The IRS Doesn’t Know Who Qualifies for the GOP’s Tax Cuts

JM Ashby
Written by JM Ashby

After hedge fund managers identified a loophole that would allow them to obtain lower tax rates by creating subsidiary corporations, Treasury Secretary Steve Mnuchin said the government would close the loophole without citing any legal basis for doing so.

It remains to be seen if Mnuchin's instructions to hedge funds will hold up to legal scrutiny, but the field of potential loophole exploiters may be about to expand dramatically.

The problem is the GOP's tax cut bill was written so hastily they left some of their own tax cuts open to dramatically different interpretations and, if the IRS doesn't tell certain parties that they can obtain lower rates for pass-through income, hedge funds will only be the first of many to go looking for loopholes.

Or as Bloomberg put it, no one knows who qualifies for the new tax cuts.

Congressional Republicans created a juicy new tax break for business owners when they rewrote the U.S. tax code late last year. Three months later, hundreds of thousands of U.S. employers still don’t know if they qualify. [...]

Some high-earning proprietors -- such as construction contractors, massage therapists, executive headhunters and restaurateurs -- could be excluded if the IRS writes the rules too narrowly. The agency plans on issuing guidelines by June. But that deadline has been questioned by a former top Treasury official given the vagueness of the legislation and complexity of the task.

The 20 percent deduction is aimed at pass-through businesses, whose income is reported on their owners’ personal tax returns. Congress tried to bar wealthy owners of service businesses from getting the break -- leaving out many doctors, lawyers and hedge fund managers unless they can find a loophole.

By trying to exclude those service businesses, though, Congress ended up asking the IRS to settle some rather absurd philosophical and semantic conundrums. What, for example, is an entertainer? Are humans the only species who get “health care,” or do animals count too? How do you tell a broker from a salesperson, or an interior designer from an interior architect?

Because Congress did not answer any of these questions, my assumption is that virtually every profession mentioned will be able to obtain lower rates if they they can muster the right paperwork.

It may go without saying, but if an even larger share of Americans are allowed to cut their rates to 20 percent, that could dramatically increase the cost of the GOP's tax cuts.

If it wasn't obvious, I find this all to be darkly humorous. I mean, if you can't laugh about it, you may lose your mind.

I would be remiss not to add that Republicans in Congress have been waging a rhetorical war on the IRS since President Obama's first term and they've pushed through cuts to the agency's budget on multiple occasions since then. Republicans are now asking the weakened agency to do their jobs for them.

  • muselet

    Part of me had nearly decided the Rs did this on purpose, to cause chaos and confusion, and blow up funding for the federal government once and for all, but then I realized the Rs couldn’t organize an orgy in a brothel. The tax deform law is a toxic mix of equal parts incompetence and stupidity, with just a soupçon of arrogance to give it the unmistakable pong of modern Republicanism.

    What a disaster.


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