Legislative Lowdown
Recess Recap: What happened over the last month in the world of tax?
Congress Considers Options to Delay Impending Shutdown. With Congress unable to reach a consensus on appropriations bills for fiscal year 2023, lawmakers must reach a deal on a continuing resolution (CR) this month to avoid a government shutdown on Oct. 1. The House of Representatives is currently discussing a proposal to extend the fiscal year 2022 government spending levels for 12 more weeks until Dec. 16. Both chambers are expected to take up this short-term solution next week at the earliest.
However, congressional requests for additional supplemental funding may complicate the process. While Republicans have expressed strong support only for a barebones extension of government funding at current rates, several policy proposals have been raised that may require consideration in any final deal. At the forefront of the conversation is a request by Sen. Joe Manchin (D-WV) to include energy permitting reform legislation in any potential budget deal. Manchin claims that Senate Majority Leader Chuck Schumer (D-NY) had previously promised him that the Senate would consider permitting reform policy before the end of the fiscal year. Yesterday, Sen. Shelley Moore Capito (R-WV) introduced a separate bill on behalf of herself and 38 other Senate Republicans to reform the federal permitting and project review process.
Further complicating the CR process, the Biden administration is seeking an additional $50 billion for several miscellaneous initiatives and policy objectives. Of this total request, $22.5 billion is dedicated to additional COVID-19 funding for vaccines and other emergency equipment. Republicans are unlikely to support the proposal, likely arguing that any additional funding for pandemic relief should be taken from already-authorized, unspent COVID funds. The White House is also requesting nearly $14 billion in additional aid for Ukraine, more than half of which would be dedicated to direct military assistance. In the past, Republican leadership has been accepting of emergency relief for Ukraine and may support a slimmed-down version of those requests. Biden has also asked for a series of more limited additional emergency support for various items including funding for Mokeypox vaccines, natural disaster relief, non-Russian-sourced uranium, modernization efforts for the Strategic Petroleum Reserve and livestock/crop insurance.
Early indications suggest that there may be bipartisan support in the Senate for a stopgap proposal to fund the government until Dec. 16. It is currently unclear which supplemental proposals will receive serious consideration in the bill.
All Eyes Turn to Treasury After IRA Enactment. Following the passage of the Inflation Reduction Act (IRA), much of the focus of both lawmakers and stakeholders will shift to the implementation and interpretation of the law’s provisions by the relevant federal agencies. The Treasury Department has rulemaking authority over most of the IRA’s revenue and spending provisions. Specifically, on the spending side, the law stipulates that Treasury must consult with the Department of Energy (DOE), the Environmental Protection Agency (EPA) and the Department of Labor (DOL) on the energy provisions in the bill and the Department of Health and Human Services (HHS) on provisions related to drug pricing reform.
The Treasury, DOE, EPA, DOL and HHS have all already begun to expedite and expand their staffing efforts, seeking to hire new employees to publish guidance to implement the IRA. Several issues have already been raised by stakeholders on the tax portions of the bill, including the implementation of new transferable and direct pay tax credits and rules around new prevailing wage and apprenticeship requirements. Agency officials will also be responsible for overhauling guidance on the existing investment and production tax credits and drafting guidance for the new hydrogen energy tax credit and advanced manufacturing incentives.
In addition to the aforementioned concerns about the green energy credits, criticism from U.S. automakers has also been levied against the domestic manufacturing and content requirements included in the modification to the existing electric vehicles (EV) tax credit. Despite initial regulatory guidance released from Treasury last month concerning the credit, experts have predicted that final regulations will limit the incentives to a very small subset of new EV models. And, on another front, foreign governments like European Union countries and South Korea have also voiced their concerns about the new EV provisions, which they think may violate international trade rules.
On the tax increase side, stakeholders have raised questions about the implementation of the new corporate domestic minimum tax. The new levy, which is scheduled to go into effect next year, will impose a 15% tax on the book profits of large corporations. Without additional guidance, several taxpayers remain unsure of what transactions will be subject to the law. For example, it is currently unknown if certain stock trades from the subsidiary companies of applicable large corporations would be taxable under the new rules, among other specific transactions.
Regulatory guidance is expected to continue to be released over the coming months and years as the relevant agencies quickly ramp up efforts in anticipation of a wave of stakeholder feedback and potential implementation roadblocks.
1111 Constitution Avenue
Next Steps for IRS Funding. The Inflation Reduction Act (IRA) provides a nearly $80 billion increase in funding for the IRS over the next decade. This funding surge will allow for a massive expansion of IRS resources, with the agency currently operating on a budget of only approximately $14 billion a year.
Upon the ultimate passage of the IRA, IRS Commissioner Rettig immediately published a statement reminding the public that any changes at the IRS “will not be immediate” and will instead slowly be implemented over the next decade. The statement also mentioned some IRS objectives aside from auditing, including upgrades to legacy technology systems and improved taxpayer services.
In a separate, private correspondence to employees of the IRS on the same day, Rettig called attention to forthcoming efforts to expand oversight and auditing of “large corporate and global high-net-worth taxpayers as well as pass-through entities and multinational taxpayers with international tax issues.”
Despite repeated commitments from Treasury and IRS authorities to limit targeting of lower- and middle-class taxpayers, Republican lawmakers have been generally unified against the additional funding, with several pointing to a report by the Ways and Means Committee minority staff that estimated that with the IRA, taxpayers making less than $75,000 will be subject to a total of 700,000 new audits per year.
Some Democrats have been more skeptical, requesting immediate information on the agency’s plans to prevent overzealous audits. This includes Rep. Bill Pascrell (D-NJ), chair of the House Ways and Means Subcommittee on Oversight, who submitted a letter to Rettig concerning some of the details of the proposed funding. While the letter expressed general approval for the funding, Pascrell ended his remarks with a request that the IRS provide a breakdown of its proposed annual spending by the end of August. As of mid-September, there has been no response from Rettig on Pascrell’s request for more detailed spending projections.
Following Pascrell’s letter, Treasury Secretary Janet Yellen submitted a similar request to Rettig, asking the commissioner to submit a detailed plan on how the agency plans to spend the funds. As opposed to Pascrell’s two-week time frame, Yellen requested that the IRS submit a response within the next six months, giving the agency until mid-February to develop its initial plan. In the memo, Yellen lays out several goals that should be addressed by any potential plan, including a solution for the current tax return backlog, improvements to public-facing taxpayer services, significant investment in training for new hires and the hiring of at least 50,000 new employees by 2028.
Despite the criticism from both sides of the aisle, Rettig has remained relatively silent on the IRS’s implementation plan since the passage of the IRA. In a rare public statement on the issue, Rettig penned an op-ed article for Yahoo! Finance, disputing some of the claims regarding the increased IRS funding. Rettig refers to many of these criticisms as “outright false suggestions,” arguing that new auditors will only target “high-end tax evaders.” Rettig also claims that the only changes that compliant taxpayers should observe are improved taxpayer services, including better phone service and more timely information processing.
IRS Accidentally Publishes Taxpayer Data. In a notice to Rep. Bennie Thompson (D-MS), who chairs the House Homeland Security Committee, Anna Canfield Roth, the acting assistant secretary for management at the Treasury, admitted that the IRS inadvertently published bulk data on private taxpayer information on Aug. 26. According to a longer private letter to the congressman, the agency disclosed the private information of approximately 120,000 IRS Form 990-Ts into a machine-searchable portal on the IRS website. IRS confirmed that the issue has since been resolved.
The IRS believed that the information that was published did not include the Social Security numbers of applicable taxpayers or any other sensitive information. However, the agency admits that some of the data may have included identifying information, including individual names and business contact information.
This leak comes as the IRS already faces intense scrutiny from the public and lawmakers alike over an influx of funding that the agency will receive over the next decade. Republican lawmakers will certainly use this most recent IRS blunder as evidence of why the agency is ill-equipped to massively expand its oversight of U.S. taxpayers.
Global Getdown
Five EU Countries Try to Save Global Minimum Tax. Five European Union countries mounted a renewed push last week to resuscitate the Pillar Two global minimum tax endorsed last year as part of the Organisation for Economic Cooperation and Development’s (OECD) efforts to address the digitization of the economy and limit base erosion and profit shifting. The announcement by Germany, France, Italy, the Netherlands and Spain comes on the heels of Congress’ failure to include provisions to adopt Pillar Two in the Inflation Reduction Act enacted in August. It also follows indications that the new UK government may be reconsidering its implementation of Pillar Two and the announcement by Pascal Saint-Amans, the chief architect of the two-pillar OECD agreement, that he will step down as the head of tax policy at the OECD at the end of October.
In a Sept. 9 joint statement, the countries stressed that “[s]hould unanimity not be reached in the next weeks, our governments are fully determined to follow through on our commitment. We stand ready to implement the global minimum effective taxation in 2023 and by any possible legal means.” (Note that the effective date reference presumably means enactment of the new rules in 2023, which would be effective in 2024, consistent with the timing envisioned in Pillar Two.) The statement appears to be a political effort to restore momentum for the global minimum tax and encourage Hungary to pull back its opposition to the proposed EU directive to implement Pillar Two when the EU finance ministers meet at the next Economic and Financial Affairs Council (ECOFIN) on Oct. 4. Hungary unexpectedly changed its position at the June ECOFIN meeting, denying the council the required unanimity to proceed with the global minimum tax in the EU.
The five nations are attempting to use the EU procedure for “enhanced cooperation” to work around Hungary’s opposition, a procedure that has not previously been used to implement tax agreements. While the proposed action could create renewed political momentum for broader adoption of Pillar Two, questions have been raised as to whether individual EU countries can impose the global minimum tax (in particular, its undertaxed profits rule) on other EU countries without a unanimously approved EU directive.
Treasury Renews Efforts to Expand U.S. Tax-Treaty Network. The Treasury Department is moving to expand and update the network of U.S. bilateral tax treaties. In August, Treasury Secretary Janet Yellen urged the Senate to ratify the U.S.-Chile tax treaty, which was reported by the Senate Foreign Relations Committee in March after languishing for more than a decade in the Senate. Chile ratified the treaty in 2015. Senate ratification would include reservation language to address changes to the U.S. international tax rules in the 2017 Tax Cuts and Jobs Act (TCJA), which will have to be approved by Chile for the agreement to enter into force.
Jose Murillo, deputy assistant secretary for international tax affairs at the Treasury, indicated last week that the Treasury Department is in discussions with Switzerland and Israel to update existing, older tax treaties. He also confirmed that new tax treaty negotiations with Romania, Norway and Croatia have been completed and that Treasury is renegotiating previous updates to the bilateral tax agreements with Poland and Vietnam to reflect the TCJA changes to U.S. law.
Each of these new and updated agreements face an uncertain future once they arrive in the Senate for ratification, largely due to Sen. Rand Paul’s (R-KY) long-standing concerns about private protections under U.S. tax treaties. Senate Majority Leader Chuck Schumer (D-NY) has limited floor time remaining this year to take up the Chilean tax treaty, which he would have to commit to using if Paul were to filibuster the Senate’s consideration of the agreement.
At a Glance
Head of Tax at OECD Set to Retire. Pascal Saint-Amans is set to retire from the Organisation for Economic Co-operation and Development (OECD) at the end of October. Saint-Amans served as the director of the Center for Tax Policy and Administration at the OECD for over a decade. During his tenure, he spearheaded efforts to negotiate and draft the proposed OECD Global Inclusive Framework tax agreement. Saint-Aman’s deputy, Grace Perez Navarro, will take over as interim director until a new tax director is appointed at the end of March. This comes as implementation of the OECD agreement continues to be delayed.
Tax Implications of Student Loan Cancellation. Last month, the Biden administration decided to forgive up to $20,000 in student loans to Pell Grant recipients and $10,000 to non-Pell Grant recipients. The program assists individuals whose incomes do not exceed $125,000 ($250,000 for joint filers). Although the debt relief will not be classified as taxable income on the federal level and most states conform to federal legislation, six states including Arkansas, Indiana, Minnesota, Mississippi, North Carolina and Wisconsin may impose state-level taxes on the loan forgiveness. In these states, individuals who receive $20,000 in loan forgiveness could face tax increases ranging from $500 to $985.
Biden Set to Announce New IRS Commissioner. Current IRS Commissioner Charles Rettig is at the end of his five-year term, which is set to expire Nov. 12. Several sources familiar with the matter have reported that President Joe Biden has narrowed his list to a few select candidates with significant private-sector business and managerial experience, as opposed to a traditional tax attorney. The White House has also reportedly solicited advice from several Senate Democrats, many of whom believe the next commissioner must have a bipartisan track record and be willing to work with House Republicans if they take leadership of the chamber in the upcoming midterm elections.
IRS Waives Late Filing Fees. Last Wednesday, the IRS announced that it will waive penalties for Americans who filed their taxes late during the COVID-19 Pandemic in 2019 or 2020. The announcement is expected to affect 1.6 million filers who will receive approximately $1.2 Billion in penalty refunds or credits. To qualify for the relief, taxpayers must submit all missing information by Sep. 30, 2022.
Hearings and Events
Senate Banking Committee
On Tuesday, the full committee held a hearing entitled “New Consumer Financial Products and the Impacts to Workers,” during which the following witnesses will testify:
- Rachel Gittleman, financial services outreach manager at Consumer Federation of America
- Penny Lee, CEO of the Financial Technology Association
- Todd J. Zywicki, George Mason University Foundation professor of law at George Mason University Antonin Scalia School of Law
- David H. Seligman, executive director of Towards Justice
On Thursday, the full committee will hold a hearing entitled “Oversight of the U.S. Securities and Exchange Commission” during which the following witness will testify:
- Gary Gensler, chair of the U.S. Securities and Exchange Commission
House Financial Services Committee
On Wednesday, the full committee will hold a hearing entitled “When Banks Leave: The Impacts of De-Risking on the Caribbean and Strategies for Ensuring Financial Access,” during which the following witnesses testified:
- Prime Minister of Barbados Mia Amor Mottley
- Wendy Delmar, CEO of the Caribbean Association of Banks
- Wazim Mohamed Mowla, assistant director and lead of the Adrienne Arsht Latin America Center's Caribbean Initiative at the Atlantic Council
- I. Wayne Shah, senior vice president of financial institutions at Wells Fargo Bank and vice chair at the Financial & International Business Association (FIBA)
- Amit Sharma, CEO, founder and director of FinClusive
- Liat Shetret, director of global policy and regulation at Elliptic
Senate Finance Committee
The committee has no upcoming hearings scheduled for this week.
House Ways and Means Committee
On Wednesday, the full committee will hold a hearing entitled, “The Future of U.S.-Taiwan Trade.” No witnesses are currently listed.
On Thursday, the full committee will hold a hearing entitled, “Preparing America’s Health Care Infrastructure for the Climate Crisis.” No witnesses are currently listed.
Administration
Tuesday, Sept. 13
Internal Revenue Service
Open Meeting of the Taxpayer Advocacy Panel’s Tax Forms and Publications Project Committee
Private Sector
Monday, Sept. 12
American Enterprise Institute
Inflation Bites: Expert Perspectives on How Financial Innovation Supports Workers During Inflation