TAS Act Proposes Changes to Tax Administration

The Senate Finance Committee recently released a bipartisan discussion draft of the TAS Act, which would make sweeping changes to tax administration. A section-by-section summary of the bill also was released. Highlights of some of the changes follow.

Simplify the timing of S-corporation elections

Under the TAS Act, newly formed corporations could elect to be treated as S corporations on their first timely filed income tax return. Currently, an S-corporation election must be made separately on Form 2553, “Election by a Small Business Corporation,” on or before the 15th day of the third month of the company’s first tax year. The TAS Act also would permit late requests to revoke an S-corporation election if there is reasonable cause.

Crowe observation

Aligning the S-corporation election with the filing of the tax return could help to reduce late S-corporation elections.

Better coordinate FBAR and FATCA filing

Certain foreign financial accounts are reported on Form 114, “Report of Foreign Bank and Financial Accounts (FBAR)” under rules issued by the Financial Crimes Enforcement Network (FinCEN). Separately, the IRC has different reporting rules for foreign financial accounts reported on Form 8938, “Statement of Specified Foreign Financial Assets,” which is attached to a federal income tax return filed with the IRS. Taxpayers that have foreign financial accounts need to navigate two sets of reporting requirements and potentially file two separate documents with two different federal agencies. The TAS Act would simplify reporting by allowing taxpayers to file their FBAR with their income tax return filed with the IRS. The IRS then would transmit the FBAR to FinCEN.

Simplify individual estimated tax filing dates

The TAS Act proposes to change the quarterly estimated tax payment due dates for individuals to even quarterly intervals: April 15, July 15, Oct. 15, and Jan. 15. Currently, individual estimated tax payments are due April 15, June 15, Sept. 15, and Jan. 15, which can be confusing for taxpayers.

Add a failure to pay penalty safe harbor

Individuals pay tax during the year through withholding and estimated tax, as applicable. The estimated tax penalty does not apply if a percentage of tax paid in the prior year is paid in the current year. There is no similar safe harbor for the failure to pay penalty if an individual doesn’t pay all the tax they owe by the original due date for payment, generally April 15. The TAS Act would add a safe harbor waiving the failure to pay penalty for individuals who pay 125% of their prior year’s tax by the original due date for payment, regardless of whether their filing due date is extended. This safe harbor would not apply to entities, those who haven’t fully paid by the time they file, those who miss the extended filing deadline, or those without a full 12-month prior year return.

Require the IRS to issue guidance for voluntary withholding agreements

Independent contractors are responsible for calculating their expected income and paying their estimated taxes quarterly. The IRC authorizes payers to enter into voluntary withholding agreements with independent contractors, but the IRS has not issued guidance to provide payers and contractors with rules for implementing voluntary withholding. The TAS Act provides that withholding under voluntary agreements is treated as withholding on wages and directs the IRS to issue guidance for voluntary withholding.

Extend the mailbox rule to electronic payments and submissions

For tax purposes, the mailbox rule provides that a tax return or payment that the IRS receives by U.S. mail or a private delivery service is considered filed or paid on time if it is postmarked by the due date, even if the IRS receives the document or payment after the deadline. Additionally, the IRS has an e-file postmark rule. Under that rule, electronically filed returns received by the IRS are treated as filed on the date of transmission. However, if the e-filed return is not accepted by the IRS, the return is treated as filed on the original transmission date if perfected within the applicable period. There is no mailbox rule for electronic payments or electronically submitted documents other than tax returns and tax return extensions. The TAS Act would extend the mailbox rule to all electronic submissions and electronic payments.

Allow the IRS to require more partnerships to e-file

Currently, partnerships are required to e-file returns if they have more than 100 partners or they file at least 10 returns. The TAS Act would allow the IRS to require partnerships with assets or liabilities greater than $10 million, or those with any item of income or loss greater than $10 million, in any of the three preceding taxable years, to e-file returns. This would provide the IRS with the authority to require partnerships that hold significant assets or that have significant losses but few partners and little or no activity to e-file.

Crowe observation

E-filed returns are less burdensome for the IRS to process and facilitate the use of data analytics to identify compliance risks.

Expand the excessive claims penalty to employment taxes

IRC Section 6676 currently imposes a 20% penalty for excessive claims for refund or credit of income taxes except where reasonable cause applies. The TAS Act would expand this penalty to also apply to employment taxes.

Looking ahead

The TAS Act discussion draft was released to seek input from the public. Provisions in the draft have bipartisan support and include recommendations made by the National Taxpayer Advocate. However, given other Congressional priorities and the fact that the TAS Act has been released as a discussion draft only, the path to enactment is uncertain.