Legislative Lowdown
Congressional Tax Staffers Outline Agenda. Several senior staffers on the House Ways and Means Committee and the Senate Finance Committee—Andrew Grossman, Courtney Connell, Derek Theurer and Tiffany Smith—participated in a conference on tax legislation and regulatory developments last week held by the D.C. Bar Taxation Community. The staffers, who serve as tax counsel to either Republicans and Democrats on the committee, agreed on potential areas of bipartisan cooperation this Congress: a retirement security package and possibly an extenders package that could be considered before the end of the year.
Another potential area for bipartisan agreement, according to the staffers, is the Facilitating American-Built Semiconductors (FABS) Act (S.2107). Authored by Sens. Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID), the chair and ranking member on the Senate Finance Committee, the FABS Act would establish a new 25% tax credit for investment in semiconductor manufacturing facilities. The FABS Act is being considered by conferees negotiating the Bipartisan Innovation Act.
Beyond this, the legislative priorities diverged. The Democratic staffers insisted that the Build Back Better Act remains the party’s top legislative priority, whereas Republicans warned against passing large spending packages that could exacerbate inflationary trends. If Republicans regain control of either chamber, the staffers said they would seek to make permanent the Tax Cuts and Jobs Act (P.L.115-97)—something the Democratic staffers largely opposed.
Staffers Discuss Build Back Better. On a separate panel at the tax conference last week, Democratic congressional staffers discussed the long-stalled Build Back Better Act (BBBA). According to Robert Andres, a senior policy adviser for Senate Finance Committee Democrats, the package will not pass in between the August district work period and the November midterm elections due to political sensitivities. Should BBBA remain stalled in Congress before the monthlong break, the next opportunity for passage would be during the “lame-duck” session, the period after the midterm elections and before the next Congress. Should Democrats attempt to move a package then, they will need to initiate a new budget reconciliation process since Congress will enter a new fiscal year beginning Nov. 1.
In the meantime, Andres said the BBBA still remains “the best vehicle to provide long-term certainty for [energy] incentives.”
Alice Lin, a budget policy adviser for House Ways and Means Committee Democrats, agreed. Should the package ultimately fail, however, she said lawmakers could still move energy provisions in a year-end tax extender package. She acknowledged, though, that the duration of the provisions would likely be shorter if they moved through an extenders package, suggesting one- or two-year periods as opposed to five years, for example.
Implementing the Inclusive Framework. Treasury Secretary Janet Yellen is still hopeful Congress can enact some version of the Build Back Better Act this year, and she wants it to include the corporate minimum tax provisions required for compliance with the Pillar Two global minimum tax regime endorsed by nearly 140 countries through the Organisation for Economic Cooperation and Development (OECD) last October.
While Yellen admitted to not knowing “what will happen with reconciliation,” she nevertheless remains “hopeful that some reconciliation package will be passed” before adding that she “believe[s] that this [the global minimum corporate tax language] will be a component.”
In terms of timing, she expects the European Union (EU) to adopt its Pillar Two measures “this spring” since “the EU is very close to adopting the global minimum tax.” Should this occur, Yellen contends, “It will be a good example for the U.S.” Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the OECD, seemingly agreed when he said at a tax conference last week that the EU would likely pass the directive enacting the 15% minimum tax this month.
At the same time, however, Saint-Amans was less optimistic about other countries adopting similar legislation quickly. He said, for instance, that “there is an extremely ambitious timeline. We’ll see whether it can be met.”
Batchelder Addresses Tax Credit Concerns. Lily Batchelder, Treasury assistant secretary for tax policy, responded last week to claims that the global minimum tax agreement would undermine U.S. tax incentives.
Speaking at a tax conference, Batchelder said the administration is “confident that the value of many [domestic] business credits is preserved under the OECD rules.” She explained that tax breaks related to low-income housing and renewable energy, in addition to the New Markets Tax Credit, would not be affected because “the income or loss and the income tax consequences of those investments typically will be excluded from the effective tax rate calculation.”
In response to questions about other U.S. tax credits such as the research and development credit, Batchelder said the U.S. has “established a process with the OECD for working towards additional clarifications.” Under the current OECD model rules, non-refundable credits would adversely affect a company’s effective tax rate calculation, potentially subjecting it to a top-up tax under the proposed global minimum tax regime.
Commissioner Rettig Testifies on the Hill. The Senate Appropriations Subcommittee on Financial Services and General Government held a hearing last week on the fiscal year 2023 budget request from the Internal Revenue Service (IRS). Commissioner Charles Rettig testified before the committee—his third time appearing before Congress within the last few weeks. During his remarks, he updated lawmakers on several issues:
- Processing Backlog: Rettig, reporting that the paper return backlog was 5.8 million as of April 21, repeated his commitment to addressing the backlog by the end of the year. When asked if the IRS had plans to implement paper scanning technology to assist with the processing of paper returns, Rettig reminded the lawmakers that 2-D barcode scanning would still require IRS personnel to be personally involved, so it would not entirely automate processing.
- Workforce: Rettig also thanked Congress for providing the IRS with direct hiring authority, which he said would allow the agency to more quickly onboard employees. He announced that since the IRS received that authority on March 15, it has begun onboarding 2,500 employees. The IRS wants to hire another 5,000 new employees this year and an additional 5,000 in 2023.
- ID.me: Rettig also discussed the agency’s transition from ID.me to Login.gov. He said Login.gov is currently attempting to increase its authentication and transaction-per-second rate to meet standards set by the National Institute of Standards and Technology. According to a Government Accountability Office report issued last week, Login.gov should be available for taxpayers in either November or December 2022.
Finally, Rettig acknowledged during the hearing that it could be his last. His term expires in November 2022, and there is no guarantee Rettig, who was nominated by then-President Donald Trump, will be renominated by President Joe Biden.
Senate Finance Examines Tax Exempt Orgs. The Senate Finance Subcommittee on Taxation and IRS Oversight held a hearing last Wednesday on the laws and enforcement governing the political activities of tax exempt entities. The politically charged hearing focused on the current reporting and oversight requirements concerning tax exempt entities and their influence activities.
Democrats, in particular Subcommittee Chair Sheldon Whitehouse (D-RI), expressed concern about attempts by foreign organizations to influence U.S. elections and attempts by organizations to bypass donor reporting requirements. To address these concerns and others, some Democrats have supported the DISCLOSE Act (S.2371). Introduced by Senate Majority Leader Chuck Schumer (D-NY) in October, the bill would, among other things, prevent foreign influence in U.S. elections and enhance disclosure requirements.
Republicans, on the other hand, warned of legislative attempts to benefit one political party over another by changing the rules and regulations. Subcommittee Ranking Member John Thune (R-SD), for instance, objected to calls for turning the Federal Elections Commission, an independent regulatory agency responsible for overseeing campaign spending, into a more partisan body.
For a full summary of the hearing, contact a member of the Brownstein National Tax Policy Group.
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2022 Filing Season Interim Results. The Treasury Inspector General for Tax Administration (TIGTA) issued a report Thursday detailing interim results for the 2022 tax filing season, which concluded on April 18.
The IRS began processing individual tax returns on Jan. 24, 2022, and it is clear the processing backlog remains high. As of the week concluding on March 12, 2022, the IRS has over 500,000 pieces of unopened mail and about 4.5 million outstanding paper tax returns. According to the report, the IRS expects to receive more than 160 million individual income tax returns. However, as of early March, it had received only 53 million, or about one-third of the total.
As the IRS continues to struggle hiring enough personnel, staffing shortfalls remain a significant contributor to backlog woes. As IRS Commissioner Charles Rettig testified last week, the agency has recently onboarded new personnel but is still far below its hiring goals for the year. As the report notes, TIGTA said the IRS has met only 9.5% of its Submission Processing Center hiring goal, estimating that the agency is facing a total staffing deficiency of 4,952 employees.
Taxpayer service has also suffered. The report notes that IRS employees answered 2.7 million calls compared to 4.4 million the previous year. It also took the IRS longer to answer phone calls, requiring taxpayers to wait an average of 24 minutes to speak with a representative compared to 18 minutes last year.
Complicating matters further were multiple changes to tax laws during the COVID-19 pandemic, requiring the resource-thin agency to quickly adapt. The report explains that, under the American Rescue Plan Act alone, the IRS had to make changes to the Child and Dependent Care Tax Credit, the Child Tax Credit, the Earned Income Tax Credit, the Premium Tax Credit and a new Recovery Rebate Credit—all of which further strained the agency.
IRS Meeting Expedited PLR Goals. In January 2022, the IRS established a new program allowing for expedited processing of private letter ruling (PLR) requests that fall under the jurisdiction of the Office of Associate Chief Counsel. If approved for consideration, the program aims to process PLRs within 12 weeks. The program has thus far proven effective, according to an IRS official last week.
Kelly Madigan, senior counsel at the Office of the Chief Counsel, reported that no deadline has been missed and no applicants have been denied. According to Madigan, the office has “taken the program very seriously and have been working hard and efficiently to make sure [it] meet[s] the fast-track deadlines.”
Global Getdown
IRS Receiving FTC Reg Input. The Treasury Department and IRS will continue consulting with industry stakeholders before making decisions on changing foreign tax credit final regulations issued in late December 2021.
At a tax conference last week, Isaac Wood, an attorney-adviser in the Office of Tax Policy at the Treasury Department, said the administration will continue receiving feedback from corporate taxpayers and their advisers. According to Wood, the Treasury Department is “going to continue that process before we determine the precise contours of any change or changes to this rule.”
Wood commented on some of the concerns raised by stakeholders so far, including the significant changes in the regulations on the treatment of royalties. While Wood said it would be difficult for taxpayers and the IRS to assess the place of use for all intangibles, “place of use” could be determined in a more administrable way when, for example, the terms of a license agreement expressly limit the license to a single country. These are the types of issues the administration is currently working through, according to Wood, who said “those considerations about other administrable approaches are exactly the questions that we’re considering at this time.”
The comments come shortly after a May letter signed by Republicans and Democrats on the House Ways and Means Committee requesting that the administration coordinate with companies to provide more comprehensive guidance on the regulations. The lawmakers raised concerns that the rules could cause businesses to face double taxation of income subject to tax in another jurisdiction and argued the rules could negatively affect companies operating in foreign countries without a U.S. tax treaty, particularly with respect to how they domicile intellectual property or are subject to withholding taxes.
At a Glance
- Senate Warm to Frost: The Senate confirmed Joshua Frost 54-42 to serve as assistant secretary for financial markets at the Treasury Department.
- Democratic Unity on Book Minimum. Sen. Elizabeth Warren (D-MA) said last week that all 50 Senate Democrats support establishing a new 15% “book income” tax on large corporations. Warren specifically said she has “50 Democrats in favor of a minimum book tax” and that she “believe[s] this is going to happen.”
- Intuit Settlement. Intuit, owner of TurboTax, agreed last week to pay $141 million to customers who paid for its products after the company advertised its free services. In an announcement about the agreement, New York Attorney General Letitia James said Intuit “mislead the most vulnerable among us to make a profit” and “cheated millions of low-income Americans out of free tax filing services.”
Brownstein Bookshelf
- Implementation of PTC. The Treasury Inspector General for Tax Administration issued a report last week on implementation of the Premium Tax Credit provisions enacted under the American Rescue Plan Act.
- Prepopulation of Tax Forms. A new study authored in part by two Treasury Department officials in the Office of Tax Analysis found that the IRS could potentially prepopulate tax forms for up to almost half of taxpayers.