Legislative Lowdown
Shutdown State of Play—Funding Deadlines Loom Yet Again: March 1 marks the deadline for four fiscal year (FY) 2024 appropriations bills: Military Construction-VA, Agriculture-FDA, Transportation-HUD and Energy-Water. The other eight appropriations bills, including funding for the Department of the Treasury and Internal Revenue Service, are funded through March 8. Lawmakers’ appropriations work has been delayed by disagreements over policy riders in addition to stalled border and national security supplemental negotiations, leading to a litany of continuing resolutions (CRs) since the Oct. 1 start of the fiscal year. One group holding up the appropriations bills is the House Freedom Caucus, which sent a letter to House Speaker Mike Johnson (R-LA) on Feb. 21 suggesting that House Republicans pass a year-long CR if the appropriations bills do not successfully secure certain policy changes. On Feb. 27, President Joe Biden invited Speaker Johnson, as well as House Minority Leader Hakeem Jeffries (D-NY), Senate Majority Leader Chuck Schumer (D-NY) and Senate Minority Leader Mitch McConnell (R-KY) to the White House to discuss the appropriations stalemate and the Biden administration’s proposed foreign aid package. Initial reports from the White House meeting stated that Speaker Johnson “unequivocally” committed to avoiding a partial government shutdown, but did not signal his willingness to support another CR. He instead suggested that Congress and the White House should continue negotiating a compromise spending bill, and only passing a CR or enduring a partial government shutdown for the period of time it takes for the Senate to pass the bill.
If the government is unable to negotiate a spending package by the end of the week, House Republicans have floated the idea of extending funding for the appropriations packages to March 22, or potentially moving forward with a partial government shutdown while the House and Senate leaders continue to negotiate on the policy riders that have continued to generate controversy.
Once the FY 2024 bills are finally passed, members will have to immediately start the FY 2025 appropriations process. The White House Office of Management and Budget has confirmed that President Biden will send his FY 2025 budget proposal to Congress on March 11.
Tax Bill Update—Potential Paths to Passage: While Congress continues to negotiate on appropriations, the Tax Relief for American Families and Workers Act (H.R. 7024) is stalled in the Senate, as the Senate Republicans discuss various provisions of the bill, including the child tax credit’s perceived lack of work incentives and whether limitations on the employee retention tax credit should be treated as an offset for budgetary purposes. Despite the temporary standstill, there remain viable paths for the bill to pass the Senate, including inclusion of the tax package in a larger spending bill, or taking up the bill as a stand-alone measure with an agreement on any amendments and debate time. If the bill is passed without amendment, it would head to the White House, where President Biden is expected to sign it.
Werfel Receives Praise, Criticism at Ways and Means Committee Hearing: On Feb. 15, Internal Revenue Service (IRS) Commissioner Daniel Werfel appeared before the House Ways and Means Committee ostensibly to discuss the agency’s recent announcement regarding Form 1099-K reporting requirements. The agency’s second delay of the effective date for expanded Form 1099-K reporting, as well as the unilateral reduction in the filing threshold in conflict with the statutory language in the American Rescue Plan Act (Pub, L. 117-2), drew sharp criticism from Ways and Means Committee Chairman Jason Smith (R-MO) and Rep. Carol Miller (R-WV).
Members of the committee also questioned the commissioner on a variety of other matters, including the agency’s ongoing implementation of funding and programs in the Inflation Reduction Act (IRA, Pub. L. 117-169), as well as IRS security concerns and potential IRS actions should the Tax Relief for American Families and Workers Act (H.R. 7024) be enacted.
Commissioner Werfel received praise from lawmakers on both sides of the aisle, including Chairman Smith, for pledging to swiftly implement H.R. 7024’s provisions should the bill be signed into law. Werfel projected that the IRS will be able to update its internal systems to reflect adjustments to the child tax credit (CTC) within six to 12 weeks after the law is enacted. Werfel also noted that the IRS will be able to update already-filed returns to refund any increased CTC amounts retroactively to taxpayers who qualify. Werfel generally received approval for the agency’s handling of outstanding employee retention tax credit claims. Democrats were quick to praise Werfel for the agency’s work in improving taxpayer service and clearing the backlog of unprocessed 2022 returns, noting that funding must be maintained in order for the IRS to continue its higher level of service.
Commissioner Werfel, however, came under heavy criticism for other actions the IRS has undertaken during the first year of his five-year term. Multiple Republican lawmakers panned the commissioner for continuing to advance the Direct File program, stressing that the pilot is not truly “free” because taxpayer funds have been used to develop the tax-preparation platform, and that the IRS lacks the statutory authority to develop the Direct File pilot in the first place. Lawmakers also expressed concerns about the IRS not doing enough to protect taxpayers’ personal information, in light of the 2021 tax return leak perpetrated by an IRS contractor that affected a large number of high-net-worth individuals, and the ensuing Treasury Inspector General for Tax Administration report noting numerous existing security vulnerabilities at the IRS.
The most discussed topic at the hearing was the enhanced enforcement and audit initiatives that the IRS has been rolling out in recent months. In 2023, the IRS announced that the agency would de-prioritize audits for low- and middle-income taxpayers claiming the earned income tax credit and child tax credit, and instead focus on wealthy individuals, large corporations and complex partnerships. Democrats praised Werfel for perceived advances in equity and for increased revenues realized after high-income audits, while Republicans criticized Werfel for potential adverse effects these policies hold for small businesses, and for not using funds allocated for enforcement to improve taxpayer customer service.
Tax Worldview
OECD Transfer Pricing Rules Updated; Affected Countries Continue Negotiations: On Feb. 19, the Organisation for Economic Co-Operation and Development (OECD) released a report proposing simplified transfer pricing methods for certain transactions, which aligns with Amount B of the OECD’s proposed Pillar One global tax regime. The proposal addresses transfer pricing as it relates to baseline marketing and distribution transactions. According to the accompanying OECD statement, the new rules are “expected to reduce transfer pricing disputes [and] compliance costs and enhance tax certainty ….”
The update comes against the backdrop of the looming March 31 deadline for member countries of the OECD’s Inclusive Framework to identify criteria for multinational businesses to determine whether certain company transactions are subject to the Amount B rules. The OECD report seeks to resolve issues relating to so-called “low-capacity” countries that choose not to apply the Amount B rules, creating a potential mismatch for a company engaging in a transfer pricing arrangement where one country applies Amount B and the other does not. The low-capacity jurisdiction provisions, however, remain under negotiation, as India has expressed concern that the OECD has not yet defined “low-capacity” or provided a list of qualifying jurisdictions. Other concerns about the draft guidance include its complexity since, despite the OECD’s intention to “simplify” the rules, an in-scope entity that chooses not to apply the simplified approach would likely be audited due to an opt-out only being advantageous for companies that do not meet operating margins thresholds under the guidance.
Nevertheless, the entire Pillar One framework remains in jeopardy given the dim prospects for the United States to adopt the proposed regime. The United States has taken the position that Amount B must be finalized before any treaty implementing Pillar One can be considered, and a Treasury Department official noted that negotiations on Amount B are still ongoing. The United States holds an effective veto over the Pillar One treaty, since such an agreement can only enter into force if countries representing a majority of the affected multinational companies ratify the treaty.
UK Passes Tax Law, Including Global Minimum Tax Commitments: On Feb. 24, the Parliament of the United Kingdom (UK) passed the country’s annual Finance Bill, with the House of Lords moving the bill to royal assent, all but guaranteeing its enactment. The bill included provisions implementing the country’s commitment to the 15% global minimum tax affecting multinational corporations, an integral part of the OECD’s two-pillar global tax regime. The law includes the OECD proposal for a transitional safe harbor to implement country-by-country reporting to calculate tax liability, as well as several mechanisms governing the use of the safe-harbor provisions.
The bill also includes several other tax provisions affecting UK businesses, such as extending 100% expensing allowances for qualifying plant and machinery costs, and a research and development credit for small companies. The bill seeks to ramp up enforcement by establishing penalties for promoters who continually advertise alleged tax avoidance schemes.
1111 Constitution Avenue
IRS to Open Direct File to Qualifying Taxpayers on Intermittent Schedule: On Feb. 21, an Internal Revenue Service (IRS) official announced that the agency will be opening the Direct File pilot program, allowing select taxpayers to file their 2023 federal tax returns for free directly with the government using IRS-managed software. The program purportedly will open to taxpayers in the 12 states where the program is being piloted, but only during “short windows of time,” meaning that, at the time a taxpayer visits the Direct File registration portal, the tool may or may not be available for use. The IRS said that the purpose of opening the portal intermittently is to test the software’s ability to “experienc[e] heavier volume[s]” of returns when opening the software to the public. Taxpayers who are not able to access the filing window would still be able to check their eligibility for the program and sign up for ID.me, the software’s required identity authentication mechanism, before revisiting the portal at a later time to complete their return.
IRS Continues Scrutiny on ERTC Administration: On Feb. 16, the Internal Revenue Service (IRS) Office of Chief Counsel released a generic legal advice memorandum detailing liability for improper and fraudulent employee retention tax credit (ERTC) claims. The memo states that third-party payers, including professional employer organizations [PEOs] and certified PEOs) that claimed the credit on behalf of their clients, would be liable for underpayments of tax obligations in cases in which the client received an erroneous ERTC payout. The memo-asserted policy remains unchanged from previous ERTC guidance and applies precedent from other employment tax credits, but it appears inconsistent with the ERTC’s statutory provisions. The memorandum also may create compliance concerns for PEOs seeking additional documentation from former clients or clients that have closed their businesses, as well as to clients that may not have access to additional documentation PEOs request.
Along with clarifying ERTC liability, the IRS is also sending letters to clients requesting documentation proving that they qualify for the credit. Reports indicate that some businesses received Letter 6612 noting that their ERTC claim is under audit and on hold, asking the taxpayer to provide additional information and inquiries, requiring a response within three to four weeks to remain eligible for the credit. This step also makes it more difficult for businesses with legitimate ERTC claims but do not have sufficient documentation substantiating those claims to be able to claim the credit.
At a Glance
IRS Takes Flight With Corporate Jet Audits: On Feb. 21, the Internal Revenue Service (IRS) announced plans to begin audits on business aircraft use amid suspicion that wealthy taxpayers are improperly claiming business deductions for the personal use of their aircrafts. The agency will use enforcement funding allocated by the Inflation Reduction Act (IRA), as well as advanced analytics it has been able to develop, to examine aircraft use. As part of the announcement, IRS Commissioner Daniel Werfel said that such audits are “a complex area where IRS work has been stretched thin,” and that audits “will help ensure high-income groups aren’t flying under the radar with their tax responsibilities.” The audits are part of a larger effort by the IRS to leverage IRA funding to increase scrutiny on wealthy individuals, large corporations and complex partnerships.
Biden Administration Implements Delayed Ethanol Fuel Rules; Vilsack Signals Farmer Benefits in SAF Regulations: The Biden administration approved a rule that would incentivize the production of E15 gasoline, which contains 15% ethanol, but delayed its implementation until April 28, 2025. The final rule would remove the volatility limit exemption from E10 fuel, the more conventional, 10%-ethanol fuel, effectively providing equal regulatory treatment of E10 and E15 gasoline. The rule benefits corn farmers that support ethanol production, as it would allow E15 fuel to be sold year-round nationwide, but hurts fuel refiners and pipeline operators that will have to construct new infrastructure to account for the change. Agriculture Secretary Tom Vilsack said that he “understand[s] that higher blends need to be supported,” adding that he is “confident” of E15’s expansion in 2025.
Along with supporting E15, Vilsack signaled his support for farmers and ethanol producers to be able to qualify for sustainable aviation fuel (SAF) credits under the Inflation Reduction Act, and that the department will look to integrate climate-smart agriculture practices into SAF credit modeling.
Brownstein Bookshelf
Becker Friedman Institute Report Highlights Positive Effects of TCJA: On Feb. 20, the Becker Friedman Institute for Economics at the University of Chicago updated a working paper finding that the Tax Cuts and Jobs Act of 2017 (TCJA, Pub. L. 115-97) created large positive effects on investment of U.S. companies and boosted U.S. economic growth. The paper, titled “Tax Policy and Investment in a Global Economy” and written by Gabriel Chodorow-Reich, Matt Smith, Owen Zidar and Eric Zwick, finds that U.S. firms’ domestic investment increased 20% compared to a no-change baseline, and foreign investment incentives substantially increased U.S. multinationals’ foreign capital.
CBPP Report Explores Benefits of CTC Lookback Provision: On Feb. 20, the Center for Budget and Policy Priorities (CBPP) released a report finding that the “lookback provision” of the child tax credit (CTC) expansion in the Tax Relief for American Families and Workers Act of 2024 would largely benefit families who temporarily face financial setbacks. The provision allows families to elect to calculate their eligibility and the amount of the CTC based on their earned income from the prior tax year. The report finds that the provision will not significantly affect employment rates and does not make the CTC “fully refundable,” as the credit will still be linked to employment.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other
On Feb. 27, the Hamilton Project of the Brookings Institution hosted an event titled “Meeting climate goals through tax reform,” featuring a fireside chat with Senate Budget Committee Chair Sheldon Whitehouse (D-RI).