March 20, 2018

Kaine & Warner Ask I.R.S. Whether Republican Tax Law Will Cause Thousands Of Virginians To Owe More On Their 2017 Tax Returns

WASHINGTON, D.C. – U.S. Senators Tim Kaine and Mark Warner sent a letter to the Internal Revenue Service (I.R.S.) seeking clarification about whether thousands of Virginians who pre-paid their property taxes ahead of the Republican tax plan going into effect will actually lose that savings they were counting on. In December 2017, Republicans in Congress passed President Trump’s tax reform legislation that put a $10,000 cap on the State and Local Tax (SALT) deduction, which will increase taxes for thousands of Virginia families. In anticipation of the Republican tax law going into effect, many individuals then pre-paid their property taxes to ensure they would be able to get their full deduction. After initially remaining silent on this issue, the I.R.S. later issued guidance, indicating that many prepayments will not be deductible, and Treasury Secretary Mnuchin suggested that these taxpayers may be at risk of audit.

“The I.R.S.’s decision to disallow the deductibility of prepaid real property taxes, without any prior notice that such a limitation existed, has adversely affected thousands of Virginia families.  Many interrupted their holiday plans to pre-pay real property taxes, in a good faith effort to take the deduction while being in full compliance with the Internal Revenue Code.  For example, in Fairfax County, more than 1,700 property owners attempted to pre-pay their property taxes,” the Senators wrote.

Kaine and Warner have long supported bipartisan efforts to reform the tax code, making it fairer and simpler to help Virginia families. But they opposed the Republican tax law because it benefited corporations and those at the top rather than middle-class Virginians, could increase the deficit by over $2 trillion, and added to the complexity of the tax code. Further, they were critical that Senate Republicans and President Trump rushed through their tax plan without enough time to consider what was in it or the impact it would have on Virginians.  Dozens of individuals reached out to the Senators concerned about what this confusion would mean for their families and how they should proceed with filing their 2017 taxes. These Virginians may now be at risk of audit due to the confusion caused by the I.R.S. According to the Government Finance Officers Association, 37 percent of households in Virginia received an average deduction of $11,288 in their taxes from the SALT deduction. 

The full text of the letter appears below:

The Honorable David J. Kautter

Acting Commissioner

Internal Revenue Service

1111 Constitution Avenue NW

Washington, D.C. 20224

Dear Acting Commissioner Kautter:

We are writing to seek clarification on December guidance issued by the Internal Revenue Service (I.R.S.) regarding the deductibility of prepaid 2018 real property taxes. The determination that prepayments will not be deductible does not appear to be based on any prior issued guidance, and it would adversely affect thousands of Virginia families.

As you know, this guidance stated that “a prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.”  However, when the 2017 tax bill became law, many states had jurisdictions that allowed prepayment of unassessed property taxes before January 1, 2018.  For example, the prepayment of property taxes in the Commonwealth is set in accordance with Sec. 58.1 -3920 of the Code of Virginia.

The I.R.S.’s decision to disallow the deductibility of prepaid real property taxes, without any prior notice that such a limitation existed, has adversely affected thousands of Virginia families.  Many interrupted their holiday plans to pre-pay real property taxes, in a good faith effort to take the deduction while being in full compliance with the Internal Revenue Code.  For example, in Fairfax County, more than 1,700 property owners attempted to pre-pay their property taxes.

We were also concerned to hear of Secretary Mnuchin’s remarks made on January 12, 2017, at the Economic Club of Washington, about audits of individuals who have prepaid property taxes. Due to the lack of clear direction and guidance from the IRS, we request that you answer the following questions:

  1. Can the I.R.S. show any prior published guidance issued by the I.R.S. or the Treasury Department that clearly states that prepaid property taxes are not deductible in the year they were paid?
  2. Did the I.R.S. conduct any analysis in reviewing state statutes that allow the prepayment of property taxes before issuing its December guidance?
  3. Does the I.R.S. intend to change its audit procedures in any way, including how it selects taxpayers for audit, which would target taxpayers in states that allowed prepayment of property taxes or target taxpayers that have year-over-year increases in their property taxes paid?
  4. How will the I.R.S. enforce its guidance on taxpayers who reside in areas that accepted pre-payments of unassessed 2018 property taxes in 2017?

If you have any questions, please contact Ron Storhaug (Kaine) at (202) 224-4024 or Jonathan Goldman (Warner) at 202-224-2023. Thank you for your prompt attention to this matter.

Sincerely,

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