The voices of Tax Policy Center's researchers and staff
Corporations, owners of partnerships and other pass-through businesses, and millions of ordinary individual taxpayers are scrambling to understand how the Tax Cuts and Jobs Act (TCJA) affects their tax situations for 2018 and beyond. And the world is full of practitioners ready—for a fee—to give them advice. Faced with a high level of uncertainty and a natural desire to minimize their tax liability, many taxpayers will be tempted to take the most aggressive advice they can find—even if that counsel carries them beyond defensible interpretations of the law.
A nice Wall Street Journal piece (paywall) this week described just a couple of ideas. One--the “crack and pack--” is aimed at allowing business owners to avoid the new law’s limits on its 20 percent deduction of pass-through income. Another--the “half and half –“ would split business income to take advantage of the new 21 percent tax rate on corporations.
Being a chump
There is nothing new about taxpayers crossing the red line in the wake of new and complex tax law. Back the heyday of tax shelters, buying into the most egregious schemes became almost a badge of honor for some. Years ago, a CEO told me, “You were a chump if you didn’t. You could barely show your face at the club.”
But because the TCJA is both complicated and far-reaching, because it was rushed through Congress without careful review of its statutory language, and because its effective date was less than two weeks after enactment, the temptation to push the envelope somehow seems greater this year than in the past.
It may be that the culture has changed as well. During his campaign, candidate Donald Trump bragged about his ability to minimize taxes, though we don’t know what tax positions he took since he continues to refuse to make his returns public. And while recent public opinion surveys have shown most that Americans are proud to pay what they owe, some fraction of the public may justify efforts to reduce their tax liability as a way to defund the “swamp.”
I recently talked with a highly-respected tax lawyer—someone who has served in senior tax policy positions in government and spent many years in private practice counseling large corporations and wealthy individuals. He told me he fully expects to lose clients this year because other practitioners will give more aggressive advice than he will. And some taxpayers will take it.
“I’ll tell them they can go only so far. Another lawyer will tell them they can be more aggressive, and some will drop me and take that advice. Maybe two or three years from now, they’ll find themselves in a dispute and I’d be able to say, “I told you so.” But maybe not.’”
Pushing the envelope
Pushing the envelope may, in fact, make good business sense, especially for those with the resources to challenge the IRS. Due to low audit rates, the Service may never discover what some taxpayers do.
And even if, years from now, regulations block a tax minimization strategy, those who take a chance could come out ahead. The rules could be made prospective, leaving their favorable arrangement in place. Or, the IRS may settle for a fraction of the disputed tax. At the very least, the taxpayer will have had access to the money for years.
Combine this reality with the new law’s real ambiguity and it is easy to see why some taxpayers will be drawn to the most aggressive tax minimization strategies. The results: Americans may have less respect for the tax system and the TCJA may end up costing even more tax revenue than the Joint Committee on Taxation predicted.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.