Legislative Lowdown
Tax Package Update—Senate Likely to Punt Consideration to Following Week: The Senate returned to Capitol Hill on Monday, and while consideration of the Tax Relief for American Families and Workers Act (H.R. 7024) was included on Senate Majority Leader Chuck Schumer’s (D-NY) April 5 Dear Colleague letter, the Senate’s agenda this week is already at capacity. Priorities for Senate consideration include the impeachment trial of Homeland Security Secretary Alejandro Mayorkas, which the Senate majority will likely table after House managers deliver the articles of impeachment, as well as the reauthorization of the Foreign Intelligence Surveillance Act. Senate Republicans are seeking modifications to the tax bill, with industry and family groups continuing outreach campaigns over the recess urging action on the package. Schumer will likely move to proceed to the tax package during this work period, although the timing is uncertain, which will add further pressure for Senate Republicans to make a decision on the bill.
House-Passed FSGG Appropriations Bill Houses IRS Rescission: On March 22, the House passed a “minibus” spending bill containing the last six remaining fiscal year 2024 appropriations bills: State-Foreign Operations, Defense, Homeland Security, Labor-HHS, Legislative Branch and Financial Services-General Government (FSGG). The FSGG bill would provide $12.3 billion for the Internal Revenue Service (IRS) for its annual operations, maintaining the FY23 funding level for the agency, but $1.8 billion less than what the president requested in in his annual budget proposal. The amounts allocated for Taxpayer Services ($2.8 billion), Enforcement ($5.4 billion) and Operations Support ($4.1 billion) remain unchanged from FY23 levels. Notably, the bill does not include any funds for IRS Business Systems Modernization and contains language designed to protect small businesses and households with incomes below $400,000 from increased audits. The FSGG bill also includes the previously agreed-to $20.2 billion rescission from IRS funds allocated in the Inflation Reduction Act (Pub. L. 117-169).
Thursday Ways and Means Hearing to Spotlight Possible TCJA Policy Extensions: On April 11, the House Ways and Means Committee will hold a hearing on the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97), ahead of the expiration of multiple tax provisions in 2025. Among the topics likely to be discussed during the hearing are the TCJA’s individual tax provisions, including the lower federal tax rates, the increased standard deduction and the expanded child tax credit. The TCJA also established a cap on the maximum allowable state and local tax (SALT) deduction and increased the exemption phaseout threshold for the individual alternative minimum tax. Witnesses may also discuss business tax provisions of interest, including the Section 199A 20% pass-through deduction and its role of making the tax rate for pass-through business income more equivalent to the corporate tax rate. Additionally, members on the committee are likely to stress the business tax provisions and child tax credit expansion proposals contained in the Tax Relief for American Families and Workers Act (discussed above) and urge Senate action.
Republican Senators Criticize Oil and Gas Tax Policies in Green Book: Led by Sens. Kevin Cramer (R-ND) and John Barrasso (R-WY), 24 members of the Senate Republican Conference sent a letter to Treasury Secretary Janet Yellen on March 21, criticizing the department for proposing tax policies in the Treasury Department’s General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals (also known as the “Green Book”) that would levy “more than $110 billion in targeted tax increases on oil, gas, and coal production.” The letter asserts that the Biden administration is impeding progress on strengthening U.S. long-term energy security by proposing tax increases on the oil and gas industry. Specifically, the senators identified the proposed repeal of full expensing of intangible drilling costs and percentage depletion of mineral-based assets as major issues within the Green Book’s tax proposals, which they say would eliminate tax parity between the fossil-fuel industries and alternative-energy industries regarding what the industries are allowed to recover with respect to production costs. An accompanying press release warns that these proposals, if implemented, would “undermine domestic energy producers, suffocate economic growth, and increase foreign competitor’s domestic and global market share.” The Treasury Department has countered these claims in the Green Book, stating that current policies give preference to the oil and gas industries, and that such “market distortion” has led to lower investment in the clean-energy sector.
Senate Democrats Urge Treasury Department and IRS to Adopt Stricter Prevailing Wage and Apprenticeship Guidance: Led by Sen. Bob Casey (D-PA), 28 members of the Senate Democratic Caucus wrote a letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel on March 21, urging the agencies to adopt stricter rules when the regulations are finalized to implement the prevailing wage and apprenticeship requirements added to the range of energy tax credits in the Inflation Reduction Act (IRA). The senators wrote that credit for complying with the prevailing wage and apprenticeship requirements “is the most important labor provision in the IRA,” and is critical to implement efficiently for the IRA’s credits to reach their full potential.
The letter urges the Treasury Department to adopt several recommendations when it finalizes guidance on prevailing wage and apprenticeship requirements expected later this year. The senators’ recommendations include treating project labor agreements as evidence of compliance with the IRA’s prevailing wage and apprenticeship requirements, establishing a front-end compliance monitoring system, and strengthening the good-faith-effort exception to the apprenticeship requirements. The letter encourages the Treasury Department to adopt these rules in order to “empower workers, raise wages, and set our workers up for success for years to come.”
Tax Worldview
OECD Misses Deadline for Amount A Convention Text: The Organisation for Economic Co-Operation and Development (OECD) missed its March 31 deadline to reach an agreement on the final convention text for Amount A, a critical facet of the Pillar One global tax agreement. Amount A would affect companies with revenues above 20 billion euros (approximately $21 billion) and profit margins in excess of 10%, with some exceptions.
A range of issues in the Pillar One negotiations remain unresolved, including whether withholding taxes should be taken to account in calculating a given company’s tax liability. The U.S. negotiators have also established “red lines” concerning a number of issues in order for the United States to sign a final agreement, including treatment of Puerto Rico as a U.S. jurisdiction under the treaty, and requiring that Amount B also be finalized. Treasury Deputy Assistant Secretary for International Affairs Scott Levine has urged the OECD to finalize the Pillar One agreement by June.
For the treaty to come into effect once finalized, at least 30 countries comprising 60% of targeted global companies must agree to the deal, giving the United States, with the majority of in-scope companies, an effective veto over whether the treaty will enter into force if the Senate were to ratify such a treaty.
1111 Constitution Avenue
IRS, Treasury Department Hold Public Hearing on Hydrogen Production Tax Credit: From March 25 to March 27, the Treasury Department and Internal Revenue Service (IRS) held an extended public hearing on the Section 45V Clean Hydrogen Credit enacted as part of the Inflation Reduction Act. Dozens of industry stakeholders argued at the hearing that the proposed hydrogen tax credit, if finalized, would impede the nascent hydrogen industry, urging that the final regulations adopt more flexible rules. Witnesses added that in its current state, few companies would qualify for the tax credit. In contrast, environmental groups expressed their support for the strict rules, contending that they are needed to ensure the hydrogen produced will not result in more emissions. Neither the Treasury Department nor IRS officials overseeing the hearing indicated when the final rules governing 45V will be published.
State Financial Officers Call for Termination of Direct File Program: On March 25, 21 Republican state financial officers wrote a letter to Treasury Secretary Janet Yellen, Deputy Treasury Secretary Wally Adeyemo and IRS Commissioner Daniel Werfel, urging the Internal Revenue Service (IRS) to shut down the Direct File pilot program, claiming the costs and challenges of its administration to taxpayers and state treasurers outweigh its benefits. They claim that, since the Direct File platform currently only allows taxpayers to file federal tax returns, taxpayers may be “unaware that they must separately file state returns [and] will not receive anticipated state refunds this spring.” They also state that this potential lower state filing rate would hurt states that are not able to collect tax revenue, and Direct File’s perceived lack of customer service options would frustrate taxpayers and disadvantage lower-income filers. The letter also alleges that the program’s administration is unnecessary, given the number of free tax-filing options made available by the tax preparation industry, the Volunteer Income Tax Assistance (VITA) program and nonprofit organizations.
Harris Talwar, a spokesperson at the Treasury Department, responded to the letter calling its claims misleading, saying that the system “ensures taxpayers get their full refund by showing them the numbers and explaining the credits they should receive.”
Treasury Department Expands Scope of Energy Community Bonus Credit: On March 22, the Treasury Department released guidance expanding the energy community bonus credit, which can increase the Sections 45 and 45Y production tax credits by up to 10% and the Sections 48 and 48E investment tax credits by up to 10 percentage points. The energy community bonus credit was designed to incentivize developers to build in communities with brownfield sites, those affected by coal mine closures and communities historically reliant on oil and natural gas operations. Specifically, the new guidance expands the onshore locations that an offshore wind developers can claim as part of a qualifying community for the bonus credit to include a project’s operations and maintenance control systems, which are often located in nearby ports. The expansion of the guidance comes after offshore wind developers raised concerns about their ability to qualify for the bonus credit despite plans to build ports in former coal communities. The new guidance also adds two new North American Industry Classification System (NAICS) codes for oil and gas pipeline construction and natural gas distribution to the list used to determine whether an area qualifies as a current or recent energy community. Following the release of the expanded guidance, Senate Energy and Natural Resources Chair Joe Manchin (D-WV) said the Energy Community Bonus Credit “was not intended to make an even sweeter deal for offshore wind, which by its very nature cannot be located in a traditional energy community. Not only does this action drive the cost of the IRA up, it spits in the face of true energy communities that need the investment and jobs.”
IRS Provides Additional Guidance on Low-Income Communities Bonus Credit: On March 29, the Internal Revenue Service (IRS) issued Rev. Proc. 2024-19, which provides guidance to stakeholders seeking to apply for an allocation of the environmental justice solar and wind capacity limitation, a facet of the low-income communities bonus credit program. This program, established under Section 48(e), which was adopted as part of the Inflation Reduction Act (IRA), allows for clean-energy infrastructure projects built in low-income and tribal communities to qualify for a credit allocation, which are determined on a competitive basis. The procedural guidance notes that the IRS will initially allocate up to 600 megawatts (MW) to qualify facilities in low-income communities, 200 MW for tribal lands, 200 MW to federally subsidized residential buildings, and 800 MW to facilities where at least 50% of the financial benefits of the electricity produced go to households with incomes below 200% of the poverty line or below 80% of area median gross income. The Treasury Department and the IRS are expected to announce dates for 2024 applications for the four categories of credit allocations later this year. As part of the announcement, Deputy Treasury Secretary Wally Adeyemo said the implementation of the low-income communities bonus credit in 2023 “saw sky-high demand for solar and wind power investments in underserved communities, and we expect that momentum to continue this year.”
At a Glance
IRS Closes ERTC Voluntary Disclosure Program, Leaves Open the Possibility of Resumption: March 22 marked the deadline for entities to submit applications for the Internal Revenue Service’s (IRS) program to voluntarily disclose erroneous disbursements of the Employee Retention Tax Credit (ERTC). The program yielded promising results—with a March 15 announcement noting that the agency had collected $225 million from over 500 taxpayers, and projections that the agency still had several hundred more applications left to process. As a result, an IRS official noted during a reporter call on March 22, the IRS could potentially reopen the program.
Treasury Department, IRS Proposed Guidance Targets CRAT Transactions: On March 25, The Treasury Department and Internal Revenue Service (IRS) released a notice of proposed rulemaking that would classify certain charitable remainder annuity trust (CRAT) transactions and similar transactions as “listed transactions,” requiring such transactions to be reported to the IRS. A CRAT is an arrangement in which a donor contributes assets to a charitable trust with income paid to a designated beneficiary for a period of time and the remainder paid to the charity thereafter. The proposed rules would only apply to certain types of CRAT structures considered to be abusive. Participants who fail to adhere to the proposed rules would be subject to significant penalties for failure to disclose. Comments on the proposed regulations must be received by May 24, and a public hearing has been scheduled for July 11.
IRS Announces Investigations of $8.9 Billion of COVID-19-Related Fraud Cases: On March 28, the Internal Revenue Service (IRS) announced that the agency’s criminal investigation (CI) division had opened investigations of a range of COVID-19 pandemic-related fraud involving provisions of the CARES Act (Pub. L. 116-136). Since the law’s inception, CI has investigated 1,644 tax and money laundering cases totaling $8.9 billion, noting that more than half of these cases were opened in the last year, partly as a result of enforcement funding the IRS received in the Inflation Reduction Act. The IRS’s release also noted that these investigations have led to 795 indictments, 373 federal prison sentences and a 98.5% conviction rate in prosecuted COVID-19 fraud cases. In the announcement, IRS Commissioner Daniel Werfel said, “[a] healthy budget for the IRS … and the work of CI provides a critical safety net to protect the nation against fraud.”
IRS Releases Updated Guidance on Home Energy Efficiency Tax Rebates: On April 5, the Internal Revenue Service (IRS) released Announcement 2024-19, clarifying federal income tax treatment of amounts paid toward the purchase of energy efficient property and improvements under Department of Energy Home Energy Rebate Programs, established by the Inflation Reduction Act. The announcement notes that consumers who receive such rebates will not be required to report the value of the rebate as taxable income.
Hearings and Events
House Ways and Means Committee
On April 9, the House Ways and Means Subcommittee on Work and Welfare will hold a field hearing titled “The Dignity of Work: Lifting Individuals Out of Poverty.”
On April 11, the House Ways and Means Committee will hold a hearing titled “Expanding on the Success of the 2017 Tax Relief to Help Hardworking Americans.”
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other Congressional Committees
On April 10, the Senate Budget Committee will hold a hearing titled “Sunny Places for Shady People: Offshore Tax Evasion by the Wealthy and Corporations.”
On April 10, the House Small Business Committee will hold a hearing titled “Tax Day: Exploring the Adverse Effects of High Taxes and a Complex Tax Code.”
Think Tanks
On April 12, the Brookings Institution will hold an event titled “The Past and Future of Public Tax Preparation."