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Democrats Challenge IRS's SALT Rules For Property Owners

by Mike Godfrey, Tax-News.com, Washington

07 March 2018


Democrat members of the Ways and Means Committee have sent a letter to Internal Revenue Service (IRS) Acting Commissioner David Kautter questioning why the agency decided to restrict the prepayment of 2017 property taxes that are not included in the Tax Cuts and Jobs Act of 2017 (TCJA).

The TCJA introduced in December 2017 restricted itemized deductions for state and local income and property taxes (SALT) to USD10,000, unfavorably impacting taxpayers with large home loans and/or those living in states with high property taxes. The change resulted in a rush to pre-pay property taxes in 2017 before the changes came into effect.

In a notice issued on December 27, 2017 however, the IRS warned that prepayment still may not be eligible to access an unfettered deduction.

"In general, whether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018," said the agency. "A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017. State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed."

The Democrats' recent letter to Kautter, sent on March 5, 2018, and signed by 11 members of the Ways and Means Committee, requested an explanation for why the IRS decided to impose these restrictions. The letter also raised concerns regarding reports that Treasury Secretary Steven Mnuchin had threatened to enforce the restrictions by auditing taxpayers who prepaid their property taxes, targeting individuals who live in Democrat-leaning states.

"There is no reason to believe that Congress made a mistake in omitting property tax prepayments, and there was certainly no basis for the IRS to substitute its own policy judgments that departs from the act of Congress, especially when the consequence of the IRS's determination may have cost taxpayers millions of dollars," said the letter. "We view this as a clear case of bureaucratic overreach, and now, as a result, many of our constituents are losing a valuable deduction – and consequently part of their hard-earned income."

The members also noted many taxpayers' confusion after the Republican tax bill's was quickly passed at the end of 2017, and pointed out that the IRS's decision to wait until December 27, 2017, to issue guidance on the prepayment issue may have added to uncertainty about what actions taxpayers were able to take.

"Now, after this confusing and disorganized process, the Treasury Secretary is indicating that the IRS leadership will pursue aggressive enforcement against these taxpayers," said the letter. "We are surprised and dismayed at this expression of IRS priorities, and we are angry to read of this naked political payback against taxpayers in blue states."

The letter requested Kautter to explain in detail IRS plans for real-estate audits, and to clarify what statutory language or evidence the IRS used as authorization to disallow the itemized deduction of 2018 property tax prepayments made in 2017. It also requested that he provide information on how many taxpayers have claimed itemized deductions for property tax prepayments, which counties/states they are from, and the dollar value of these deductions.

The members requested a response by March 16, 2018.

TAGS: individuals | tax | property tax | law | real-estate | audit | Internal Revenue Service (IRS) | enforcement | United States | Tax

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