Tax Tidbit
Progress on Werfel and Blatchford Appointments, Other Nominations Delayed. Following the retirement of former IRS Commissioner Chuck Rettig in early November 2022, the tax-administration agency has been without a permanent leader to guide the implementation of historic funding provided through the Inflation Reduction Act (IRA). Despite this extended vacancy, the Biden administration had already announced its pick for replacement commissioner, Danny Werfel, nearly three months ago on Nov. 10. After a brief period of interim leadership under Commissioner Douglass O’Donnell, Werfel is scheduled to receive a nomination hearing before the Senate Finance Committee today, Feb. 15.
In this hearing, Republican senators are expected to question Werfel on his plans for the new IRS enforcement funding, as well as any potential intentions to increase the security of confidential taxpayer information. To date, members of the Senate tax-writing committee from both sides of the aisle have already met with Werfel, including Sen. James Lankford (R-OK) and Chair Ron Wyden (D-OR). Werfel previously worked in the Obama administration as controller of the Office of Management and Budget, a post he occupied for four years before serving as acting commissioner of the IRS for most of 2013.
In addition to the Werfel appointment, Laurel Blatchford was recently announced as the new IRS chief of implementation for the IRA. In this role, Blatchford will work across the IRS to coordinate teams implementing the law’s tax provisions. Blatchford served in the Obama administration as chief of staff to Housing and Urban Development Secretary Shaun Donovan. Last year, President Joe Biden initially nominated her to serve as the controller of the Office of Management and Budget, but the nomination was withdrawn before it received congressional consideration.
At the start of the 118th Congress, several other top tax positions also remain vacant. This includes the role of IRS general counsel, which will likely be given to Beth Kaufman, an estate tax expert and former Treasury Department official. The Biden administration has also not named anyone to fill three vacancies on the United States Tax Court.
Tax Worldview
Jason Smith Sends Letter to OECD, Condemns Global Minimum Tax Deal. In a letter sent last week to Secretary-General of the Organisation for Economic Co-operation and Development (OECD) Mathias Cormann, House Ways and Means Committee Chairman Jason Smith (R-MO) criticized the development and implementation of the OECD’s global tax deal. Specifically, Smith argued that if foreign countries modify their tax laws to comply with the agreement, U.S. multinational corporations will be unable to fully leverage U.S. tax incentives that would drive their reported tax liability below 15%. Since some countries like China utilize direct government funding instead of tax credits to spur economic development and social policies, Smith contends that the proposed Undertaxed Profits Rule (UTPR) will disproportionately target U.S. companies.
Instead of a single international tax system, Smith said that countries should follow the example of the U.S. Global Intangible Low-Taxed Income (GILTI) regime and impose their own outbound anti-base erosion taxes. Smith argues that localized global minimum-tax policies would be a more appropriate approach for countries to govern the tax benefits available to their own companies or business activity occurring within their border, without unjustly taxing foreign multinational corporations through a UTPR. Smith said that the creation of the OECD’s global tax agreement was ultimately a result of the Biden administration’s failure to protect U.S. interests throughout the international negotiation process, resulting in an agreement that does not have sufficient congressional support.
Moving forward, Smith asserted that the OECD should refocus its efforts on other global tax objectives, such as combatting discriminatory digital service taxes. He warned that if the OECD continues to facilitate the adoption of the current proposed global minimum-tax agreement, House Republicans will pursue retaliatory taxes and tariffs to protect American jobs. Smith’s letter comes as several governments have already begun to enact policies to comply with the global minimum-tax regime, including South Korea and the European Union, which reached a preliminary agreement in December for each member country to adopt the changes into their domestic tax laws by the end of 2023. Other countries, including the United Kingdom, Australia and Japan, have taken initial steps to adopt the global minimum-tax regime.
1111 Constitution Avenue
IRS Provides Guidance on Tax Credits for Disadvantaged Communities. On Feb. 13, the Treasury Department, IRS and Department of Energy (DOE) released two notices providing initial guidance on a pair of Inflation Reduction Act (IRA) tax credits designed to spur green-energy investment in low-income and rural communities. Unlike most other energy-tax incentives included in the IRA, both provisions addressed in these notices have maximum funding allocations. Accordingly, to receive credits under these programs, taxpayers must submit individual project applications for consideration under competitive award processes opening later this year.
The first announcement, Notice 2023-17, concerns the new Low-Income Communities Bonus Credit Program created within the existing Section 48 Energy Property Investment Tax Credit (ITC). This new provision allows the Treasury Department secretary to designate specific solar and wind energy generation projects to receive bonus amounts above the base 30% ITC if they comply with certain environmental-justice initiatives. Under this program, a project can receive an additional 10% or 20% ITC boost if it satisfies additional eligibility criteria.
The notice specifies that in 2023, the additional credit amounts will be allocated among a total of 1.8 gigawatts in capacity available across four categories of solar and wind projects with maximum outputs of less than five megawatts each. Project applications will be solicited through two phases in 2023, with the first for facilities built in connection with low-income residential buildings. Subsequently, the program will provide credits for an additional 1.8 gigawatts of energy projects in 2024.
The second announcement, Notice 2023-18, provides initial guidance with respect to the renewed Section 48C Qualifying Advanced Energy Project Credit. The program provides taxpayers an ITC of up to 30% for certain qualified manufacturing facilities. As part of the IRA, it was allocated an additional $10 billion in new funding, with at least $4 billion reserved for projects in census tracts that contain (or are located adjacent to such tracts), abandoned coal mines or decommissioned power plants. The credit is designed to incentivize the construction or retrofit of manufacturing facilities that produce clean-energy technology, such as recycling or critical mineral refining equipment.
The guidance provides several examples of potential qualified projects, including facilities designed to construct solar panels, wind turbines or carbon sequestration equipment. Similar to the aforementioned section 48(e) bonus credit allocations, section 48C will be awarded through a two-phased application process in 2023, with first-round concept papers due to the DOE by July 31, 2023. Additionally, the guidance highlights that the first round of funding will provide $4 billion in total tax credits, with approximately 40% reserved for projects in former coal mining communities.
In her remarks last week at the American Bar Association’s Tax Section 2023 Midyear Meeting, Treasury Assistant Secretary for Tax Policy Lily Batchelder previewed these energy notices and provided a broad overview of the Treasury Department’s efforts to implement the myriad energy incentives included in the IRA. Batchelder also noted that the department would release a notice of proposed rulemaking for the Section 30D Clean Vehicles Tax Credit in March, as well as additional guidance on the green credits’ prevailing-wage and apprenticeship requirements, which went into effect last month. Moreover, Batchelder said the agency would be providing additional clarity on the stock buyback excise tax and corporate minimum tax in the coming months.
More generally, Batchelder discussed ongoing efforts to enact the Pillar Two global minimum tax in the United States and highlighted several ongoing efforts at the IRS to utilize new funding to improve taxpayer services and enhance enforcement.
IRS Selects New America to Assist in Direct E-file Report. Included in the nearly $80 billion in new funding for the IRS provided by the Inflation Reduction Act (IRA) is $15 million for the agency to furnish a report on the feasibility of a new “direct e-file” tax return system. The IRA specifies that the report should design an outline for a program that could offer multilingual options, protect sensitive taxpayer information and be available on mobile devices, among other key goals. The report must also include estimates of the expected costs to create and administer the potential IRS-operated direct filing system. Demand for this product has primarily emanated from progressive lawmakers who argue that this option would streamline the current IRS Free File partnership program and provide significant benefits to filers with simple returns, including most low-income taxpayers.
Also noted in the statutory mandates was a requirement that the IRS solicit outside opinions on portions of its report, including an objective analysis of the agency’s capacity to successfully implement such a program. On Feb. 8, the IRS announced that it would collaborate with the New America think tank to satisfy this oversight requirement.
In the past, New America has advocated for reform to simplify the federal filing process and bolster the IRS’ role as a “benefits administrator.” In particular, a report from the organization in April 2022 titled “Improving Public Programs for Low-Income Tax Filers” argued for a reinstatement of software like the temporary “GetCTC” to allow low-income taxpayers without filing obligations to claim certain refundable tax credits. In another report, the organization advocated for government programs to “bypass tax preparers” by restructuring and automating certain federal entitlement programs. Several other New America studies have also already explicitly called for a direct e-file option, suggesting that the organization will ultimately advocate for the program in its portion of the IRS’ final report.
In addition to New America, the IRS’ e-file report task force will include Ariel Jurow-Kleiman, an associate law professor at Loyola University who specializes in tax policy. According to subsequent comments from the IRS, the report will be submitted to Congress in May of 2023. In the meantime, the IRS will send its full 10-year operational plan to Congress on Feb. 17—the deadline imposed on the agency by Treasury Secretary Janet Yellen in August 2022.
At a Glance
- Jason Smith Calls for Prompt Testimony on President’s Budget. On Feb. 9, Jason Smith (R-MO), chair of the House Committee on Ways and Means, requested that Treasury Secretary Janet Yellen testify on the Biden administration’s annual budget the morning of March 10—the day after the proposal is slated for publication. In his letter, Smith noted that, in previous years, Yellen had delayed her testimony on the administration’s budget requests until months after the proposals were initially released. Smith’s letter follows a recent memo from National Economic Council Director Brian Deese suggesting that the president’s annual budget will contain legislative proposals to balance the federal deficit, including a new mark-to-market tax regime.
- IRS Says Most 2022 State Tax Payments Are Tax Exempt. On Feb. 10, the IRS clarified that taxpayers would not be required to report most state payments as income on their 2022 federal tax returns. This guidance provides unconditional tax-free treatment to all filers regarding several cost-of-living and disaster relief special rebates offered to residents in 17 states. In addition, taxpayers in four other states can exclude these state payments from their returns if they meet specific requirements. This notice comes after National Taxpayer Advocate Erin Collins criticized the IRS last week as being “asleep at the switch” for delaying the issuance of guidance on state payments until after the commencement of the tax season.
- SALT Caucus Returns With Several New Tax Committee Members. In a press conference on Feb. 8, a bipartisan group of lawmakers announced the relaunch of the Congressional SALT Caucus for the 118th Congress. The caucus is focused on passing legislation to increase or repeal the current $10,000 State and Local Tax (SALT) Deduction. In the coming Congress, returning Co-chairs Reps. Josh Gottheimer (D-NJ), Young Kim (R-CA) and Andrew Garbarino (R-NY) will be joined by Rep. Anna Eshoo (D-CA) to form the caucus’ primary leadership. Notably, the caucus boasts bipartisan membership from a record nine members of the House Ways and Means Committee, further increasing the likelihood that SALT reform legislation is discussed in the 118th Congress.
- Yellen Comments on Manufacturing Incentive Successes. On a visit to the construction site of a new battery manufacturing facility in Spring Hill, Tennessee, Treasury Secretary Janet Yellen provided a brief statement on progress made toward the Biden administration’s economic goals. This included several mentions of post-COVID-19 economic growth, as well as recent legislative action concerning the manufacturing sector, including the CHIPS and Sciences Act and Infrastructure Investment and Jobs Act. Additionally, Yellen ended her speech by highlighting the ongoing work of the Treasury Department in implementing the tax provisions of the Inflation Reduction Act.
Brownstein Bookshelf
- State of the Union Tax Outlook. On Feb. 7, President Joe Biden delivered his second State of the Union address, outlining several of his administration’s tax priorities for the 118th Congress. Brownstein’s complete analysis can be found here.
- Ways and Means Committee Hearing on Unemployment Fraud. On Feb. 8, the House Ways and Means Committee held a hearing with witnesses from the Government Accountability Office and Department of Labor to discuss COVID-19 unemployment insurance fraud.
- TIGTA Recommends IRS Improve Long-Term Allocation Planning. On Feb. 8, the Treasury Inspector General for Tax Administration (TIGTA) provided an audit report to the IRS recommending that the agency improve long-term resource allocation. TIGTA believed this should include the creation of a multiyear, comprehensive examination strategic plan to provide explicit direction on allocating enforcement resources in future years.
Hearings & Events
Senate Finance Committee
On Wednesday, the full Senate Finance Committee will hold a hearing entitled “Nomination of Daniel Werfel to be Commissioner of Internal Revenue Service,” during which the following witness will testify:
- Daniel Werfel, Commissioner-Elect, IRS
On Thursday, the full Senate Finance Committee will hold a hearing entitled “Ending Trade that Cheats American Workers by Modernizing Trade Laws and Enforcement, Fighting Forced Labor, Eliminating Counterfeits, and Leveling the Playing Field,” during which the following witnesses will testify:
- Cindy Allen, Vice President For Regulatory Affairs And Compliance, FedEx Logistics
- Andy Meserve, Local Union President 9423, United Steelworkers
- Scott Nova, Executive Director, Worker Rights Consortium
- John Pickel, Senior Director, International Supply Chain Policy, National Foreign Trade Council
- Brenda Smith, Global Director, Government Outreach, Expeditors International of Washington, Inc.
Private Sector
Tuesday, Feb. 14
World Bank Group and Peterson Institute for International Economics
Driving Global Trade for Development
Wednesday, Feb. 15
Peterson Institute for International Economics
Challenging China’s Critical Mineral Dominance
Thursday, Feb. 16
American Enterprise Institute
Learning from Practitioners to Promote Upward Mobility and Advance Opportunity: A Conversation with Paul Ryan
Friday, Feb. 17
Tax Foundation
Talking Tax Reform: Modeling the Growth and Opportunity Agenda
Tuesday, Feb. 21
Urban Institute
Launching Urban’s Financial Well-Being Data Hub: A New Approach to Improving Financial Security and Advancing Equity.