Rough days at the IRS

With help from Aaron Lorenzo

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— The snafus with direct payments are getting a lot of attention, but that’s also far from the only issue weighing down the IRS during the coronavirus pandemic.

— How did the changes to loss limit rules for pass-through companies become perhaps the most controversial tax provision in the phase three coronavirus package?

— Which states’ budgets are really under the gun because of the coronavirus? Looking at you, Kentucky and Pennsylvania.

ALRIGHT: FRIDAY IS HERE, week five of WFH is almost in the books and we are ready to hit the weekend with the vigor of these nuns on the basketball court.

No, not him. Apparently, there was another one: Today marks 145 years since a British army officer named Neville Chamberlain reportedly invented the billiards game called snooker while stationed in India. (Chamberlain was apparently no relation to the 20th century British prime minister of the same name.)

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NOT HAVING A GOOD TIME: Certainly, some of those $1,200 checks are getting misrouted. But consider this: The coronavirus has hampered the IRS to such an extent that the agency is storing its mail in trailers, as Pro Tax’s Aaron Lorenzo reported.

That’s just one of several eyebrow-raising ways that the IRS is dealing with its new normal, an April in which the agency’s energy is focused on getting payments into Americans’ bank accounts and it faces abnormal hurdles in its usual mission of tax collecting.

All things considered, the IRS has done a decent job in handling tax returns, even as processing and taxpayer assistance centers have been shut down and the agency is no longer working on returns sent in on paper. The issues dealing with matters on paper are likely to cause problems in other areas, like audits, and there are already concerns from former IRS brass that the slowdown with tax returns this year could be so all-encompassing it spills over into the 2021 filing season.

But first things first: The IRS is getting money — at least $1,200, but in some cases much more — to tens of millions of people this week, so it’s understandable that situations where things go awry are getting a lot of attention.

The Washington Post laid out a number of problems that people are facing, like not receiving the $500 payments for dependents 17 or younger. But the IRS is also facing a more structural complication stemming from the usual filing season procedures employed by TurboTax, H&R Block and others.

In a nutshell, the problem is that the IRS had temporary bank accounts linked to those online preparers on file for millions of taxpayers that got an advance on their refunds or had the companies take their fee out of a refund. “This works well in normal times, not so much in virus times,” said Mark Mazur of the Urban-Brookings Tax Policy Center, who was a senior Treasury official in the Obama administration.

Instead of sending a payment to the accounts held by the tax prep companies, the IRS probably held off and is urging people to use the new web tool to log their actual direct deposit information. But to confuse matters even more, a TurboTax spokesperson told Pro Tax that the company has seen customers who get an upfront refund receive their new stimulus payment without any issue, and that TurboTax sends in a user’s bank information along with their return. H&R Block said much the same thing, with a spokesperson asserting the IRS had caused the confusion by not using the bank account information the company had given them. “We share our clients’ frustration,” the spokesperson said.

More on those checks: Our DataPoint team is out with a new graphic outlining industries in which workers are most likely to get a full or partial payment (food prep and health care support) and which are least likely (architecture and engineering).

KNOW ABOUT IT NOW: The loss limit changes for pass-throughs didn’t get the same amount of attention in the run-up to phase three as even the related provision to bring back net operating loss carrybacks for corporations.

But with headline numbers like these — a cost of $170 billion over a decade, with more than 80 percent of the benefits going to those making seven figures a year — the provision was bound not to stay under the radar for too long.

Democrats are now pressing to get rid of the change, which also rolls back (at least temporarily) one of the pay-fors in the 2017 tax law, H.R. 1 (115), arguing that the new tax break only helps people and businesses that are in good shape to weather the current storm. For their part, Republicans say the provision is doing its part to help businesses stay afloat and keep people on the payroll, as Pro Tax’s Brian Faler reports.

The debate doesn’t look like it will end anytime soon, either: One former congressional aide predicted that there will be a push to enact even tougher restrictions when the current break expires at year’s end.

One last point: Advocates for pass-throughs have said they’re puzzled by the $170 billion score that the Joint Committee on Taxation gave the provision, which dwarfs the cost of the change on NOL carrybacks. (JCT scored the corporate NOL change as more of a timing shift, with the provision losing close to $90 billion in the first two years and then gaining more than $60 billion back over the next eight years.)

Still, there are some good reasons why the pass-through side would cost more, including that those businesses earn more than corporations in the U.S. these days. Another key issue is that it’s not totally a direct comparison, because both the 2017 tax law and the CARES Act offered different rules on losses for pass-throughs and corporations.

LIKE REALLY BAD SHAPE: It’s basically tough budget times for all 50 states, with plunging revenues expected throughout the country. But a new report from MultiState Associates found that Kentucky and Pennsylvania were most likely to face immediate problems, based on the status of their rainy day funds, their unemployment rates and the fact that neither has finalized a budget for fiscal 2020-21 yet. Arkansas, Hawaii, Illinois, Louisiana, New Jersey, and New York are in better shape, but still at great risk of short-term problems. On the flip side, the group found that states like Alaska, North Dakota and Wyoming are the least at risk for now, because of how reliant they are on severance taxes from drilling oil and natural gas, even as their long-term problems remain.

IS THAT IT? Japanese companies aren’t exactly impressed with the coronavirus relief being offered so far by Prime Minister Shinzo Abe’s government. A Reuters Corporate Survey found three in four firms in Japan found the $1 trillion worth of support from the government at least somewhat insufficient. One issue might be that the $1 trillion price tag might have been overstated. But companies also seem to have been interested in more aggressive tax relief, like cutting the sales tax (after it was increased just last fall) and an “unconditional” deferral of taxes, as one business manager put it.

TRUMP TO CITY…? Mayor Bill de Blasio of New York asked President Donald Trump for a bailout from the federal government, after the coronavirus wreaked havoc on the city’s bottom line. The mayor spoke to Trump and Vice President Mike Pence on Wednesday, as our Erin Durkin reported — and said Thursday that the city should get a boost from the feds if airlines and other industries will be. “How about bailing out the epicenter of this crisis, where people have been suffering?” de Blasio said at a news conference where he also noted the city had already lost $7.4 billion in revenues. “That is what our federal government should do.”

The small business rescue fund put into place by Congress is out of money.

CBO: Phase three cost $1.8 trillion.

Most people are using their direct payments for necessities like rent and groceries.

The NCAA offers a yearly Gerald R. Ford Award to a top advocate for college sports.

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