioner lines. So losing that 35 days was going to put the IRS behind. We can say, based on the latest statistics, that we have, that the IRS seems to have closed the gap between the returns that it has received and the returns that it has processed. At the beginning of the filing season that gap was close to double digits, between the returns received and the ones processed. Meaning that there was a large gap of the returns that were being processed by the IRS that were getting out of queue, that were not stacking up in backlog like they would have been had the shutdown continued. We've now closed that double-digit gap down to 4.6 percent compared with the last filing season from the same period last year, which is a considerable improvement all the way around. We're still below the number of returns received at this time last year, although, we are catching up in that area. And there's no reason to believe that by the end of the filing season we shouldn't have roughly the same number of returns received: roughly 150 million individual returns that we had in previous years.
David Stewart: Alright, so as we're recording this, we're four weeks into the data that we've received. And a lot of the discussion about this filing season has been about the size of refunds taxpayers are getting. What are we seeing on that?
William Hoffman: Well, after a rather shocking first couple of weeks of the IRS's filing season statistics that showed that the number of refunds issued by the IRS, the total amount issued, and the average refund issued were double digits down in the case of the number and the amount. And the average refund was still 8 percent behind what it was the same time last year. And the numbers stayed down for those first two weeks of filing season statistics, which everybody was cautioning us those are early numbers, not complete, don't draw conclusions. And we did see an increase in the last couple of weeks’ statistics, where the average refund amount has actually exceeded slightly the amount that was issued at that same period last year. The difference being that, in this case, we're dealing with uncertainties about this filing season that we didn't have before. For example, last year, and I believe it was the year before as well, we had the PATH Act restriction on issuing refunds that were claiming the earned income and child tax credit until February 15th to give the IRS time for information matching and to prevent improper payments. Now, that had a very visible effect on last filing season and the filing season before as people adjusted. We're facing different situations here, with the big changes in the tax code that came from the Tax Cuts and Jobs Act. The standard deduction, personal exemptions, all the different regulations. And at this point, it's really unclear which direction refunds are heading for the filing season as a whole. At this time, they seem to have recovered to the same levels, as I said, about this time last year. But there are still filing season landmarks to come, such as the issuance of refunds tends to peak right around Tax Day, April 15th. And then it peters off towards the last of the reporting periods in late May. We have no idea how that's going to wind up. And the predictions are ranging everywhere from the GAO, Government Accountability Office, predicting that some 30 million people are going to be under-withheld, which would mean tax bills or smaller refunds for most of those people. And then you have financial services institutions, like J.P. Morgan, which is claiming that their analysis is that refunds are going to come in about 28 percent higher than in previous years. So you got people all over the board as to how this is gonna turn out, and we can only just wait for the numbers.
David Stewart: So, is some of this ambiguity on which direction refunds may be going in, is that due to the withholding tables that were released partway through the last tax year?
William Hoffman: The withholding tables are somewhat of a mystery. The Treasury Department recalculated them shortly after the law was passed, with the explicit instruction, which they said was taken from the law, that they wanted to balance people's withholding through their employers or quarterly estimated tax payments against their actual tax liability. The result of this would be that people would get slightly larger paychecks throughout the year, but at the end of the year, when filing season began, the result would be also smaller, smaller refunds, and quite possibly a tax bill if the withholding had not been calculated precisely. There was also some confusion over the IRS's new withholding calculator. Treasury and IRS were consistent and very persistent in encouraging taxpayers to go and get their withholding checked at the calculator. However, my reporting and my interviewing with numerous tax practitioners across the country was that the withholding calculator by itself was notoriously unreliable, difficult to use. The taxpayer advocate, Nina Olson, said last year during an interview that she spent two hours trying to get her withholding adjusted correctly through the withholding calculator online. So, what it all adds up to is, yes, there's a lot of questions about the accuracy of the withholding calculator, questions that are almost certainly only going to be answered over the course of this filing season. There's also, the GAO pointed out last summer, that there were considerable questions about the methodology that Treasury used to calculate those withholding tables. The GAO also said that they didn't find anything wrong, necessarily, with the calculations, but they said the methodology was opaque. To my knowledge, Treasury has done nothing to clear that up. So the long and the short of it is that we will not know whether the withholding tables were reasonably accurate, or even what effect they had, until probably well after this filing season is over.
David Stewart: As I mentioned, we're now part of the way through the year, and we're expecting more data to come out as we approach April 15th and beyond. Is there a sense of when we might have a clearer picture of how this filing season is going to go? How much more data we're going to need before we have an idea of whether some of the projections about how big refunds were gonna be versus how many taxpayers are expected to owe money?
William Hoffman: Probably we are not going to have a good picture of that until actually after the filing season is over and the final statistics are issued. The final statistics won't be issued until October. But the main ones for filing season will be out near the end of May, and that will give us the clearest picture, I think, of what the results have been. I think the other factor that really is missing is the political factor. We've seen already how many people — both in Congress and in the general public, the professional community, and now Treasury's catching up, as well — how many people are concerned that this is not going the way that it was expected. That refunds are not only going to be short, but they are going to be nonexistent for many people who are expecting them. There are many anecdotal stories about this. And I think that the turning point, if there is going to be one in this filing season, is when those anecdotal, individual complaints turn into some sort of a mass movement. And by that I'm not talking about Occupy Wall Street or something. I'm talking about people calling their congressman or -woman and saying, we need to get this straightened out. Why was I expecting to get a bigger refund, because of x, y, and z, and instead I'm looking at a tax bill. We know there are an uncounted number of people out there. When they begin to exercise their political dissatisfaction with this result is when we'll know how the filing season truly turned out.
David Stewart: Now, the Tax Foundation and Chairman Grassley, the Treasury Department, have all urged people to stop focusing so much on the size of refunds, and instead on the total tax liability. Why is there so much focus on the size of refunds?
William Hoffman: Well, there's a lot of focus on the size of refunds because that is the most visible touch that the IRS has with the average taxpayer in any given year. About 80 percent of taxpayers get refunds, and they count on getting them every year, either simply because they've gotten them before, and they've come to expect them or because in many cases, especially among lower-income taxpayers, they need that money to buy a new couch, or to put a downpayment on a new car, something else that they or their family needs. Senator Grassley sent out, actually a couple of announcements, over the last couple weeks, saying that there was too much focus on the size of refunds, and not enough focus on the tax liability that people are paying. And, insofar as that argument goes, he's correct. People are focusing on what they're getting back as a result of having been over-withheld by their employer on behalf of the IRS in order to pay their estimated tax liability. I think a good deal of the confusion stems from the fact that politically this was sold as a tax cut that was also, according to some political figures who were quoted in our own pages last year, was not going to only result in a tax cut, but in larger refunds for some taxpayers. And taxpayers don't think about taxes until tax time. And they do hear politicians' promises about big-ticket items like this one. So I think that there was a certain amount of confusion. I also don't think that most taxpayers necessarily understand, in the language that tax people use it, what is the relationship between their tax liability and their withholding, and then their eventual refund. But when you explain it without using jargon, that the withholding is meant to help prepare to pay the taxes that you owe throughout the year. That way you don't have to cut a big check at the end of the year. Sometimes, the IRS and your employer withhold too much. That means you get a refund. Everyone understands that. The problem is it's not being explained to them that way, and it wasn't explained to them in the run up to this tax season, in the sense of, adjust your withholding, or you're going to get a smaller refund. Instead, for the most part, the media blitz that was put out by the IRS, to a certain extent by Treasury, was, adjust your withholding, period. It wasn't explained in a way that most people understood as being a crucial decision as to whether or not they were going to get either a lower tax liability throughout the year, and thus a nominally bigger paycheck, and thus maybe a smaller refund, or what that balance could be that ordinarily people would be able to make. And I think that a lot of the problem here has stemmed from that confusion and the inability of the IRS to communicate directly to the taxpayer in language the taxpayer understands.
David Stewart: Well, we'll definitely have to have you back when we have more data to parse through. Bill, thank you for being here.
William Hoffman: Thank you.
David Stewart: And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?
Jasper Smith: In Tax Notes, Paul Crispino discusses the increasing scrutiny of multinational corporate related-party debt. And Libin Zhang explores potential benefits of taxpayers’ structural simplification.
In State Tax Notes, David Bertoni and David Swetnam-Burland examine the implications of Wayfair for state false claims act lawsuits. We'll also begin a periodic publication of the SALT Scoreboard, a collaboration with Eversheds Sutherland summarizing significant taxpayer wins and losses. This installment provides insights on Louisiana's refund procedure, and a spotlight on New Jersey cases.
And in Tax Notes International, Daisy Dai discusses China's individual income tax framework and its problems in theory and practice. While Alicja Majdanska and Yuchen Wu describe how to design an evaluation assessing the outcomes of the OECD's International Compliance Assurance Program, meant to promote efficient use of resources by tax administrators and taxpayers.
David Stewart: You can read all that and a lot more in the March 11th editions of Tax Notes, State Tax Notes, and Tax Notes International. That's it for this week. You can follow me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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