Tax Outlook for 2016

Tax changes for 2016 will mostly come from the IRS and the states. In 2015, Congress addressed key tax legislation for both 2015 and 2016. The only significant tax item Congress pushed to 2016 was the fate of the Internet Tax Freedom Act (ITFA), set to expire on October 1, 2016. But that item was addressed in early 2016. P.L. 114-125 (2/24/16) made permanent the moratorium on state and local taxes on Internet access fees and multiple and discriminatory taxes on e-commerce.

This article explains why Congress is unlikely to provide any significant federal tax changes this year. Possible changes from the IRS and the states are noted along with a projection for the 115^th Congress that starts in January 2017 along with a new President.

Congress Cleared Its 2016 Tax Calendar 

Laws enacted in 2015 made over 150 changes to our federal tax system. Many of these were administrative changes, effective starting in 2016, to due dates, statute of limitations, and penalties. In addition, Public Law 114-113 (12/18/15) extended the provisions that expired at the end of 2014. All were extended to at least the end of 2016. Others were extended through 2019 and a few were made permanent. [For a helpful explanation of the extenders legislation, see JCX-144-15 (12/17/15) from the Joint Committee on Taxation. For a list of items that remain as temporary provisions as of January 1, 2016, see JCX-1-16 (1/8/16). http://www.jct.gov.]

While there are several provisions expiring at the end of 2016, we know from past extenders bills that Congress can easily wait until the end of 2017 to tell us what the law is as of January 1, 2017! Possible tax items from Congress in 2016 include technical corrections to 2015 legislation and discussion of funding changes for the IRS. In addition, minor tax changes that raise revenue might find their way into legislation dealing with non-tax matters. For example, P.L. 114-125, the Trade Facilitation and Trade Enforcement Act of 2015, not only made the ITFA permanent, but also increased failure to file penalties under IRC §6651 from $135 to $205, effective for returns filed after 2015. Similar types of changes may find their way into the “revenue offsets” part of non-tax legislation this year.

IRS Activity for 2016 

Every year the Treasury Department and IRS publish a “Priority Guidance Plan” listing the over 250 projects on their agenda. Many of these projects stem from past law changes. With the significant amount of law changes made in 2015, most of which are effective starting in 2016, the IRS gained several new priorities. Some of the key topics for which the IRS needs to provide guidance are:

• How small taxpayers can use the research credit against AMT or payroll taxes.
• Guidance on definitions of various terms relevant under the changes to bonus depreciation, such as for specified plants.
• How preparers know if a client has a new taxpayer identification number and is thus ineligible to claim certain credits on an amended return or original, late-filed return.
• How the new preparer due diligence rule of §6695(g) that has only addressed the Earned Income Tax Credit (Form 8867), will also apply to the child credit and American Opportunity Tax Credit.
• The new partnership audit rules effective for returns filed for tax years beginning after 2017, but that might require changes to partnership agreements before then.

The IRS is likely to continue to address ways to reduce identity theft, improve taxpayer services, and manage with reduced funding. In addition, the IRS will continue work on its “Future State Initiative,” perhaps also (hopefully) seeking public input (https://www.irs.gov/uac/Newsroom/IRS-Future-State).

State Activities 

States will continue to press Congress to enact the Marketplace Fairness bill (such as S. 698 (114^th Congress)) to enable states to collect use tax from large non-present (remote) vendors. We are likely to see more states take legislative or administrative action to require certain remote vendors to collect use tax. For example, effective January 1, 2016, Alabama regulations require vendors with substantial economic presence with the state (rather than physical presence) to collect sales tax. One factor indicating economic presence is that the vendor’s sales of tangible personal property to Alabama customers exceeded $250,000 in the prior calendar year (Reg. 810-6-2-.90.03). Similar efforts are underway in other states (such as SB 106 in South Dakota). These bold moves are in response to Justice Kennedy’s statement in a concurring opinion in March 2015 (Direct Marketing Association v Brohl, No. 13-1032) that it was time to revisit the 1992 Quill decision (504 U.S. 298). He stated:

“Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. ”¦ It should be left in place only if a powerful showing can be made that its rationale is still correct.”

Other possible tax legislative activities in the states for 2016 include continuation of past efforts, such as:

• Broadening the sales tax base.
• New deductions, exemptions and credits.
• New accountability measures for tax incentives.
• Tax reform, usually directed at lowering rates and making the state more competitive.

Looking Beyond 2016 

Presidential candidates have offered a variety of tax proposals, usually without details. As the race moves to just two candidates after the summer political conventions, we should ask for more details, whether the proposals follow principles of good tax policy and the likely economic and social impact. The 115^th Congress and next President will have an opportunity to complete long-discussed tax reform to broaden the federal tax base and lower tax rates. Other reforms to consider include better use of technology in tax compliance, simplification, modernization, and international competitiveness.

In conclusion, 2016 will be light in terms of tax changes. Yet, we’ll have lots of talk from elected officials, candidates, tax administrators, and think tanks about problems with our federal and state tax and fiscal systems and possible reforms. It will be a good opportunity for tax professionals to help clients and others understand our current tax systems. A SWOT analysis approach should prove useful – examining the strengths, weaknesses, opportunities and threats. In the meantime, the numerous law changes from 2015 will keep tax practitioners and the IRS busy enough for 2016.