Legislative Landscape
House and Senate Lawmakers Reach Deal on FSGG Funding: On Sunday, lawmakers released the Fiscal Year (FY) 2026 Financial Services and General Government (FSGG) appropriations bill and joint explanatory statement. The bill provides the Internal Revenue Service (IRS) with an annual budget totaling approximately $11.2 billion, a 9% cut from FY2025. Specifically, the bill allocates:
- $3.037 billion for Taxpayer Services (with specified minimums including $12 million for Tax Counseling for the Elderly, $28 million for Low-Income Taxpayer Clinics and $271.2 million for the Taxpayer Advocate Service);
- $4.999 billion for Enforcement (including up to $35 million for Criminal Investigation investigative technology); and
- $3.160 billion for Technology and Operations Support under tighter IT oversight via quarterly reports to the committees, Treasury Inspector General for Tax Administration (TIGTA), and Government Accountability Office (GAO), semiannual Treasury Department reviews and annual GAO/TIGTA audits.
Non-IRS Treasury Department provisions maintain funding for the Cybersecurity Enhancement Account ($59 million) and CDFI Fund ($324 million), which supports the New Markets Tax Credit (NMTC) program, reduces TIGTA to $165 million, and directs TIGTA to issue reports on Individual Taxpayer Identification Number (ITIN) refundable credit usage, plus a NMTC focus for Appalachia flood areas. Additional restrictions prohibit finalizing section 501(c)(4) regulations, bar ideological targeting, mandate taxpayer rights training and protect data confidentiality.
Lawmakers Continue to Negotiate ACA Reforms: Last week, 17 House Republicans crossed party lines to support—by a 230 to 196 vote—a Democratic proposal on the House floor to extend the enhanced Affordable Care Act premium tax credits (eAPTCs) for an additional three years through 2028. A similar Senate measure failed in December due to insufficient votes, but Sens. Susan Collins (R-ME), Josh Hawley (R-MO), Lisa Murkowski (R-AK) and Dan Sullivan (R-AK) voted with Senate Democrats on the proposal. Majority Leader John Thune (R-SD) is unlikely to put the House bill on the Senate floor in the near term.
At the same time, a bipartisan group of Senate lawmakers led by Sens. Susan Collins (R-ME), Bernie Moreno (R-OH) and Jeanne Shaheen (D-NH) continues to pursue alternatives. Ongoing negotiations include a two-year extension with reforms such as income caps at 700% of the federal poverty level, extended open enrollment to March 1, minimum premiums, fraud penalties for insurers and Health Savings Account options in year two. If an agreement is reached, the House-passed eAPTC extension bill could be a vehicle for Senate consideration of a bipartisan package.
RSC Issues Framework for Second Reconciliation Bill: On Jan. 13, the Republican Study Committee (RSC) released its framework for a second reconciliation bill, which outlines tax and non-tax proposals to address housing, energy and health care issues. The scores listed in the framework were not calculated by the Joint Committee on Taxation (JCT) or the Congressional Budget Office.
- Housing reforms would include elimination of capital gains taxes on home sales to first-time buyers, establishment of tax-advantaged Home Savings and READY disaster recovery accounts, doubling of the 401(k) limits for single-earner households, elimination of the child and dependent care tax credit marriage penalty, and barring non-U.S. residents from using the Low Income Housing Credits.
- Health care changes would include redirecting Affordable Care Act subsidies to Health Freedom Accounts and equalizing the tax treatment for health-sharing ministries, short-term plans, medical cost-sharing and subscription-based medical care.
- Workforce provisions would include introduction of tax-free Jumpstart Accounts for apprenticeships/startups with employer credits and reauthorization of the Work Opportunity Tax Credit (WOTC).
- Other provisions would include indexing of capital gains, repeal of the federal estate tax, imposition of taxes on foreign purchasers of U.S. real estate, expansion of the remittance tax on transfers of funds out of the United States by noncitizens, and taxation of third-party litigation financing.
House and Senate Tax Committee Aides Provide Legislative Outlook for 2026: Speaking at the DC Bar Tax Conference last week, Sean Clerget, chief tax counsel for the House Ways and Means (W&M) Republicans, said that while prospects for a second reconciliation tax bill are slim, legislation clarifying crypto tax and tax administration issues could emerge as an area of bipartisan agreement. Clerget noted that lawmakers on both sides of the aisle are eager to establish consistent tax rules for digital assets, noting the draft legislation released by Reps. Max Miller (R-OH) and Steven Horsford (D-NV). He added that committee Republicans are optimistic about advancing legislation in this space. Andrew Grossman, chief tax counsel for the W&M Democrats, noted that overall momentum for tax legislation may be dependent on whether Congress can secure an agreement on the expired enhanced Affordable Care Act premium tax credits (eAPTCs).
With respect to the W&M Committee’s expected focus for 2026, Clerget indicated that Republicans will concentrate on One Big Beautiful Bill Act (OBBBA) awareness, crypto, health care and tax administration. Democrats, according to Grossman, will focus on health care, the child tax credit (CTC), clean energy tax credits, affordability, retirement, crypto and tax administration.
Schneider, Yakym Introduce the BARCODE Efficiency Act: On Jan. 6, Reps. Brad Schneider (D-IL) and Rudy Yakym (R-IN) introduced H.R. 6956, the Barcode Automation for Revenue Collection to Organize Disbursement and Enhance (BARCODE) Efficiency Act. The bill would require scannable barcodes to be included on paper tax returns and mandate that the IRS use of optical character recognition (OCR) for digitizing such paper returns, with an exception allowing the Treasury Department secretary to opt out if OCR proves slower or less accurate.
Sens. Todd Young (R-IN) and Raphael Warnock (D-GA) lead the companion bill, S. 452, in the Senate.
Hassan, Young Introduce the Stronger Start for Working Families Act: On Jan. 8, Sens. Maggie Hassan (D-NH) and Todd Young (R-IN) introduced S. 3596, the Stronger Start for Working Families Act. The bill would allow taxpayers to claim the refundable amount of the CTC starting with the first dollar earned rather than having to meet the current $2,500 threshold to qualify.
Energy-Tax Mainlines
Treasury Department Sends Section 45Z Proposed Regulations to White House for Review: Prior to the holidays, the Treasury Department sent proposed regulations for the section 45Z clean fuels productions credit to the White House Office of Information and Regulatory Affairs (OIRA) for review. The Treasury Department reportedly requested expedited review, but OIRA is now scheduling stakeholder meetings, which is likely to delay consideration of this long-awaited guidance further. While the Biden administration released draft proposed regulations (IRS Notice 2025-10) in January of 2025, significant changes to the section 45Z credit were enacted as part of OBBBA. The biofuels industry had hoped to see initial guidance implementing the revised credit before the end of the 2025 tax year, during which the credit was effective. While Treasury Department officials continue to state that the guidance will be published “soon,” the precise timeline for OIRA’s review and the Treasury Department’s release of the proposed regulations remains unclear.
Graham, Cantwell Introduce Disaster Zone Energy Affordability and Investment Act: On Jan. 8, Sens. Lindsey Graham (R-SC) and Maria Cantwell (D-WA) introduced S. 3605, the Disaster Zone Energy Affordability and Investment Act, which would allow eligible energy companies to monetize previously unused energy tax credits from prior years. Current restrictions cap the use of certain credits as well as the company’s ability to carry forward unused credits. The bill also targets credit relief to business conducted in a presidential- or state-designated disaster zone.
1111 Constitution Avenue
IRS Announces Tax Filing Season for Businesses and Individuals: Last week, the IRS announced that the filing season for business tax returns will open on Jan. 13, and individual returns will be accepted beginning on Jan. 26. On Jan. 18, the IRS will accept five additional tax returns through its modernized e-file system, including those for foreign persons’ U.S.-source income, homeowners associations, gifts and generation-skipping transfers, nonresident estates, and estates and trusts.
Relatedly, Frank Bisignano, CEO of the IRS and commissioner of the Social Security Administration, will likely lead the IRS heading into the 2026 filing season. Bisignano is currently managing daily operations while Treasury Secretary Scott Bessent formally serves as acting commissioner.
Treasury Department Officials Discuss Next Guidance Projects: Last week, James Wang, international tax counsel at the Treasury Department, said the agency plans to issue proposed and final rules in 2026 to allow retroactive application of the international tax transition provisions in OBBBA. He also said the Treasury Department must finalize these regulations within 18 months of the law’s enactment to ensure they apply retroactively. The guidance will cover transition issues addressed in 2025 notices, including foreign tax credit changes, dividend treatment under section 951(a), tax allocation rules and exclusions for outbound sales of intangibles.
Wang noted that while finalizing these rules is a top priority, the Treasury Department also remains focused on deregulation as part of its broader 2026 agenda. Kevin Salinger also noted that the Treasury Department expects to release guidance on all the issues listed in the 2025-2026 Priority Guidance Plan released last fall.
IRS Issues Guidance on 1099-K Reporting: On Jan. 8, the IRS issued a notice of proposed rulemaking to amend backup withholding regulations. The guidance aligns the regulations with changes made in OBBBA, which restored the section 6050W reporting threshold for third-party settlement organizations to $20,000 and 200 transactions annually. These updates specify that backup withholding applies to payments in settlement of third-party network transactions only if both thresholds are met in the current year with the deductible amount being the full transaction triggering withholding plus subsequent payments. The restored threshold amounts are effective for calendar years beginning after Dec. 31, 2024.
Tax Worldview
EU Takes Administrative Steps to Implement OECD Side-by-Side Agreement: On Jan. 12, the European Commission published Notice C/2026/253 in the Official Journal of the European Union to begin the process of implementing the “side-by-side” system announced by the Organisation for Economic Cooperation and Development last week. The notice confirms that the new system, which exempts U.S. multinationals from the Pillar Two global minimum tax, will be applied by European Union (EU) member countries starting on Jan. 1, 2027, even though it will take additional time for the side-by-side system to be enacted by each EU member country at the local level.
OECD Officials Preview Next Steps: At the 2026 DC Bar Tax Conference, Jeff Mitchell, a senior advisor at the Organisation for Economic Cooperation and Development (OECD), announced plans to release additional Pillar Two guidance addressing joint ventures, local financial accounting standards, hyperinflationary currencies and real estate investment trusts.
Manal Corwin, director of the OECD’s Center for Tax Policy and Administration, said that OECD member countries might resume discussions on Pillar One at the April Inclusive Framework meeting. Achim Pross, deputy director of the OECD’s Center for Tax Policy and Administration, said that over 140 countries have committed to applying the new “side-by-side” system, but that some jurisdictions may need up to a year to enact supporting legislation. He also said countries must retroactively implement the safe harbor exempting U.S.-parented multinational enterprises from Pillar Two GLOBE rules (IIR/UTPR) effective Jan. 1, with legislation possibly needed in six to nine months under OECD review for compliance.
Trump Administration Withdraws from International Organizations: Last week, President Trump issued a memorandum directing agencies to withdraw from 66 international organizations deemed contrary to national interests. The list included the UN Department of Economic and Social Affairs, which oversees global tax cooperation initiatives. The committee has generally helped developing economies boost revenue and ensure a global equitable tax system. Notably, the list does not appear to include the Organisation for Economic Cooperation and Development (OECD).
Treasury Department Plans to Amend QBU Gain and Loss Calculations: At the DC Bar Tax Conference last week, Kevin Salinger, deputy assistant secretary for tax policy, confirmed the Treasury Department plans to retain Section 987 regulations governing how qualified business units (QBUs) compute foreign-currency gains and losses, while amending them to reinstate the “earnings and capital” method for tax years beginning in 2025 onward. Salinger noted taxpayers can continue using the earnings and capital method for calculating their gains and losses.
Burch Discusses Digital Economy Taxation: Last week, Treasury Deputy Assistant Secretary for International Tax Affairs Rebecca Burch indicated that the United States may resume multilateral discussions on digital economy taxation following the recent modifications to the Pillar Two agreement. She emphasized the need for taking a step back to rethink the approach rather than reusing the stalled Pillar Two multilateral convention (MLC) for amount A, which aimed to reallocate taxing rights on residual profits of large multinational enterprises and eliminate digital services taxes.
Robert Kelley from the IRS Office of Associate Counsel also said that the Treasury Department and IRS are considering expanding the U.S. Amount B transfer pricing framework beyond traditional baseline distribution activities to cover some digital content distribution.
At a Glance
States Continue to Uncouple from Federal Tax Code: Last year, lawmakers in Delaware, Illinois, Michigan, Pennsylvania and Rhode Island began passing laws to decouple their state tax systems from the federal tax code following the modifications made by OBBBA. These actions caused nearly two dozen other states to review conformity options amid revenue pressures from base erosion, weaker growth and federal shifts in Medicaid and food assistance. For many states, the OBBBA changes can have a significant impact on state budgets, in particular with regard to business provisions like bonus depreciation, increased section 179 expensing, restored R&D expensing and cost recovery provisions.
Hearing and Events
House Ways and Means Committee
The House Ways and Means Committee held a markup on H.R.6956, the BARCODE Efficiency Act, on Wednesday, Jan. 14.
Senate Finance Committee
The Senate Finance Committee does not have any hearings scheduled for this week.