Clients and friends asked me all of 2018 how the changes to the tax code were going to affect our work. “Does this mean you’re going to see more or fewer clients?” “Does this mean the IRS will have more resources for collections?”

So, here are three thoughts about what the tax code changes from December 2017 will mean for those of us defending clients in collections and exam:

There will be a bunch more people with small-to-medium tax debts who have never had them before. The changes to deductions for mortgage interest and state/property taxes are going to be the big culprit here. Self-employed people who relied on those deductions to mitigate their tax bill will be particularly stuck. Those folks counted on those deductions to keep their annual bill within the range of something they can throw on a credit card. Think professionals and self-employed people making $100,000-$200,000 per year. Also, the changes to the withholding calculators are going to leave a bunch of people surprised to find that they have under withheld for the year. Think about people in dual-income households where stacked incomes produce a balance because neither was withholding enough to account for the other? That problem is definitely worse now.

IRS does not have anywhere near enough resources to deal with the questions and problems that people are going to have.  The IRS hold times in the fall were already well over an hour. That is going to get much, much worse as people try to deal with entirely new forms (no 1040EZ any more!) and new balances. Add to that the shutdown is making it so much less appealing to work in the government, retirements are going to be even more rampant this year at the IRS.

Liens filings will go up. This is the one that obviously affects us the most since so many of our clients come to us from the direct mail piece we send after the lien is filed. What I predict is that the taxpayer and their preparer finish the return, realizing that they owe too much to pay off at once. The preparer, like so many who don’t do resolution work regularly, can’t get through to IRS on the phone, so throws an Installment Agreement request with the return. If the payment is too low, the lien will follow, and I’m going to get a lot of calls about how “the tax code changes really screwed me up and my CPA set up a payment plan, and now I have a lien….”.

This will go unnoticed by most people. The same people who ask me every day “Oh, is the government still shut down?”. But to a larger-than-ever pocket of first-timers, this is going to be a very rude awakening to how these tax cuts in 2017 really hurt a lot of regular people, and how tax policy isn’t something you pass and implement in a matter of weeks. Even holding the changes off for one year could have avoided a lot of pain.

I think it might turn out to be pretty painful….

UPDATE: IRS Confirms Tax Change Withholding Problems

Wow, that was strange. I posted yesterday that the tax code changes from last year are about to produce a bunch of new debts for people who hadn’t faced them before. Then, late yesterday, the IRS basically announced exactly that.

This announcement prompts stammering for several reasons:

1. Despite the headline, the IRS isn’t “waiving” withholding and estimated tax penalties. They’re reducing them. That is, in the past if you hit 90% of your liability through withholding or estimated taxes, no penalty. This year, they won’t penalize you if you get to 85%. Unless they already know that this little shift will save at least half the people who have a new problem… it’s a really shoddy maneuver. Between the use of “waiver” in the headline and the paltry shift in penalty policy, it’s a galling p.r. maneuver.
2. They act like the Service actually tried to warn people this would happen, talking about their “extensive outreach and education campaign” pointing people to the “paycheck checkup” Raise your hand if you saw a single news article warning about this? Now, part of the blame for the whole situation belongs with Congress and the President who dropped these changes on everyone, including the IRS, with no warning. This announcement proves that passing the tax law and implementing a year later would have been a good idea, so the “extensive campaign” could have been more effective at warning people.
3. Reducing the penalty isn’t going to cut it. There will be people with balances due, and provisions should be made to facilitate installment agreements, to provide increased resources to deal with the flood of new balances, and to re-consider policies on lien filings. Otherwise, this public relations mess is going to grow into the biggest tax cut backfire in history, depressing the economy, home sales, and further eroding basic compliance.