Tax Tidbit
SCOTUS Denies New York v. Yellen. The U.S. Supreme Court announced on Tax Day it would not hear a constitutional challenge to the $10,000 deduction limit on state and local taxes (SALT) enacted under the Tax Cuts and Jobs Act (P.L.115-97). The Supreme Court declined to provide reasoning for not hearing the challenge.
New York, Connecticut, Maryland and New Jersey argued the SALT deduction cap was unconstitutional since it interfered with their authority to collect property and income taxes.
The Second Circuit previously ruled against the states, finding that Congress had the constitutional authority to limit the SALT deduction. In its decision, the Second Circuit said “the SALT deduction cap is not unlike the countless federal laws whose benefits and burdens are unevenly distributed across the country and among the several States.”
New York, New Jersey and Connecticut are hoping for a different outcome in another pending case. In that one, the states challenged Internal Revenue Service (IRS) regulations that prevent states from creating SALT deduction cap workarounds. That case, New Jersey v. Mnuchin, is currently before a New York federal court.
Legislative Lowdown
Rettig, Collins Testify Before House Oversight Panel. On Thursday, the House Oversight and Reform Subcommittee on Government Operations held a hearing entitled, “IRS: Is It Ready?”, during which IRS Commissioner Charles Rettig and National Taxpayer Advocate Erin Collins testified. The discussion focused on issues that have long plagued the IRS, such as its processing backlog, its difficulties maintaining adequate levels of trained personnel and the state of its technology systems.
Click here for a summary of the hearing.
The hearing comes shortly after Rep. Carolyn Maloney (D-NY), chair of the House Oversight and Reform Committee, launched an investigation into the IRS relationship with ID.me, with which the agency partnered to integrate facial recognition technology. In a recent letter to ID.me CEO Blake Hall, Maloney and Rep. Jim Clyburn (D-SC), who chairs the Select Subcommittee on the Coronavirus Crisis, expressed “serious concerns about the efficacy, privacy, and security of ID.me’s technology.” Both committees are expected to continue this investigation, particularly as the IRS reexamines its relationship with ID.me and other providers now that the filing season is over.
Republicans Again Probing ProPublica. In June 2021, ProPublica launched a series of publications entitled “The Secret IRS Files,” which detailed the tax practices of wealthy taxpayers. The reports—the most recent of which was published on April 13—contain confidential, legally protected taxpayer information. The release of this information has raised questions about how the data was leaked from the Treasury Department and the IRS. The Treasury Inspector General for Tax Administration and other governmental agencies has since begun investigating the matter.
Ten months after the initial report, Rep. Kevin Brady (R-TX) and Sen. Mike Crapo (R-ID), top Republicans on the House Ways and Means Committee and the Senate Finance Committee, have asked again about the status of the investigation. In a letter last week to Treasury Secretary Janet Yellen, the lawmakers said Congress still has little information as to how the data was leaked. Nevertheless, Brady and Crapo maintained that “there is little doubt that the leaked information came from inside the IRS.”
In congressional testimony last week, IRS Commissioner Charles Rettig addressed the ProPublica issue, saying “the delays in getting answers for the public certainly impacts the ability for the public to have trust and respect for the Internal Revenue Service.” He added that “this is a very serious situation—it is a crime for somebody to breach the system, if that’s how this occurred, and take that information outside and like everyone else, we would hope that that would be appropriately prosecuted."
Lawmakers Getting Intuit. In March 2022, the Federal Trade Commission (FTC) issued a complaint against Intuit, owner of tax preparation software company TurboTax, for “deceiving consumers with bogus advertisements pitching ‘free’ tax filing that millions of consumers could not use.” The case has recently begun, being heard by Judge Charles Breyer, the younger brother of retiring U.S. Supreme Court Justice Stephen Breyer. According to reports, the younger Breyer was skeptical of the government’s efforts to prevent TurboTax from running advertisements of their “free” products.
In response to this legal action, three congressional Democrats sent a letter last week to Intuit CEO Sasan Goodarzi accusing the company for employing an “ongoing pattern of hiring former regulators to defend TurboTax products that scam American taxpayers into paying for services that should be free.” Through the letter, the signatories—Sen. Elizabeth Warren (D-MA), a member of the Senate Finance Committee, and Reps. Katie Porter (D-CA) and Brad Sherman (D-CA)—sought to explore “the extent to which Intuit has used former government officials to defend and maintain its unethical and potentially illegal practices.”
The lawmakers applauded the FTC action, arguing that despite encouraging the IRS to establish the Free File program, Intuit had engaged in “bad-faith participation in the Free File program” by instead funneling users into their paid products. These actions, according to the letter, have cost taxpayers—including military members, students and disabled Americans—billions of dollars.
Intuit has gotten away with this scheme, according to the lawmakers, because of its “extensive lobbying and adroit influence-peddling.” To address this, the lawmakers highlighted their Tax Filing Simplification Act, which would require the IRS to establish and operate free programs that would provide online tax preparation and filing software.
1111 Constitution Avenue
Tax Filing Season Concludes. The tax filing season is now in the books, closing on Monday, April 18. The third filing season under the shadow of the COVID-19 pandemic, this year’s filing season was marred by issues that have long caused troubles for the IRS, such as a persistent processing backlog, an inadequate level of trained personnel and antiquated technology.
While it may take months to completely digest this year’s filing season, some early statistics are already emerging. As of early April, the IRS received over 130 million returns from individuals and businesses and disbursed more than $220 billion in refunds and credits. The agency was also expected to issue an additional $50 billion in refunds above last year’s level, and while the size of the average refund increased by 10% to over $3,175. The percentage of taxpayers receiving any refund dropped to 70%, a decline of about 5%.
According to IRS Commissioner Charles Rettig, the IRS has about 2.4 million unprocessed paper individual income tax returns remaining from the previous tax filing season—a 10 million decrease since the start of the year. In 2022 alone, the IRS has received an additional 2.5 million paper returns.
The Biden administration is expected to highlight difficulties like the processing backlog in its efforts to increase agency funding. In a blog post published on Tax Day, for instance, Natasha Sarin, counselor for tax policy and implementation at the Treasury Department, said the filing season was “the agency’s most challenging filing season in recent history.” She stressed the need to address longtime IRS problems like technological modernization and the lack of employees. The solution to all of this, according to Sarin, is stable, long-term funding. She specifically highlighted the $80 billion proposed by the Biden administration to modernize IRS’s technology and invest in its workforce.
Rettig: Information Reporting Must Include Funding. The Biden administration has also proposed, as part of its Build Back Better initiative, information reporting requirements that would oblige banks and other financial institutions to provide the IRS with taxpayer information above a certain threshold. Although the information reporting requirement proposal has gained support from key moderate Democrats, it and the Build Back Better Act have failed to become law.
However, because it remains a top priority for the Biden administration and certain congressional Democrats, IRS Commissioner Charles Rettig wants to be prepared. This is why Rettig recently underscored the need for Congress to provide the IRS with enough funding for technological developments if it enacts information reporting requirements. According to Rettig, without funding for the technology necessary to manage the would-be incoming data, “you’re just building a bigger haystack to be out in the yard, and by themselves, those haystacks aren’t helpful.” Funding would also be necessary to train employees, Rettig said.
Warren, Chu: No Plaudits for Audits. Some congressional Democrats are concerned about IRS audit rates for low-income wage earners. In a recent letter to Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, Sen. Elizabeth Warren (D-MA) and Rep. Judy Chu (D-CA), each of whom sit on their chamber’s tax writing committees, were concerned that the audit rates for low-income taxpayers was the same as wealthy taxpayers. The duo urged the IRS to “end the targeting of low-income Americans, in line with the Administration’s commitment not to increase audits of taxpayers making under $400,000.”
The Treasury Department has said its insufficient levels of trained staff and advanced technology have contributed to the low audit rates for high-income taxpayers. Treasury Department officials have explained that “to have audits across the pay scale, we need the resources,” adding that inadequate technology is like “having a book without an index.”
GAO: 2021 Tax Filing Season Challenges. The Government Accountability Office (GAO) recently issued a report that reviewed IRS performance during the 2021 tax filing season. It specifically focused on how issues related to processing tax returns led to delays and increased costs.
While each tax filing season has its own challenges, a notable one during 2021 was the number of tax filing errors associated with new tax credit changes enacted by Congress in response to the COVID-19 pandemic. The number of individual return errors doubled relative to the previous year from 14.2 million to 28.4 million, about 60% of which were related to the American Rescue Plan Act and the Consolidated Appropriations Act. The Recovery Rebate Credit, also known as the Economic Impact Payment, alone accounted for errors on 11.5 million returns.
Ultimately, GAO recommended the IRS:
- Develop a process to identify and analyze underlying causes for taxpayer errors
- Direct IRS business units to regularly monitor and report on the reasons for individual and business-related interest payments
- Reduce the amount of refund interest paid for cases within IRS’s control
- Develop a modernization plan for “Where’s My Refund”
- Estimate timeframes for resolving IRS’s correspondence backlog
- Develop a plan for in-person taxpayer services
The IRS agreed with all GAO recommendations except for two. With respect to the recommendation to analyze underlying causes for taxpayer concerns, the IRS said it already has a robust process for this; and with respect to the recommendation about reducing interest paid, the IRS said it is bound by statutory requirements in this regard.
Global Getdown
White House Continues to Pursue Pillar Two Adoption. Biden administration officials are confident Congress will enact legislation this year to bring the United States into alignment with the OECD Inclusive Framework’s Pillar Two requirements, which would establish a 15% minimum tax rate for large corporations. Lily Batchelder, Treasury assistant secretary for tax policy, said at an event over the congressional recess that the administration is “optimistic” it will meet its commitment to enact Pillar Two in 2022. However, the primary vehicle through which to enact these requirements has been the Build Back Better Act reconciliation bill, which remains stalled in Congress.
Batchelder also responded during her remarks to objections that the undertaxed profits rule (UTPR) in Pillar Two could diminish the value of domestic tax incentives. After acknowledging these concerns, Batchelder characterized the UTPR as a necessary tradeoff to ensure large multinational corporations are subject to the minimum tax on a global basis. She also said some of the incentives at issue would “almost certainly” be unaffected, presumably due to the refundability of certain tax incentives under current law, although she did not provide specific examples. Nevertheless, she said the administration is "committed to working with Congress to explore other ways to protect U.S. incentives that promote U.S. jobs and investment.”
Batchelder also downplayed the concerns, stressing “the number of U.S. taxpayers even potentially affected by UTPRs is incredibly small." While arguing that only 0.02% of U.S. companies would potentially see any limitation on non-refundable tax incentives like the research and development or low-income housing tax credits, Batchelder said “this is emphatically not something that small or even reasonably large corporations will be affected by.”
At a Glance
- Babies Over Billionaires. Rep. Jamaal Bowman (D-NY) introduced legislation last week that would tax the unrealized capital gains of taxpayers with $100 million in assets. The so-called Babies Over Billionaires Act would impose an annual 30% tax on the unrealized gains of publicly traded assets and a 50% tax on private capital assets every five years. It would invest the revenue in programs that support families and children.
- American Innovation Act. Rep. Vern Buchanan (R-FL), who is a top contender to replace Rep. Kevin Brady (R-TX) as the House Ways and Means Committee ranking member, reintroduced the American Innovation Act over the congressional break. The legislation, which passed the House in 2018, would quadruple the amount of start-up costs small businesses can deduct from their income taxes from $5,000 to $20,000 and increase the threshold for deductions from $50,000 to $120,000 for start-up expenditures.
Brownstein Bookshelf
- PWBM Scores Biden Budget. The University of Pennsylvania Wharton Budget Model issued an economic estimate of President Biden’s fiscal year 2023 budget proposal. The estimate found that the administration’s proposal would reduce debt by 1.7% in 2050 and grow the economy by 0.4%.
- Equity Action Plan. The Treasury Department released its Equity Action Plan one year progress report over the congressional break. The report details efforts by the Treasury Department to reexamine its efforts to reduce access barriers and strengthen delivery programs and services for historically underserved communities. Looking ahead, the Treasury Department will assess the impact of climate change on household and communities.