Taxation & Representation, Nov. 1, 2023
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Taxation & Representation, Nov. 1, 2023

November 01, 2023

By Brownstein Tax Policy Team


Legislative Lowdown

Johnson Elected Speaker: Shutdown Looms, Year-End Tax Bill Remains a Possibility. After a three-week speakership vacancy following Rep. Kevin McCarthy’s (R-CA) removal from the position on Oct. 3, the House voted 220-209 along party lines to elect Rep. Mike Johnson (R-LA) as its new speaker.
Speaker Johnson, prior to his election, released a Dear Colleague Letter on Oct. 23 outlining his plans to pass fiscal year (FY) 2024 appropriations measures quickly through the House. He also wrote in support of passing another stopgap measure to extend government funding beyond the current Nov. 17 deadline, with a new expiration date of either Jan. 15 or April 15. He further called for the FY 2024 Labor, Health and Human Services (HHS) and Education bill and the FY 2024 Commerce, Justice, and Science bill to be discharged from the House Appropriations Committee, as well as the establishment of a working group to address member concerns with the FY 2024 Agriculture, Rural Development, and Food and Drug Administration (FDA) appropriations bill after it failed to pass the chamber late last month. Speaker Johnson suggested passing all remaining appropriations bills in the House by the beginning of December, with FY 2024 funding negotiations continuing into January–April of next year. Pursuant to the Fiscal Responsibility Act, which lifted the federal debt ceiling until 2025 in exchange for caps on federal spending programs, if all 12 appropriations bills are not enacted by Jan. 1, 2024, all federal agencies will receive a 1% cut to their FY 2023 budget levels beginning on April 30. The House has passed five of the 12 spending bills to date, with the Energy and Water bill advancing on Oct. 26.
With Speaker Johnson’s rise comes renewed interest as to whether both houses will agree to pass a tax bill by the end of the year. Though Speaker Johnson has expressed interest in passing a bill that would raise the state and local tax (SALT) deduction cap—a move that won him critical support from Republicans representing districts in high-tax states like California and New York—the outlook for such a provision remains unclear. Instead, the focus will be on interactions between Speaker Johnson and Senate leadership and whether a final appropriations bill can carry a tax package to be negotiated by the chamber’s two tax-writing committees centered on expensing of research and development, bonus depreciation, and the interest deduction from the Tax Cuts and Jobs Act (Pub. L. 117-52), combined with an expanded child tax credit and potentially affordable housing provisions.
Senate Update: Minibus Slated for Floor Vote, Paul Amendment Would Rescind IRS Funding. On Oct. 24, Senate leadership reached a deal to advance the process of filing amendments to a $280 million “minibus” spending bill that includes its versions of the Military Construction-VA, Agriculture-FDA, and Transportation-HUD spending measures. As early as Nov. 1, the Senate plans to continue voting on amendments with the goal of passing the minibus later in the week.
40 amendments to the minibus will be considered, one of which is Sen. Rand Paul’s (R-KY) amendment to rescind $25.035 billion in IRS enforcement funds allocated to the IRS in the Inflation Reduction Act (IRA, Pub. L. 117-169). The amendment is expected to fail resoundingly, as it would require 60 votes to pass and Sen. Paul only expects up to 10 Republican senators to vote with him on the bill. Sen. Paul claimed that there was a lack of concern over the federal deficit by his Republican colleagues, but an analysis by the Congressional Budget Office (CBO) showed that his amendment would increase the federal deficit by $23.8 billion over the next 10 years.

House Republicans Propose Israel Aid Bill with IRS Funding Cut. On Oct. 30, House Speaker Mike Johnson (R-LA) released the House Republicans’ bill to provide $14.3 billion aid to the Israeli government amid an ongoing Israel-Hamas war. The bill would rescind the same amount—$14.3 billion—in enforcement funding for the Internal Revenue Service (IRS) allocated in the Inflation Reduction Act. In an interview, Speaker Johnson stated that he hoped the bill would garner bipartisan support, the “immediate and urgent need” of addressing the conflict outweighs funding “IRS agents.” The bill will be Speaker Johnson’s first to head to the floor for consideration, and he intends to hold a vote this week.
The bill’s fate is uncertain in the House, as some Republicans like Reps. Thomas Massie (R-KY) and Marjorie Taylor Greene (R-GA) have announced their opposition to funding Israel for now. But even if it does pass the House, the bill will face steep opposition by Senate Democrats, who oppose both the lack of funding in the bill for Ukraine and other U.S. humanitarian interests as well as the rescission of IRS funds. Senate Majority Leader Chuck Schumer (D-NY) stated shortly after the bill’s release that he would prefer a more comprehensive aid bill, such as the package proposed by President Biden. Senate Finance Committee Chair Ron Wyden (D-OR) dismissed the idea of IRS budget cuts funding aid programs, saying that “gutting IRS enforcement funding is an absolute nonstarter.” Wyden also noted the CBO study finding that reducing IRS enforcement funding would likely increase the deficit.




Tax Worldview

Puerto Rico Considers Entrance into GMT Deal. On Oct. 26, Puerto Rican Secretary of Treasury Francisco Parés Alicea stated that the island territory intends to take steps to incorporate a global minimum tax compliant with the Organisation for Economic Co-operation and Development’s Pillar Two global tax regime. Parés Alicea cited Pillar Two’s uncertain future in the United States as a primary reason for Puerto Rico to forge ahead in adopting the new regime, stating that widespread global adoption of Pillar Two rules would affect non-U.S.-based companies in Puerto Rico. Parés Alicea also noted that the companies with which he met requested additional tax credits or incentives to offset the additional tax burden resulting from the imposition of a minimum tax, to which Parés Alicea said he will “keep [his] options open.”
Senate Finance Committee Members Urge Biden Administration to Suspend U.S.-Russia Tax Treaty. On Oct. 26, Sens. Catherine Cortez Masto (D-NV) and John Cornyn (R-TX) sent a letter to Treasury Secretary Janet Yellen and Secretary of State Antony Blinken, calling on them to terminate or suspend the tax treaty between Russia and the United States. They stated that the Russian invasion of Ukraine, as well as Russian President Vladimir Putin’s unilateral suspension of certain treaty benefits in August, run counter to the treaty’s intention of “pursu[ing] a path of peace and global cooperation.” The senators called on the Biden administration officials to use authorities under Article 28 to terminate or suspend the treaty as a retaliatory measure against Russian aggression, further limiting Russia’s ability to finance the invasion.



1111 Constitution Avenue

IRS Inundated with Comments on Crypto Reporting Rules As It Braces for 8 Billion Filings. On Oct. 25, Internal Revenue Service (IRS) Digital Assets Initiative Project Director Julie Foerster revealed that the agency has received more than 13,000 comments on proposed rules governing digital asset broker reporting requirements. As of Oct. 29, that number has grown to 26,588, with two weeks still remaining to submit comments. IRS Large Business and International Division Program Manager Bryan Stiernagle stated that, despite the influx of comments, the agency still expects to release final rules regarding cryptocurrency and other digital asset transactions on schedule. The IRS had extended the deadline for public comments from Oct. 30 to Nov. 13, in order to give crypto industry officials more time to analyze the regulations.
The proposed rules require cryptocurrency brokers to submit a separate Form 1099-DA for every transaction made, meaning that the agency will have to process an estimated eight billion related filings. The proposed rules also state that reporting requirements will begin in 2026, countering legislation that had mandated the IRS to require crypto exchanges to disclose detailed information about client transactions starting in 2023. The delay has received bipartisan pushback, as some lawmakers, like Senate Finance Committee Ranking Member Mike Crapo (R-ID), stated that the Biden administration is repeatedly ignoring statutory guidelines, and others, like Sen. Elizabeth Warren (D-MA), noted that the delay in rule implementation would cause the government to lose billions of dollars in revenue.
Testimony Before House Oversight Committee on IRS Operations. On Oct. 24, Internal Revenue Service (IRS) Commissioner Daniel Werfel and Government Accountability Office (GAO) Strategic Issues Director Jessica Lucas-Judy testified before the House Oversight and Accountability Subcommittee on Government Operations and the Federal Workforce and the Subcommittee on Health Care and Financial Services regarding the IRS’s level of taxpayer service and ongoing enforcement efforts in the context of funding the IRS received in the Inflation Reduction Act (IRA). During the hearing, most Republicans criticized the IRS’s use of funds, with many stating that they believed the increased enforcement funding would increase audit rates on middle-class taxpayers, and that the IRS was not holding government auditors accountable for making mistakes in processing taxpayer tax returns and audits. Other Republican members also believed the IRS was acting in a partisan manner with regard to which taxpayers and organizations they selected for audits, as well as preferential treatment for President Biden in investigations of potentially illegal business conducted with Hunter Biden. On the other hand, Democrats and Commissioner Werfel were largely supportive of the IRS’s continued efforts to improve taxpayer service, digitize the processing of paper returns, streamline IRS operations, and increase audits on high-income earners and corporations. Many Democrats called for Congress to maintain IRA-allocated IRS funding.



At a Glance

IRS Planning to Release Guidance on 1099-K Reporting Before 2023 Tax Filing Season. At a conference on Oct. 26, IRS Commissioner Daniel Werfel said that they will release guidance for taxpayers who engage in regular e-commerce transactions on reporting any 1099-K forms they receive. The American Rescue Plan Act had decreased the reporting threshold from $20,000 to $600, with some lawmakers stating that they wanted to reverse course and restore the higher threshold. The IRS had originally planned to implement the rule in the 2022 filing season, but had delayed it by a year in response to comments the agency received. Werfel stated that the forms will only apply to taxpayers using e-commerce platforms to sell goods and services for a profit.
IRS to Vet Direct File Program Rigorously. At a conference on Oct. 25, Internal Revenue Service (IRS) Commissioner Werfel and Chief Taxpayer Experience Officer Kenneth Corbin stated that the IRS Direct File program will go through the same security and reliability vetting process that the IRS uses for other commercial paid software before its deployment. The vetting process includes various checks to ensure conformity with the tax code, and Werfel said that the pilot will not be released if the program does not meet quality control standards. Testing is expected to begin at the end of October and will continue through the end of December.
IRS Plans to Narrow Scope of Stock-Buyback Tax Funding Rule. At a conference on Oct. 26, Internal Revenue Service (IRS) associate chief counsel Arielle Borsos stated that the IRS will narrow the scope of a rule governing stock repurchases by foreign corporations—the so-called “funding rule”—in impending guidance. Borsos noted that the agency had received comments that the “per se” rule within the funding rule was deemed to be too broad and the agency plans to “tailor” the rule.



Brownstein Bookshelf

  • Treasury Department Report on Post-Pandemic Economic Recovery. On Oct. 23, the Treasury Department released a report claiming that the economic recovery after the brief recession caused principally by the COVID-19 pandemic was the “most equitable in recent history.” The report cites certain Biden administration policies, including the expanded child tax credit from the American Rescue Plan Act of 2021 (Pub. L. 117-2) as a reason for the equitable recovery.


Hearings and Events

House Ways and Means Committee
Nov. 2, the House Ways and Means Committee will hold a markup of five bills, including H.R. 5863, the Federal Disaster Tax Relief Act of 2023.
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.