Tax Tidbit
Werfel Faces IRS Funding Questions on Route to Likely Senate Confirmation. On Wednesday, Feb. 15, the Senate Finance Committee held a hearing to consider the nomination of Danny Werfel to be commissioner of the IRS. This is the first step in the nomination process for Werfel—President Joe Biden’s choice to fill the position currently occupied by acting Commissioner Doug O'Donnell. At the hearing, Werfel testified on IRS enforcement initiatives and assured committee members of a transparent process as the agency determines how to spend funding provided by the Inflation Reduction Act (IRA).
One of the key themes of the hearing was Werfel’s plans for allocating the $45 billion in new enforcement funding if confirmed. Committee Chairman Ron Wyden (D-OR) requested that Werfel use new resources to increase audits against certain taxpayers, including wealthy individuals and multinational corporations. In response, Werfel highlighted his intention to balance the agency’s audit levels against different income brackets. Ranking Member Mike Crapo (R-ID) then urged Werfel to commit to not utilizing new IRA enforcement funding against taxpayers with annual income below $400,000. Acknowledging Crapo’s comments, Werfel agreed to adhere to Treasury Secretary Janet Yellen’s directive not to increase audit levels against taxpayers below that income threshold.
Following the public hearing, Werfel responded to several more written questions for the record from committee members. Through these published questions, lawmakers further pressed Werfel on his potential solutions to improve IRS taxpayer services and reduce the current paper return backlog. In his responses, Werfel admitted that current IRS technology was outdated. He committed to prioritizing the adoption of new digital technologies, including scanners, to reduce the backlog and ensure new resources were best allocated to meet taxpayer needs. In addition, Werfel stated his intention to install new automated taxpayer-service technologies, as well as prioritize the modernization of legacy IRS systems, such as the Individual Master File and Business Master File systems, to optimize data security for sensitive taxpayer documents.
Several lawmakers were also particularly concerned about the prospective administration of certain tax credits under Werfel’s leadership. This included a group of four senators who posed questions concerning the ongoing delays and potential fraud in the processing of the Employee Retention Tax Credit. Werfel committed to investigating the issue and briefing the committee on his findings. Werfel later responded to a question from Sen. Michael Bennet (D-CO) on the lack of public information concerning the Child Tax Credit and Earned Income Tax Credit by pledging to expand resources to make filers aware of all tax benefits for which they may qualify. Additionally, Werfel announced his intention to focus on stakeholder outreach related to new IRA energy credits to ensure taxpayers can best access funding for these new programs.
Written questions were also posed concerning the IRS’ development of an operational plan detailing the agency’s proposed allocation of new IRA resources. This included a request from Sen. Chuck Grassley (R-IA) for Werfel to publicly release the entire plan if confirmed. In response, Werfel did not directly commit to a public release of the document. Instead, he said that he would seek to generally improve transparency and committed to “keeping the public informed on [the IRS’] plans.” Last year, Yellen requested that the IRS furnish this operational plan by Feb. 17, although recent reports indicate that the agency has missed this deadline.
Following the hearing, Wyden has expressed his desire to expedite the process to ensure proper implementation of IRA funding. Werfel appears to have gained support from a bipartisan group of committee members, with Sens. Thom Tillis (R-NC) and Todd Young (R-IN) publicly stating that they will likely support the nomination. The Senate Finance Committee will meet in executive session to consider Werfel’s nomination on Thursday, March 2. If the committee favorably reports his nomination, the full Senate is expected to approve Werfel’s nomination.
Legislative Lowdown
House Set to Vote on Overturning DOL ESG Fiduciary Rule. The House of Representatives will likely vote on a resolution this week to potentially overturn the Biden Labor Department’s new fiduciary investment rule. The new regulations, which went into effect earlier this year, reversed a pair of Trump-era rules that prevented retirement plan sponsors from considering environmental, social and governance (ESG) factors when selecting investments. Under the Biden administration’s new rule, retirement plan sponsors can consider non-pecuniary factors in their investment decisions.House Ways and Means Committee
To eliminate this new rule, opponents will rely on powers provided by the Congressional Review Act, which allows Congress to strike down agency actions within 60 days of enactment. This mechanism only requires a simple majority vote in both chambers and is not subject to the Senate filibuster.
With GOP control of the House, the resolution, sponsored by Rep. Andy Barr (R-KY), will likely pass. However, its fate in the Senate is unclear. Sen. Mike Braun (R-IN) pledged to bring the resolution up for a vote following the Presidents’ Day recess but did not specify an exact date. For the resolution to pass the Senate, Republicans need one more Democrat to vote in favor of the measure along with Sen. Joe Manchin (D-WV), who has already signaled his support for the measure. The GOP is likely targeting Sens. Angus King (I-ME) and Jon Tester (D-MT), who have both said they are still undecided on the issue. Importantly, President Biden would likely veto the measure should Congress advance it.
Lawmakers Eye Farm Bill as a Potential Vehicle for Tax Provisions. In the past year, there has been growing support from lawmakers on both sides of the aisle for a broad range of extensions for expiring tax provisions. Despite this push, the current split in the control of Congress makes it unlikely that there will be many viable legislative vehicles for tax policy in the 118th Congress. Moreover, when lawmakers had a recent opportunity to attach tax legislation to a must-pass bill, the fiscal year 2023 omnibus, a deal could not be reached on key tax extenders. In 2023, however, the possibility of additional legislative vehicles has provided some hope for congressional tax writers to revive their policy priorities.
The first notable opportunity comes with legislation reauthorized every five years to extend current subsidies, insurance and conservation programs for the agricultural sector, as well as nutrition initiatives like the Supplemental Nutrition Assistance Program. This omnibus legislative package, commonly referred to as the “Farm Bill,” has occasionally also included a tax title to raise revenues or expand current tax credits and deductions. Many of the current agricultural programs are set to expire in September, making it necessary for a new Farm Bill to be passed in the coming months. As a result, some members of Congress are beginning to propose tax legislation for inclusion in this year’s bill.
If the 2023 Farm Bill includes tax provisions, lawmakers will likely focus on policies that benefit the agricultural sector. Earlier this month, Sen. Raphael Warnock (D-GA), chairman of the Commodities, Risk Management and Trade Subcommittee of the Senate Agriculture Committee, said he hopes to include a tax deduction for landowners who have had timber lost to natural disasters in the upcoming Farm Bill. If the bill is opened for tax provisions, other lawmakers are likely to propose a broader range of tax extenders for inclusion. Earlier this month, Rep. Randy Feenstra (R-IA) discussed this possibility, suggesting that the inclusion of several long-sought GOP tax objectives in the Farm Bill might provide benefits to farmers. Specifically, Feenstra said that extending full bonus depreciation and the immediate expensing of the Sec. 174 research and development deduction would be especially beneficial to taxpayers in agriculture that utilize heavy machinery.
While there is undoubtedly an appetite among some lawmakers to consider tax policy in the Farm Bill, it will be a tough sell in a divided Congress. In addition, many of the usual energy and fuel tax extenders that are often included in the agriculture package were already renewed by the Inflation Reduction Act last year. To further complicate matters, House Agriculture Committee Chairman Glenn Thompson (R-PA) cast doubt on the renewed push last week, telling reporters that “we don’t really do tax policy in the Farm Bill.” Ultimately, the House Ways and Means Committee would need to sign off on including tax policy in the legislation—something the committee has been reluctant to support in the past.
Other Possible Avenues for Tax Legislation in 2023. In addition to the Farm Bill, some members of Congress have pointed to the upcoming Federal Aviation Administration (FAA) reauthorization bill as another possible vehicle for certain business tax extenders. The bill, which is also likely to pass before Sept. 30, provides funding to support the FAA and operate several ongoing safety and equipment certification programs.
Notably, the bill generally includes a section modifying the tax code with a series of fuel and ticket excise taxes extensions that help fund the agency. As with the Farm Bill, some lawmakers, including Ways and Means Committee Vice Chairman Vern Buchanan (R-FL), have discussed the FAA legislation as a potential vehicle for a broader consideration of general business tax extenders. Despite this expanded push, it is rare for non-aviation tax provisions to be included in the bill. When discussing the legislation, Sen. Ben Cardin (D-MD) agreed that there was a possibility for other tax provisions, although he said the decision would be left up to congressional leadership.
In addition to these opportunities, lawmakers may pursue standalone legislation designed to incentivize sectors of the U.S. economy perceived to be vital to U.S. national security. This bipartisan effort would provide another opportunity for business tax extenders that may be framed as critical to ensuring the U.S. manufacturing sector can compete with industries in China. The inclusion of these incentives, however, may depend on whether Democrats continue to insist that any business tax provisions must be paired with an expansion of the Child Tax Credit and other progressive tax priorities.
Regardless of what legislation ultimately receives consideration, several members are optimistic about a bipartisan tax bill passing in the 118th Congress. In an interview last week, Senate Finance Committee Ranking Member Mike Crapo (R-ID) said that without the animosity of the reconciliation process, Congress “may have a better climate to be able to bring some bipartisan effort.” Rep. Lloyd Smucker (R-PA) echoed this sentiment telling reporters he thought “there’d be a chance of getting [a tax deal] done” later this year.
1111 Constitution Avenue
IRS Finalizes New Business E-File Requirements. Last Tuesday, the Treasury Department and IRS issued final regulations concerning updated electronic filing (e-filing) requirements for certain companies. This guidance reflects provisions included in the Taxpayer First Act, which was signed into law in July 2019. These mandates were included in the legislation as part of a push to increase e-filing and streamline the tax filing process, without imposing undue hardship on affected taxpayers.
Generally, these changes require business taxpayers to use e-filing in several circumstances that previously allowed for paper information returns. Notably, the new rules reduce the current threshold for businesses to qualify for mandatory e-filing from 250 to 10 returns. In conjunction, the guidance eliminates the previous e-filing exception afforded to income tax returns of corporations that reported total assets under $10 million. As a result, covered businesses that file a total of at least 10 annual returns must now file all of their information electronically in most circumstances. In addition, the IRS is now mandating that several other return and document types previously accepted by paper must now be filed online.
To assist taxpayers in complying with these new requirements, the IRS is launching a free online portal called the Information Returns Intake System (IRIS). IRIS is primarily intended for use by small businesses that must now file 1099 forms electronically, and it will be used to phase out certain legacy IRS filing tools like the Filing Information Returns Electronically (FIRE) system.
The final regulations will apply to eligible taxpayers beginning in 2024, giving businesses time to prepare for these new mandates. With these new requirements, the IRS hopes to further reduce the nearly 40 million paper information returns it still physically receives. In conjunction with new modernization funding provided by the Inflation Reduction Act, these regulations will likely shrink the paper return backlog that has plagued the agency since the onset of the COVID-19 pandemic.
Racial Equity Executive Order Puts Potential IRS Biases Back in Spotlight. On Feb. 16, President Joe Biden issued an executive order to compel several agencies to expand and improve racial equity programs, especially concerning the use of artificial intelligence and other automated processes. This action follows Biden’s previous executive order, issued in January 2021, which broadly charged federal agencies with advancing equality and addressing systematic racism in current policies.
Included in the executive action is a requirement for several officials, including Treasury Secretary Janet Yellen, to develop a new Agency Equity Team to coordinate the implementation of new equity initiatives. Within 30 days, Yellen must also designate a senior official to work with the newly created White House Steering Committee on Equity to develop an agencywide “Equity Action Plan” for the Treasury Department. In addition, each covered agency must annually furnish a document outlining progress toward increasing access to federal programs, services and activities for disadvantaged communities.
This executive order follows new accusations that the IRS has inadvertently imposed racial biases in tax administration. On Jan. 30, the Stanford Institute for Economic Policy Research released a report in which researchers determined that Black taxpayers received at least three times as many automated audit notices from the IRS as their non-Black counterparts. The study concludes with several hypotheses to account for this current discrepancy. Included among them, researchers believe that systems within the IRS that automatically flag potential fraud or errors for audit tend to target less complicated Earned Income Tax Credit returns that are primarily submitted by low- and middle-income taxpayers. Since Black Americans are overrepresented in this group, this likely contributes to much of the audit discrepancy.
This Stanford report was later invoked in the nomination hearing of Danny Werfel, as Wyden asked if Werfel would research the reasons for racial disparities in audit selections. Werfel stressed that fairness was an essential element of tax administration and committed to examining the underlying reasons for racial disparities in audit selections to the committee within 60 days of his potential nomination.
In the coming months, the Treasury Inspector General for Tax Administration and Government Accountability Office are likely to investigate further claims of racial biases in audits and provide advice aligned with this new executive order to modify the IRS’ use of automated systems in a manner that advances equity.
At a Glance
- Upcoming Oklahoma City Ways and Means Field Hearing on State of the Economy. According to recent comments from a staffer for a Republican House Ways and Means Committee member, the next committee field hearing will center on the state of the U.S. economy. The upcoming hearing is scheduled for March 7 in Oklahoma City and is expected to cover tax policy related to the oil, gas, agriculture and manufacturing sectors, among others. In this hearing, Republicans will likely continue to advocate for tax provisions to incentivize greater domestic extraction and refining of oil and natural gas. This event will be the second field hearing for the Republican-led House tax-writing committee, following an earlier event in West Virginia that also focused on the state of the American economy.
- New CAMT Guidance Addresses Questions from the Insurance Industry. On Feb. 17, The Treasury Department and IRS issued a notice to provide interim guidance to insurance companies on the new Corporate Alternative Minimum Tax (CAMT). The guidance clarifies ongoing concerns related to unrealized gains and losses in the sector and is intended “to help avoid substantial unintended adverse consequences to the insurance industry.” Notably, the guidance clarifies issues related to variable contracts—certain types of life insurance or annuity contracts, the taxable treatment of which was unclear in the initial statute. In addition, the guidance excludes certain net income resulting from reinsurance agreements for purposes of the tax. Stakeholder comments on any portion of the notice are due by April 3.
- Schweikert Previews Upcoming GOP Tax Oversight Hearings. In an interview on Feb. 13, Rep. David Schweikert (R-AZ), chairman of the House Ways and Means Oversight Subcommittee, outlined the GOP’s potential tax regulatory agenda for the 118th Congress. Schweikert highlighted several key areas of federal spending that he believed were ripe with fraud worthy of investigation, including Medicare and COVID-19 stimulus programs. In addition, Schweikert advocated for oversight initiatives to reexamine old budgetary scores for existing tax programs to determine what provisions had fallen short of initial revenue estimates or exceeded projected costs. Schweikert also previewed the possibility of upcoming committee hearings to investigate the development of the global minimum tax deal and potential fraud, waste and abuse at the IRS.
Brownstein Bookshelf
- Auto Dealers Resume Push for LIFO Relief. On Feb. 15, Sens. Sherrod Brown (D-OH) and Tim Scott (R-SC) reintroduced legislation that would provide relief for auto dealers that use the “last in, first out” (LIFO) accounting method. To date, the bill has garnered co-sponsorship from 49 senators.
- Jason Smith Renews Request for Investigation Into IRS Data Breach. On Feb. 16, Rep. Jason Smith (R-MO), chairman of the House Ways and Means Committee, sent a letter to Treasury Inspector General for Tax Administration (TIGTA) J. Russell George to request that the watchdog agency conduct a comprehensive investigation concerning the leak of confidential taxpayer information to ProPublica in 2021.
- Superfund Excise Tax Regulations Under Review. Earlier this month, the Treasury Department delivered proposed rules on the Superfund excise tax to the Office of Information and Regulatory Affairs for review. This levy is a tax on specific produced or imported chemicals and was reinstated in 2021 through the Infrastructure Investment and Jobs Act.
- Warren Buffett Criticizes Stock Buyback Tax. On Feb. 25, Warren Buffett, the CEO of Berkshire Hathaway, sent a letter to the company’s shareholders in which he argued against the recent imposition of taxes on corporate stock buybacks. This letter follows President Joe Biden’s recent call for a quadrupling of the current 1% stock buyback tax.
Hearings and Events
House Ways and Means Committee
On Tuesday, the full committee held a markup of several legislative items, including:
Senate Finance Committee
The committee has no upcoming hearings scheduled for this week.
House Select Committee on the Chinese Communist Party
On Tuesday, the full committee held a hearing entitled “The Chinese Communist Party’s Threat to America.”
Administration
Thursday, March 2
Small Business Administration
IRS Tax Update for Small Business
Private Sector
Monday, Feb. 27
Tax Policy Center
Predicting Tax Credits: How Income Volatility and Family Dynamics Affect Intended Beneficiaries
Tuesday, Feb. 28
American Enterprise Institute
How Do Government Deficits and Debt Drive Inflation?
Wednesday, March 1
Brookings Institution
Reducing Child Poverty in the United States: A Fireside Chat with Sen. Michael Bennet (D-CO)
Economic Policy Institute
Noncompete Clauses Cut Worker Power Off at the Knees
Friday, March 3
National Bureau of Economic Research
Monetary Economics Program Meeting, Spring 2023
Monday, March 6
Brookings Institution
The Economic Case for Tackling Climate Change Now
Tuesday, March 7
Peterson Institute for International Economics
Summers and Blanchard Debate the Future of Interest Rates