Legislative Lowdown
Tax Package Update: Bill Passes House; Senate Process Remains Uncertain: On Jan. 31, the House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) by a 357-70 vote. The bill is a compromise originally crafted by House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR), which the Ways and Means Committee reported favorably on Jan. 19 by a 40-3 vote. The House considered the bill under the “suspension of the rules” procedure, which precluded amendments, but required a two-thirds vote of the House to pass.
The bill moved forward without changes despite concerns raised by New York Republicans, which resulted in negotiations with House Speaker Mike Johnson (R-LA) regarding relief from the $10,000 cap on the deduction of state and local taxes (SALT). The reported compromise allowed the tax package to move forward in exchange for later consideration of a standalone SALT relief bill, known as the “SALT Marriage Penalty Elimination Act” (H.R. 7160), which the Rules Committee favorably reported on Feb. 1 by an 8-5 vote. The House may consider that bill next week, but it has slim chances of passage, as several members on both sides of the aisle have raised concerns ranging from the lack of offsets to a preference for eliminating the SALT cap entirely.
In the Senate, Majority Leader Chuck Schumer (D-NY) has expressed interest in advancing the tax package after the strong bipartisan House vote, although Senate Republicans are seeking an opportunity to offer amendments to address concerns, largely focused on the bill’s modifications to the Child Tax Credit. The outlook in the Senate remains unclear and any discussions between Schumer and Minority Leader Mitch McConnell (R-KY) regarding a potential pathway to passage are being held up by the Senate’s continued focus on the national security supplemental. With the Senate scheduled to begin a two-week recess at the close of this week, action on the tax package appears likely to be postponed at least until the last week of February.
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Werfel Details IRS Priorities as Filing Season Begins, Including Increased Scrutiny of Wealthy Filers: On Feb. 5, IRS Commissioner Daniel Werfel provided insight into the Internal Revenue Service’s (IRS) top policy priorities as the agency seeks to utilize the additional funding from the Inflation Reduction Act (IRA, Pub. L. 117-169). Werfel stated that the agency’s focus would be in improving taxpayer service, enforcing compliance, and protecting taxpayers from tax scams and fraud.
As part of ongoing taxpayer service improvement initiatives, Werfel said that the agency is seeking to help taxpayers file correctly and avoid subsequent IRS engagements, expand service provided by Taxpayer Assistance Centers and the IRS Online Account, continue work on digitization initiatives like paperless processing, and simplify notices to ensure easier communications between taxpayers and the IRS. He added that the Direct File program, a government-operated program that will presumably allow certain taxpayers the option to file their 2023 tax returns for free directly with the government, also will help “ensure [taxpayers] have options to fulfill their tax obligations.”
With regard to compliance, Werfel reinforced his commitment to “reverse the historically low audit rates for large corporations, complex partnerships, and high-wealth individuals” by hiring enforcement personnel, accountants and other specialists to increase audits on millionaires and to analyze complex corporate structures conducive to tax avoidance. Finally, Werfel said that the agency will look into ways to improve warnings to taxpayers of ongoing tax scams and schemes that jeopardize taxpayer security and the overall U.S. tax system.
Biden Announces Tax Court Nominees as Backlog of Enforcement Cases Grows: On Feb. 1, President Biden nominated three individuals to serve as judges on the U.S. Tax Court, the first tax court nominations of his presidency. The nominees include Rose Jenkins, a tax attorney at the IRS Office of Associate Chief Counsel; Adam Landy, a special trial judge on the U.S. Tax Court and previously a senior attorney at the IRS Office of Chief Counsel; and Kashi Way, a senior legislation counsel at the Joint Committee on Taxation. Confirmation of Tax Court judges falls under jurisdiction of the Senate Finance Committee, and Chair Ron Wyden (D-OR) said that he “look[s] forward to processing these nominees in a timely way.”
The U.S. Tax Court currently has six vacancies out of its 19 positions, and confirming these nominees is critical for the IRS as the agency seeks to bring an increasing number of tax-enforcement cases to the Tax Court, as Commissioner Daniel Werfel indicated (see above). The Tax Court’s fiscal 2024 report warned that increased enforcement initiatives could lead to more complex cases, and that funding secured as part of the Inflation Reduction Act allocated to the court would help with modernization, hiring and streamlining efforts.
Senate Votes to Advance Rollinson Nomination a Second Time: On Jan. 31, the Senate Finance Committee convened to consider the nomination of Marjorie A. Rollinson to be chief counsel of the Internal Revenue Service (IRS). Rollinson had previously been nominated for the role in 2023 and had advanced out of the Senate Finance Committee in a Sept. 28 hearing, but her nomination lapsed and was returned after the first session of this Congress ended in December. Her nomination advanced out of committee by a 16-11 vote. Her nomination now moves to the full Senate for consideration. The IRS is once again one step closer to filling the role of chief counsel, a position that has been vacant since the beginning of the Biden administration.
IRS Faces Influx of ERTC Claims as Bill Sunsetting Credit Looms: A provision in the Tax Relief for American Families and Workers Act of 2024 establishes Jan. 31, 2024, as the last day to file a claim to receive the Employee Retention Tax Credit (ERTC), pushing forward the deadline established by the CARES Act (Pub. L. 116-136) to file an ERTC claim as April 15, 2024, for tax year 2020 and April 15, 2025, for tax year 2021. Given the bill’s release on Jan. 16, advisers were given two weeks to file outstanding claims before the new deadline, leading to speculation that the IRS was inundated with ERTC claims during this abbreviated period. In addition, these claims will not be processed until a later date, as the IRS’s moratorium on processing ERTC claims is still in effect.
If the bill passes, it remains unclear whether this provision will be applied retroactively to automatically disqualify ERTC claims filed between Jan. 31 and the date of the bill’s enactment, and such a designation could be subject to legal challenges. In addition, lawmakers could consider amending the bill to extend the deadline to file an ERTC claim as part of ongoing negotiations, but the chances of this happening are also unclear, as the provision is being used as a pay-for to fund other parts of the bill.
Treasury Department to Begin Finalizing Clean Energy Tax Credit Rules: The Treasury Department announced its “third phase” of tax guidance under the Inflation Reduction Act (IRA), which will include, among other guidance projects in the coming months, final guidance on the monetization of applicable IRA energy-tax credits. Outgoing Assistant Treasury Secretary for Tax Policy Lily Batchelder stated that phase three’s core priorities will be to “build on the foundational investments made to date by providing long-term stability for the market” by incorporating stakeholder feedback on proposed rulemakings issued in 2023. Areas in which the Treasury Department will seek to issue final guidance include production and investment credits (sections 45 and 48), the alternative fuel vehicle refueling credit (section 30C), the sustainable aviation fuel tax credit (section 40B), the advanced energy project tax credit (section 48C), and the low-income communities and domestic content bonus credits. Guidance also is expected to be issued on credit mechanics, like elective pay and transferability of certain clean-energy credits and prevailing wage and apprenticeship requirements. The Treasury Department notably did not provide a timeline for finalizing guidance on the clean hydrogen tax credit. The proposed regulations on hydrogen are still open for comment until Feb. 26.
At a Glance
IRS Potentially Finalizing “Killer B” Transaction Guidance in 2024: Speaking at an event on Jan. 30, Internal Revenue Service (IRS) Office of Chief Counsel attorney Brady Plastaras said that the IRS is seeking to issue final regulations, potentially in the first half of 2024, governing foreign corporations’ engaged in so-called “Killer B” transactions. Killer B transactions involve triangular reorganizations in which a subsidiary buys stock in its own parent company and uses the stock to acquire another company. Plastaras indicated that the final regulations will not markedly differ from proposed regulations issued in October 2023.
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CBPP Releases Report on Effects of Tax Package’s CTC Expansion: The Center on Budget and Policy Priorities (CBPP) released a report analyzing the impact of the expansions to the Child Tax Credit (CTC) in the Tax Relief for American Families and Workers Act of 2024. The report finds that the expansion would benefit about 16 million children, including 3 million children under the age of 3. The CTC expansion also would help lift families with children out of poverty, with estimates that 400,000 children would be lifted above the poverty line in the first year of the credit’s implementation, and at least 500,000 children in the second year.
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.