Programming Note: Taxation & Representation will return on April 10, following the two-week congressional recess.
Legislative Lowdown
Tax Bill Update – Package Not Expected to Move Before Congressional Recess: The Tax Relief for American Families and Workers Act (H.R. 7024) continues to stall in the Senate, and negotiations between the Senate’s top tax writers have not made progress. Last week, both Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID) reportedly offered compromises that included significant modifications to the bill’s child tax credit (CTC) provisions. However, Wyden rejected the Republicans’ offer out of concerns that it would cut too deeply into the CTC and endanger Senate Democrats’ support for the bill, and Crapo is reported to have rejected the Democrats’ offer based on a further expansion of the CTC’s refundability. Given the March 22 deadline to pass the final tranche of FY2024 appropriations bills, the Senate’s next opportunity to consider the bill will be after the upcoming two-week congressional recess. During the recess, industry supporters of the bill, as well as family advocacy groups, are expected to make a final push on the Senate to reach a compromise given their interests in the package’s business tax provisions and the CTC and low-income housing modifications on the family side of the package. The individual tax-filing deadline on April 15 continues to be the informal cutoff for action, after which enactment of the CTC provisions, in particular, will become increasingly difficult as the November election nears and the political environment in Congress will consign tax reforms to the 119th Congress.
Appropriations Update – Homeland Security Bill Threatens Timely Passage: The temporary funding for the final tranche of FY 2024 appropriations bills—comprised of State-Foreign Operations, Defense, Homeland Security, Labor-HHS, Legislative Branch and Financial Services-General Government—is set to expire on March 22. With five of the six bills finalized earlier in the week, negotiators reached a handshake agreement on March 18 on the Homeland Security bill, encompassing issues on immigration and border security. While an additional continuing resolution of a few days may be needed, the agreement on the Homeland Security bill paves the way for Congress to wrap up FY 2024 appropriations after nearly six months of temporary funding measures.
Biden Administration’s FY 2024 Budget Requests Includes Key Tax Proposals: On March 11, President Biden released his budget request to Congress (“Budget”) and various accompanying documents. Separately, the Treasury Department released its General Explanations of the Administration’s Fiscal Year (FY) 2024 Revenue Proposals, commonly known as the “Green Book,” which provides detailed descriptions of the tax proposals in the Budget along with associated revenue estimates.
The $7.3 trillion Budget is the largest in U.S. history, including $1.6 trillion in base discretionary spending—approximately $895 billion for defense and $734 billion in non-defense discretionary spending. If enacted in its entirety, the Budget would raise $5 trillion in additional tax revenue over the next 10 years compared to baseline budgetary estimates on top of revenues resulting from the expiration of the 2017 Tax Cuts and Jobs Act, which the Budget assumes. For FY2025, the Budget would result in an estimated federal deficit of approximately $1.8 trillion—an increase of about 30% compared to FY2023 levels.
Treasury Secretary Janet Yellen will appear before the Senate Finance Committee on March 21 to review the Treasury Department and IRS budget requests and address lawmakers’ questions. Yellen is expected to also participate in a similar hearing with the House Ways and Means Committee following the spring recess.
This is the fourth and final budget proposal that Biden will submit to Congress before the end of his first term and highlights the tax-policy priorities that will continue to be central to his reelection campaign. Republicans are expected to oppose a majority of the tax and spending proposed in the Biden budget request, and the extent of congressional Democrats’ support for all of the tax proposals is uncertain.
For Brownstein’s key tax takeaways and a comprehensive summary of tax proposals in the Green Book, please click here.
Senate Democrats Write in Support of IRS Increased Corporate Jet Audits: On March 10, six Democratic senators, including Senate Finance Committee Chairman Ron Wyden (D-OR), wrote a letter to Treasury Secretary Janet Yellen and Internal Revenue Service (IRS) Commissioner Daniel Werfel to support the agencies’ decision to resolve ambiguities in the “Standard Industry Fare Level” policy allowing improper use of corporate jet travel to minimize business executives’ tax liabilities. The letter praises the use of existing regulatory authority to take action and urges more action to evaluate the ambiguity, saying, “audits are an important tool, but stronger rules on the valuation of personal use of corporate aircraft would close a regulatory loophole that helps wealthy taxpayers maximize corporate jet tax breaks even when reporting personal travel.” The letter asks the Treasury Department and IRS to provide a staff-level briefing by March 25 on the IRS’s progress in scrutinizing corporate jet usage. Separately, the Biden administration’s FY 2025 proposal includes two line items affecting owners of corporate jets—increasing the excise tax on kerosene jet fuel and increasing the depreciation period for private-use aircraft.
Tax Worldview
Smith and Crapo Continue Opposition to Ongoing Pillar One Negotiations: On March 13, House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Ranking Member Mike Crapo (R-ID) issued a joint statement criticizing the Biden administration for preparing to commit to the Pillar One global tax agreement negotiated by the Organisation for Economic Co-operation and Development (OECD). The letter discusses an analysis from the Joint Committee on Taxation (JCT) finding that U.S.-based companies would be responsible for about 70% of profits subject to reallocation under Pillar One, and that the United States would have lost $1.4 billion in federal tax receipts if Pillar One Amount A rules had been implemented in 2021. Smith and Crapo stressed that “the bad behavior of foreign countries imposing [digital services taxes] should not be rewarded by accepting a deal that reduces U.S. revenue, undermines our tax sovereignty, and fails to provide more stability to boost American companies in the global marketplace,” urging the Biden administration to renegotiate the deal in consultation with Congress.
1111 Constitution Avenue
Direct File Fully Launched in 12 Pilot States; Take-Up Rate Remains Low: On March 12, the Internal Revenue Service (IRS) announced that the IRS Direct File pilot, which allows select taxpayers to file federal tax returns through a government-operated tax preparation software and processing system, has been fully launched to taxpayers in the 12 pilot states for filing their tax year 2023 returns. The IRS has stated that its initial rollout—first to eligible agency employees, followed by select “early users” of the program—was a success, with IRS Commissioner Daniel Werfel saying, “[t]he early results from Direct File have shown taxpayers like the ease and convenience of the tool, and moving into the full-scale launch of the pilot will give more taxpayers the chance to use this free option.”
The assessment of the pilot program’s performance will determine whether the program will be fielded in future years, though the political atmosphere after the 2024 election will inevitably play a role in whether funding can be secured for the program’s expansion. The take-up rate on Direct File has been low, with only 15,000 taxpayers having created an account, started a return or completed a return on the Direct File portal, far below the IRS’s target of “several hundred thousand” outlined a few weeks ago. More recently, the Treasury Department and the IRS have trimmed their expectations, saying that they hope 100,000 taxpayers use Direct File. But insiders believe even that low figure could be hard to reach. The IRS has said that they will not be using the number of users as a measure of success, citing the pilot’s limited scope, and the commissioner and others have not discussed the overall costs of the pilot. These two figures—number of users and overall costs—will be critical in any assessment of whether Direct File should continue. Furthermore, as many Republicans in Congress have noted, the IRS arguably needs an authorization from Congress to expand Direct File to the general population.
IRS Signals Enhanced Crypto Tax Enforcement with First Charge: On March 6, a federal grand jury charged Frank Richard Ahlgren III for filing false tax returns and structuring cash deposits to avoid currency transaction reporting requirements in a case the IRS said marked the first time a charge has been levied only for underreporting of cryptocurrency gains on a tax return. The charge signals that the IRS is increasing scrutiny on cryptocurrency traders and purchasers, using funds from its enhanced enforcement budget provided by the Inflation Reduction Act (IRA) to do so. Proving cryptocurrency tax fraud, in the absence of other tax-related crimes like fraud or money laundering, can be difficult because of cryptocurrency transactions’ relative lack of a paper trail detailing how much was gained from a sale, and thus how much capital gains tax should be assessed. This also demonstrates that the agency has built up technical resources and expertise on combatting cryptocurrency-related tax crimes.
Guy Ficco to Replace James Lee as IRS Criminal Investigation Chief: On March 13, the Internal Revenue Service (IRS) announced that Guy Ficco, the current deputy chief in the IRS Criminal Investigation (CI) division, will succeed James Lee as chief after Lee announced his retirement from the role at the end of March. The CI division is the IRS’s law enforcement arm, which conducts investigations on various financial crimes. Before serving as deputy chief, Ficco served as a supervisory special agent in the IRS’s Washington, D.C., Field Office and as executive director of the Global Operations, Policy and Support subdivision.
At a Glance
DOE Awards $750 Million to Clean Hydrogen Projects: On March 13, the Department of Energy (DOE) awarded $750 million to help finance 52 domestic hydrogen projects across 24 states, some of which may also qualify for clean energy tax credits. According to DOE, the projects, which are funded by the Infrastructure Investment and Jobs Act of 2021 (Pub. L. 117-58), will support more than 1,500 new jobs, produce up to 14 gigawatts of fuel cells per year and enough electrolyzers to create an additional 1.3 million tons of clean hydrogen annually. DOE notes that the funding will complement its Regional Clean Hydrogen Hub program and the Section 45V tax credit to achieve the Hydrogen Shot goal of reducing the cost of producing clean hydrogen to $1 per kilogram. Among the selected projects, eight will highlight low-cost, high-throughput electrolyzer manufacturing; 10 will develop an electrolyzer component and supply chain; 18 will demonstrate advanced technology and component development; five will support advanced manufacturing of fuel cell assemblies and stacks; and one will establish a recovery and recycling consortium.
Yellen Announces Ramped-Up Outreach Initiatives on IRA Energy-Tax Credits: On March 13, Treasury Secretary Janet Yellen announced that the Treasury Department will increase consultations with local governments on utilizing the energy-tax credits in the Inflation Reduction Act (IRA). The department will also aim to increase outreach by joining the Thriving Communities Network, which advocates for the Biden administration’s Justice40 initiative. The IRA allows for state and local governments to claim IRA credits for any clean energy manufacturing credits through the direct pay option that allows qualifying entities to monetize the credits. Some local officials have expressed concerns that the direct-pay mechanism may induce local governments to accrue budget deficits to finance projects that may prove to be ineligible, but White House officials noted that the federal government will offer bridge financing and budget planning initiatives to mitigate these concerns.
Ways and Means Republicans Probe IRS on Remote Work Policy: Reps. David Kustoff (R-TN) and Ron Estes (R-KS), joined by eight Republicans on the House Ways and Means Committee, wrote a letter to IRS Commissioner Daniel Werfel on March 12 discussing the IRS’s telework policies and how the policy may adversely affect taxpayer service and information security. The letter notes that taxpayers have reported difficulty in reaching the IRS and having inquiries resolved, and that the possibility of IRS employees and contractors accessing sensitive information remotely “ultimately increases the risk of unauthorized access and disclosure.” The representatives ask the commissioner to respond to eight questions concerning how many IRS employees work remotely and the sensitivity of information they are able to access remotely.
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
On March 21, the Senate Finance Committee will hold a hearing titled “Hearing on the President’s Fiscal Year 2025 Budget.”