Programming Note: Taxation & Representation will return on Feb. 28, following the one-week congressional recess.
Don’t Waffle, Werfel
IRS Commissioner to Face Possible Grilling at Ways and Means Committee Hearing
Internal Revenue Service (IRS) Commissioner Daniel Werfel will return to Capitol Hill on Thursday to testify before the House Ways and Means Committee. What topics will generate discussion—and criticism?
Below are Brownstein’s top five areas where members are most likely to focus during Thursday’s Ways and Means Committee hearing:
- 1099-K reporting guidelines. Commissioner Werfel was initially invited to testify before the committee in December 2023, after all Republicans on the Ways and Means Committee wrote a letter demanding his testimony on the agency’s apparent unilateral reinterpretation of the lowered 1099-K reporting threshold included in the American Rescue Plan Act (ARPA, Pub. L. 117-2). Under the ARPA provision, the reporting threshold for Form 1099-K, covering third-party settlement organization transactions, was reduced from $20,000 (and at least 200 transactions) to $600 (with no minimum number of transactions) beginning in 2022. The reduction was criticized for sowing confusion and potentially creating compliance issues, especially for taxpayers who engaged in only occasional covered transactions. In December 2022, the Internal Revenue Service (IRS) extended the effective date for the lower threshold by one year. Then, in November 2023, weeks before the delayed ARPA provision was set to go into effect, the IRS announced a further delay of the reporting threshold for calendar year 2023. More surprisingly, the agency announced that for 2024 the IRS would implement the ARPA provision at a $5,000 threshold. The delay was intended to “reduce the potential confusion” from the issuance of an estimated 44 million Forms 1099-K, but no explanation was offered for the $5,000 threshold. Ways and Means Committee Republicans responded that the delay was indicative of the agency’s lack of preparedness to implement ARPA requirements and questioned the agency’s authority for the delay as well as the 2024 threshold that is not consistent with the statute.
- IRS Direct File pilot program. In January, the IRS launched the Direct File pilot program, which is intended to allow select taxpayers to file federal tax returns through a government-operated tax preparation software and processing system. The Inflation Reduction Act (IRA, Pub. L. 117-169) included funding for a report on the viability of such a program. Republicans have been critical, contending that the program is unnecessary and an overreach of the agency’s statutory authority. As of this writing, just over a dozen IRS personnel have used the pilot program to file their federal returns, a figure IRS officials say demonstrates the program’s success, but nevertheless may represent the extremely limited access to the program. The low take-up rate may also portend a lack of enthusiasm by taxpayers for the free-filing platform, once the pilot is expanded to taxpayers in the 12 states that will be able to use Direct File starting in mid-March. Expect Commissioner Werfel to be grilled on the IRS’s authority (or lack thereof) to conduct a pilot; the costs associated with the pilot; and taxpayer interest in Direct File, given the wide range of free tax-filing options available today.
- Employee retention tax credit administration. Ways and Means Committee members have been critical of the implementation of the employee retention tax credit (ERTC), which was established by the CARES Act (Pub. L. 116-136) as a mechanism for companies affected by the COVID-19 pandemic to continue operations and keep workers on payroll. Critics of the ERTC contend that its implementation has led to rampant fraud and abuse by so-called “ERTC mills” that aggressively advised companies to amend their business tax returns to make questionable ERTC claims, often on a contingent fee basis. In response to these and other concerns about the ERTC, the IRS imposed a moratorium in 2023 on ERTC claims processing, a decision that Ways and Means Committee Chairman Jason Smith (R-MO) and Oversight Subcommittee Chair David Schweikert (R-AZ) criticized in an October 2023 letter as unnecessarily holding up the processing of legitimate ERTC claims. Subsequently, the committee took legislative action to address fraudulent ERTC claims by adding a provision in the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), which the House passed on Jan. 31, requiring amended returns claiming ERTCs to have been filed by Jan. 31, 2024 (see below for additional information on the status of this legislation).
- Security of sensitive taxpayer information. On Feb. 6, the Treasury Inspector General for Tax Administration (TIGTA) released a report requested by Chairman Smith evaluating how the IRS grants access to and safeguards sensitive federal tax information on the agency’s computer systems. The TIGTA investigation follows reports in 2021 that a former IRS contractor leaked sensitive tax information about high-income individuals, including former President Donald Trump, to media outlets. TIGTA’s report found numerous deficiencies in IRS security protections, including examples where former employees’ maintained access to sensitive systems or contractors’ access to sensitive data was adjusted after background checks yielded unfavorable results. With the release of the report, Chairman Smith stressed that “the IRS must prioritize safeguarding taxpayer information and put adequate controls in place.” Committee members also may pursue questions regarding the former IRS contractor, Charles Littlejohn, who was only charged with one count of disclosing tax return information without authorization and sentenced to five years in prison, with some criticizing Justice Department prosecutors for not seeking additional charges based on the large number of taxpayers affected by the leak.
- IRA funding and enforcement initiatives. The Inflation Reduction Act (IRA) allocated over $80 billion dollars to the IRS to enhance its service and technology resources and strengthen agency enforcement efforts. Even after rescissions included in last year’s debt-limit deal, the IRS still has over $60 billion to improve customer service and shore up compliance efforts. The allocation of such IRS funding continues to be controversial. Though the agency has said it will not use the enforcement budget to increase audits on individuals earning less than $400,000, Republicans have consistently argued that this policy will not exclude as many taxpayers from audits as might be assumed. Furthermore, the IRS has experienced mixed results with regard to initiatives to improve customer service, with quarterly TIGTA evaluation reports showing that telephone service has markedly improved while mail correspondence continues to struggle with backlogs. Committee members from both sides of the aisle are expected to ask some questions about whether the IRS has improved its operations due to IRA funding.
Legislative Lowdown
Tax Package Update: Senators Continue Negotiations: Members of the Senate Finance Committee continue to review and discuss the provisions of the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), including what modifications to make to the bill, if any. As of this writing, the bill continues to await action, with Senate Republicans focused on finding a viable path for the processing of the bill as well as options to address specific concerns. In addition, the Senate has been occupied with the national security supplemental, with a broader funding and border-security package being voted down last week. With the supplemental funding-only measure being passed early Tuesday by a vote of 70-29, the Senate has begun its Presidents’ Day recess, likely pushing further negotiations on the tax package until late February.
1111 Constitution Avenue
Treasury Department Analysis Finds Favorable Return on Investment of IRA Funding: On Feb. 6, the Department of the Treasury and the Internal Revenue Service (IRS) released an analysis providing an updated evaluation of the revenue estimates and return-on-investment (ROI) of IRS funding allocated by the Inflation Reduction Act (IRA). The analysis found that the IRA’s IRS funding, as enacted, would increase revenue by roughly $561 billion over the next 10 years, and that renewing IRA funding when it runs out would yield estimated revenues of $851 billion. Furthermore, the paper found that a $20 billion rescission of IRA’s IRS enforcement funding, which was first informally agreed to by President Biden and former House Speaker Kevin McCarthy (R-CA) to take place over two years, and then was accelerated to a one-year rescission in a topline spending deal negotiated by current House Speaker Mike Johnson (R-LA), would reduce revenues by over $100 billion. The analysis highlights the Treasury Department’s desire to continue funding the IRS, saying that IRS budget cuts in the 2010s dramatically decreased audit rates on the wealthiest individuals and corporations, and that enforcement funding has enabled the agency to hold wealthy taxpayers accountable.
IRS Releases Additional Guidance on Clean Vehicle Credits: On Feb. 7, the Internal Revenue Service (IRS) released Rev. Proc. 2024-12, which grants sellers of clean vehicles a temporary extension to perform certain required procedures when claiming the clean vehicle credit (Section 30D) or the previously-owned clean vehicle credit (Section 25E). Under prior guidance, for vehicles sold in 2023 or later, sellers were required to furnish a report of certain information to taxpayers and the IRS by Jan. 15, 2024. The new guidance will provide dealers and used-vehicle sellers additional time to submit seller reports through the IRS Energy Credits Online Portal, with extended deadlines varying based on the date of sale.
For clean vehicles sold in 2023, sellers can report the sales to the IRS by Feb. 15, 2024, a one-month extension from previous guidance. For sales of vehicles placed into service between Jan. 1 and Jan. 16, 2024, sellers must report the sale by Jan. 19. And for sales of vehicles placed in service on or after Jan. 17, 2024, sellers have three calendar days from the date of sale to submit reports.
At a Glance
Gomez to Rejoin House Ways and Means Committee: Rep. Jimmy Gomez (D-CA) rejoined the House Ways and Means Committee on Feb. 2, replacing Rep. Brian Higgins (D-NY) after his retirement. The House Democratic Caucus voted to unanimously approve Gomez rejoining the committee. In a press release, Gomez said that he would especially focus on “issues of affordable child care and housing costs ….” Gomez was previously on the committee during the 117th Congress when Democrats last controlled the House.
Brownstein Bookshelf
TPC Analysis Reveals SALT Legislation Would Disproportionately Benefit High-Income Households: On Feb. 8, the Tax Policy Center (TPC) released an analysis finding that the SALT Marriage Penalty Elimination Act (H.R. 7160) would primarily benefit higher-income households, with fewer than 0.01% of households making below $100,000 benefiting from the legislation. 28.5% of households making between $200,000 and $500,000 would benefit, with an average tax cut of $1,330. And 34.1% of households with an income between $500,000 and $1 million would benefit, with an average tax cut of $2,230. The legislation does include a cliff where households with an adjusted gross income (AGI) of $500,000 would no longer qualify for the elevated SALT cap; however, TPC employs a more expansive measure of income than AGI, which is why their analysis shows benefits accruing to these households.
Hearings and Events
House Ways and Means Committee
On Thursday, the House Ways and Means Committee will hold a hearing titled “Hearing with Commissioner of the Internal Revenue Service, Daniel Werfel.”
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other
On Tuesday, the Center for Strategic and International Studies held a webinar titled “Hydrogen Growth Prospects: Impact of the Initial 45V Guidance."