Legislative Lowdown
Tax Package Update: Bill Awaits Further Action in Congress: The House is expected to vote on the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) under suspension of the rules on Wednesday evening. Bringing a bill under suspension allows the bill to bypass the House Rules Committee, but the process precludes amendments and requires a two-thirds vote to pass.
The bill is moving forward without changes—late Tuesday a group of blue-state Republicans used procedural maneuvers to reopen negotiations with Speaker Mike Johnson (R-LA) demanding that he amend the bill to include relief from the $10,000 state-and-local tax (SALT) deduction cap. The House may consider SALT relief as a standalone bill, paired with changes to the Child Tax Credit (CTC) to assuage concerns from the House Freedom Caucus.
Introduced on Jan. 16, the bill is a compromise between House Ways and Means Committee Chair Jason Smith (R-MO) and Senate Finance Committee Chair Ron Wyden (D-OR). On Jan. 19, the bill was reported out of the Ways and Means Committee with a 40-3 vote. Despite strong bipartisan support, certain members of the House Republican Conference have raised two main concerns about the bill:
- No SALT relief. The bill does not include an increase in the cap on the SALT deduction—a component from the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97) that has garnered criticism from Republicans and Democrats representing high-tax wealthier states such as New York, New Jersey and California. Though the so-called “SALT Caucus” is small, many of its GOP members face difficult paths to reelection and would prefer to see SALT relief added to the legislation to provide tax relief for their constituents.
- CTC expansion. Notwithstanding House Democrats’ criticism that the CTC expansion does not balance the bill’s extension of the TCJA business tax provisions, some House Republicans, including members of the House Freedom Caucus, have raised concerns that the CTC is available to undocumented immigrants whose children were born in the United States and have Social Security numbers.
On the other side of the Capitol, Majority Leader Chuck Schumer (D-NY) has expressed interest in advancing the tax package through the Senate, although the chamber remains focused on border security and funding for Ukraine and Israel. The prospects for the national security supplemental, however, remain in question with former President Donald Trump urging opposition and Minority Leader Mitch McConnell (R-KY) telling Senate Republicans in a private meeting that the time to reach a border compromise may have run out. It remains to be seen whether the supplemental’s diminishing prospects will make room for Senate consideration of the bipartisan tax package should it be passed by the House.
The legislative calendar is also creating challenges for the tax package—while the House must pass the bill before the Senate can take up the measure, the Senate is only in session for the current work period until Feb. 9, when it begins a two-week recess. Additionally, the tax-filing season began on Jan. 29, and the longer Congress waits to pass the bill, the more returns claiming the CTC will likely be filed and then require adjustments due to the legislative changes in the tax package. Nevertheless, Internal Revenue Service (IRS) Commissioner Daniel Werfel urged taxpayers to file when they are ready to do so, and not wait for the enactment of the bill. A press release from Ways and Means Committee Republicans indicates that the IRS projects that the agency will be able to update its system to account for the changes made by the tax bill “by around six weeks after the date of enactment.” This timeline counters a warning from National Taxpayer Advocate Erin Collins, who said earlier in January that tax legislation enacted during filing season may lead to refund delays extending into the end of the year.
Yellen Provides Window into Biden’s Second-Term Tax Agenda: Speaking at a keynote address on Jan. 25, Treasury Secretary Janet Yellen discussed some of President Biden’s tax policy priorities should he be reelected to a second term in November. Yellen said that Biden would seek to keep the Tax Cuts and Jobs Act’s provision on individual tax rate cuts for taxpayers earning less than $400,000 but raise taxes on corporations and wealthy individuals, saying that “the President is clearly focused on tax fairness.” Yellen also noted that Biden would seek to retain IRS enforcement-funding allocations from the Inflation Reduction Act, saying that enforcement initiatives are contributing to long-term economic growth.
Senate to Vote on Advancing Rollinson Nomination a Second Time: On Jan. 31, the Senate Finance Committee will convene to consider the nomination of Marjorie A. Rollinson to be chief counsel of the Internal Revenue Service. Rollinson had previously been nominated for the role in 2023, and had advanced out of the Senate Finance Committee in a Sept. 28 hearing, but her nomination lapsed and was returned after the first session of this Congress ended in December. Her nomination is again expected to advance out of committee. The committee will also consider the nomination of Corey Anne Tellez to be deputy undersecretary of the Treasury Department.
1111 Constitution Avenue
IRS to Begin Rollout of Direct File Pilot: The 2023 tax-filing season opened on Jan. 29, and certain eligible federal and state workers apparently will be the first to try the Direct File pilot program, an Internal Revenue Service (IRS)-managed program that will allow select taxpayers to file federal tax returns through government-run and operated tax preparation software. The pilot program is voluntary; filers invited to use it have the choice to use it instead filing their taxes using other free or paid tax preparation options. The IRS expects to open the program to other eligible taxpayers in mid-March, but has not provided any further specifics.
Upon launching the program, the IRS asks a series of questions to confirm that a taxpayer is eligible to file their taxes via the pilot. Eligibility requirements include limited states of residence; the pilot is also only open to filers having certain basic tax forms and health insurance plans. The Direct File Pilot also only supports taxpayers who claim the standard deduction and do not claim credits other than the child tax credit, earned income tax credit and the credit for other dependents. Taxpayers are required to authenticate their identity using the ID.me program, an authentication process that some say will be cumbersome for certain taxpayers.
After completing the federal portion of their return, a taxpayer will be redirected to complete the state-filing portion of their return. Some state-filing systems will prepopulate information from the federal return. Taxpayers have indicated that they want to be able to submit a state income tax return (if they are required to file one) simultaneously with their federal return. Direct File does not have that capability currently. The IRS has said that it will measure success based on the rate of fraudulent returns, the reject rate and the audit rate of returns filed.
The Direct File pilot program also continues to garner criticism that the IRS does not have statutory authority to create and administer the program. On Jan. 30, 13 Republican state attorneys general sent a letter to Treasury Secretary Janet Yellen, urging her to end the Direct File pilot, charging it to be “unnecessary and unconstitutional.”
IRS Looking to Hire and Retain Compliance Workers Through New Recruiting Strategies: Speaking at the University of Southern California Gould School of Law Tax Institute, Internal Revenue Service (IRS) Large Business and International Division (LB&I) official Eric Cirelli stated that the IRS is looking to new resources and incentives to hire professionals focused on enforcement for high-income individuals and corporations. Cirelli noted that instead of relying on professionals to apply for IRS jobs through the USAJobs portal, the agency is using its direct hiring authority to “headhunt” for experienced professionals and offer them attractive incentives to apply for a position. Such incentives include higher starting salaries, strengthened leave incentives and hiring bonuses. Cirelli also discussed the agency’s bolstered training programs in order to build employees’ confidence levels and retain its workforce.
At a Glance
Former IRS Consultant Sentenced in 2021 Tax Return Data Leak: On Jan. 29, Charles Littlejohn, a former Internal Revenue Service (IRS) contractor, was sentenced to five years in prison for leaking tax return information about wealthy filers, including former President Donald Trump, to ProPublica and The New York Times in 2021. Littlejohn allegedly stole the returns while working as a government contractor for the agency and released the data to the two news outlets. Judge Ana Reyes’ decision to impose the maximum sentence was praised across the political spectrum, with Justice Department Acting Assistant Attorney General Nicole Argentieri saying that the sentence “sends a strong message that those who violate laws intended to protect sensitive tax information will face significant punishment.” House Ways and Means Committee Chair Jason Smith (R-MO) said that the sentence “sends a strong message that the U.S. judicial system takes these crimes seriously.”
IRS Continues Scrutiny of ERTC Promoters: In a press release dated Jan. 25, the Internal Revenue Service (IRS) announced that they are continuing to urge businesses to review their eligibility for the Employee Retention Tax Credit (ERTC), a program whose implementation has been criticized for rampant fraud and abuse by certain “promoters” of the credit. The agency noted that the Criminal Investigation division will soon begin a series of educational sessions for tax professionals about the ERTC, including eligibility criteria and best compliance and reporting practices. Currently, the CI division has several open investigations and civil cases regarding ERTC promoters, and has convicted 11 promoters of fraud since October 2023.
Aron-Dine to Replace Batchelder at Treasury, Among Other Departmental Changes: Aviva Aron-Dine, currently a deputy director at the National Economic Council (NEC), will replace Lily Batchelder as the acting assistant secretary for tax policy at the Department of the Treasury, according to recent press reports. Aron-Dine’s background is in economic policy, and her work at the NEC has included advice and implementation of the Fiscal Responsibility Act and the Inflation Reduction Act. She notably does not have a legal background or in-depth experience with tax policy.
Other personnel changes at the Treasury Department includes the imminent departure of Tom West, deputy assistant secretary for tax policy, and the elevation of senior advisor Ted Lee to deputy assistant secretary for tax policy and delivery. Also this month, Scott Levine replaced Michael Plowgian as Treasury Department deputy assistant secretary for international affairs. He will become the lead Treasury Department negotiator at the Organisation for Economic Co-Operation and Development (OECD) with respect to the two-pillar tax regime.
Democratic Senators Introduce Legislation Expanding Child and Dependent Care Tax Credit: On Jan. 25, Sens. Patty Murray (D-WA), Bob Casey (D-PA) and Ron Wyden (D-OR) introduced the Child and Dependent Care Tax Credit Enhancement Act (S. 3657), which would permanently expand the Child and Dependent Care Tax Credit (CDCTC). The bill would build off temporary expansions to the CDCTC by Democrats in the American Rescue Plan Act (ARPA, Pub. L. 117-2), increasing the maximum credit amount to $4,000 per child, tying the rate to inflation, and expanding eligibility and refundability of the credit. The bill is co-sponsored by several members of the Senate Democratic Caucus.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
On Jan. 31, the Senate Finance Committee will hold an Open Executive Session to consider several nominations, including Marjorie A. Rollinson to be chief counsel for the Internal Revenue Service and Corey Tellez to be a deputy undersecretary of the Treasury Department.