Legislative Lowdown
Bipartisan Innovation Act: More Tax Talk. The conference committee to reconcile the House-passed America Creating Opportunities for Manufacturing, Pre-Eminence in Technology and Economic Strength Act (COMPETES, H.R.4521) and the Senate-passed U.S. Innovation and Competition Act (USICA, S.1260) will soon officially begin its work. First, the Senate must vote on nearly 30 motions to instruct—nonbinding instructions for conferees on provisions to include in the final package.
Among those motions is one proposed by Sen. Maggie Hassan (D-NH), a member of the Senate Finance Committee. The Senate will vote on her motion to include a research and development tax credit for small businesses and renew immediate expensing of research and development costs. Members from both parties have supported the provision.
Other members are urging conferees to include a provision that would provide relief for certain companies that use “last in, first out” (LIFO) accounting measures. Due to global supply chain issues, some companies that fail to maintain a certain amount of inventory, such as automakers, can be subject to recapture taxes. Rep. Dan Kildee (D-MI), a member of the House Ways and Means Committee, has pushed conferees to adopt his bill, the Supply Chain Disruptions Relief Act (H.R.7382), during negotiations. The bill has strong bipartisan support in both chambers and would provide a statutory determination that the requirements for a qualified liquidation under Section 473 have been satisfied for new motor vehicle dealers that have had a reduction of new vehicles held in LIFO inventory.
Senate Preparing Retirement Legislation. The House Ways and Means Committee and the House Education and Labor Committee have both advanced retirement legislation this Congress—the Securing a Strong Retirement Act (“SECURE 2.0,” H.R.2954) and the Protecting America’s Retirement Security Act (H.R.7310). The Ways and Means product, SECURE 2.0, passed the House in March 2022 with overwhelming bipartisan support, but the Education and Labor measure, the Protecting America’s Retirement Security Act, only advanced along party lines out of committee in early April 2022.
On the Senate side, work on a potential retirement package continues. The Senate Health, Education, Labor and Pensions (HELP) Committee and Senate Finance Committee are expected to advance their own retirement packages.
Senate HELP Chair Patty Murray (D-WA) and Ranking Member Richard Burr (R-NC) are crafting the retirement package they hope to move “later this spring.” Other committee members may attempt to have separate retirement legislation considered by the panel. Sens. Tim Scott (R-SC) and Jacky Rosen (D-NV), both of whom sit on the committee, introduced the Small Business Retirement Choices Act (S.4086) last week. That bill would amend existing law to allow small businesses to use retirement plan funds to pay expenses associated with retirement plan design changes.
Sen. Rob Portman (R-OH), who is crafting a retirement package with Sen. Ben Cardin (D-MD), said last week he expects the Senate Finance Committee to consider their legislation, the Retirement Security and Savings Act (S.1770), in May. However, Senate Finance Committee Chair Ron Wyden (D-OR) said earlier in the week that he plans to hold a markup on SECURE 2.0 after the current work period, which ends around Memorial Day.
With such strong bipartisan support, a final retirement package is currently expected to pass during the “lame-duck” session, the period after the midterm elections and before the start of the next Congress.
Neal Outlines Appropriations Priorities. Senate Appropriations Committee Chair Pat Leahy (D-VT) wants appropriators to reach a topline spending agreement “in the next couple of weeks.” His remarks came shortly after a meeting of top Democrats and Republicans on the House and Senate appropriations committees—a meeting Leahy described as “excellent” and one devoid of “any political posturing from anybody in either party.” At the same time, Leahy acknowledged that discussions remain in early stages. “Where’s the top line? We’re not there yet,” he said. “It may be a while.”
As government funding discussions continue, Rep. Richard Neal (D-MA), who chairs the House Ways and Means Committee, sent a letter last week to House Budget Committee Chair John Yarmuth (D-KY) outlining his top priorities for the spending package. Neal said he aims to ensure U.S. tax policy and administration “are fair for families and small businesses”, strengthen retirement security, improve health care affordability and modernize U.S. infrastructure, among other things.
Diving deeper into the tax component of his budget priorities, Neal highlighted the importance of tax policy on wage levels, housing and health care markets, access to higher education and the cost of raising children. To address these issues, Neal said the committee will “examine policies that deliver more inclusive economic growth that supports and grows America’s middle class.” He said the committee will pursue “worker-focused policies” that “will include infrastructure investment, retirement savings, workforce development, access to higher education, and small business growth.”
IRS Commissioner Charles Rettig testified today before the Senate Appropriations Subcommittee on Financial Services and General Government.
1111 Constitution Avenue
GAO Examines Free File. The Government Accountability Office (GAO) issued areport last week revealing the findings of its review of the Free File program, which allows taxpayers with incomes below $73,000 to prepare and file their tax returns for free. The Free File program is operated by the IRS and Free File Inc., a group of eight tax preparation companies. The current agreement between these companies and the IRS runs through October 2023.
Two companies—Intuit and H&R Block—have left the Free File program in recent years, after which the percentage of taxpayers using Free File dropped. In fact, the GAO reported that while over 70% of taxpayers are eligible for Free File, only about 4% of taxpayers use the service.
The report detailed ways in which the IRS might improve the Free File program. The IRS could, for instance, optimize Free File for mobile devices, improve access for taxpayers with disabilities and expand the number of foreign languages.
The GAO also explored the potential advantages of the IRS developing its own filing system, rather than operating through Free File Inc. Stakeholders told the GAO that the IRS has an informational advantage relative to industry with respect to data it receives from third parties. They suggested the IRS could potentially prepopulate tax returns—automatically entering third-party information into a taxpayer’s return. However, the GAO said this could be accomplished through the existing Free File arrangement and would not require the IRS to operate its own program. Nevertheless, the GAO said laws to ensure taxpayer information privacy would make it easier for the IRS to offer this capacity rather than industry. But previous studies have found that it might be difficult for the IRS to obtain relevant third-party data in a timely manner.
Finally, the GAO said the IRS faces risks from relying too heavily on Free File Inc., particularly if companies continue to abandon the program. The IRS has limited leverage over the companies because it does not pay them for participating in the program, so others leaving the Free File program could cause significant disruptions.
IRS Names New SB/SE Division Leads. The IRS announced last week that Lia Colbert will be the new commissioner of the Small Business/Self-Employment (SB/SE) Division. In this role, Colbert will be responsible for overseeing 20,000 employees dedicated to helping more than 57 million small businesses and self-employed taxpayers understand and meet their tax obligations.
Prior to this new role, Colbert served as director for the Taxpayer First Office within the Office of the National Taxpayer Advocate. Before that, she served in multiple roles at the IRS, including chief of staff to IRS Commissioner Charles Rettig. In the release announcing Colbert’s new appointment, Rettig said, “This is a crucial position for the IRS, and Lia's background provides a unique perspective for this important role.”
The IRS also announced that Maha Williams will serve as deputy commissioner for examination within the SB/SE Division. In this role, Williams will be responsible for “providing executive expertise and direction for special projects covering major segments of SB/SE including Campus Exam/Automated Under Reporter (AUR), Field Exam, Specialty Exam, Headquarters Exam and Exam Performance & Planning Analysis.” In this role, she will also provide support for all IRS efforts in identifying abusive tax transactions, tax schemes and emerging abusive arrangements. Prior to her appointment, Williams held various positions in SB/SE, including deputy director for examination and director for case selection.
Global Getdown
FTC Regs in Need of Attention. A bipartisan group of 10 House Ways and Means Committee lawmakers sent a letter to Treasury Secretary Janet Yellen last week urging the administration to reconsider foreign tax credit (FTC) final regulationsissued in late December 2021.
The lawmakers specifically raised concerns that the rules could cause businesses to face double taxation of income subject to tax in another jurisdiction. They explained that “denying credits for foreign taxes that were previously creditable may lead to unintended consequences with compounding effects for U.S. businesses, such as double-taxation or U.S. firms making decisions to offshore intellectual property.” The result could be fewer investments in U.S. emerging markets and a decrease in U.S. competitiveness, the letter contends.
The letter also presented a common objection to the rules often expressed by industry players: they will
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.
To address these issues, the letter requested the IRS to coordinate with companies to provide more comprehensive guidance and consider offering safe harbors “to make clear the regulations do not disallow credits for taxes that are clearly imposed on net income attributable to the taxing country.” Importantly, the letter also recognizes the effect that the new regulations are having on financial statements filed by publicly traded companies and stresses that “for those elements where Treasury is unable to provide further administrative guidance to clarify the application of these regulations, we respectfully request that Treasury extend the implementation window for the final regulations.”
The letter was signed by Reps. Brad Schneider (D-IL), Kevin Hern (R-OK), Stephanie Murphy (D-FL), Drew Ferguson (R-GA), Ron Kind (D-WI), Jodey Arrington (R-TX), Jimmy Panetta (D-CA), Ron Estes (R-KS), Stacey Plaskett (D-U.S. Virgin Islands) and Jackie Walorski (R-IN).
At a Glance
- GDP Falls. Gross domestic product (GDP) declined by an annualized 1.4% rate during the first quarter, well below the 1% growth rate expected by some economists. It was the first time GDP declined since 2020—the beginning of the COVID-19 pandemic.
- Gas Price Plan. House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer (D-NY) announced legislation last week to address rising gas prices. The legislation would provide additional authorities to federal and state agencies to combat alleged “price gouging and profiteering” by oil and gas companies.
Brownstein Bookshelf
- JCT: Excise Tax Revenues. The Joint Committee on Taxation issued a reportlast week on income and payroll tax offsets to changes in excise tax revenues for 2022-2032.
- CRS: Opportunity Zones. The Congressional Research Service released areport last week on tax incentives for opportunity zones.