Legislative Lowdown
Werfel Unveils New Tax-Administration Commitments at House Hearing. In a hearing before the House Ways and Means Committee last Thursday, Internal Revenue Service (IRS) Commissioner Danny Werfel testified on ongoing efforts to improve agency transparency and accountability. The appearance was Werfel’s first public interaction with members of the House tax-writing committee and followed a similar hearing the week prior in which the commissioner testified before the Senate Finance Committee. Throughout the House hearing the committee debated the merits of the IRS’ recent request for a 15% increase in discretionary funding for fiscal year 2024, which Werfel said would be necessary to maintain baseline taxpayer services.
Lawmakers also pressed Werfel for further details on the IRS’ expected use of the $45 billion in additional Inflation Reduction Act (IRA) funds allocated for enforcement activities over the coming decade. Committee Chairman Jason Smith (R-MO) specifically highlighted reports estimating that “90% of underreported income actually came from taxpayers earning less than $400,000” and asked how the IRS’ plan would address this gap. Werfel said that the IRS did not intend to increase enforcement against low- and middle-income taxpayers and would instead target the “$163 billion of tax dodging” perpetrated by high-income filers. When asked for specifics regarding expected audit rates, Werfel said “none of the new audits will be of people earning under $400,000” for “a number of years.” Instead, he said enforcement spending will be exclusively used to hire auditors to target “large partnerships, corporations, billionaires and multimillionaires” that file more complex returns. Notably, this position differs from Werfel’s earlier comments suggesting that the audit rates of taxpayers below the $400,000 threshold may increase to as high as 2018 levels.
The committee also discussed perceived uncertainty in the IRS’ staffing plans, noting that estimates provided in the agency’s Strategic Operating Plan (SOP) did not include expected new IRA-supported hires beyond fiscal year 2024. Werfel said the IRS was working on a final set of estimates for its 10-year hiring plan and would deliver the report to the committee “within the next few weeks.” Werfel also noted that long-term hiring estimates are unreliable due to the 16,000 IRS employees that are expected to retire in the coming years. Furthermore, Werfel said the IRS currently only has 2,600 employees responsible for assessing the tax returns of the 390,000 wealthiest taxpayers.
In addition to discussions over the SOP, Smith and Rep. Darin LaHood (R-IL) noted private-sector reports challenging the viability of an IRS-operated direct e-file option. Smith discussed a MITRE poll concluding that “most working-class Americans who file simple tax returns do not want an IRS system.” Werfel said the IRS would review the report and consider it as part of the IRS’ ongoing e-file feasibility study that is expected to be completed by mid-May. Rep. Earl Blumenauer (D-OR) dismissed Republicans’ opposition to the study, reminding committee members that several other countries currently offer free electronic filing software to taxpayers.
Later in the hearing, Reps. Linda Sánchez (D-CA) and Carol Miller (R-WV) asked about legislative efforts to reduce compliance burdens resulting from the recently lowered threshold for taxpayers to receive a Form 1099-K. While Werfel would not opine on the merits of specific legislative proposals to modify the provision, he confirmed the “IRS would have an easier time” with tax administration if the threshold was raised.
On April 26, the House passed the Limit, Save, Grow Act, which would repeal unobligated IRA allocations provided to the IRS for enforcement activities, operations support and the creation of a task force to study the feasibility of an IRS-run direct e-file option. While the Senate is not expected to take up this bill, Senate Majority Leader Chuck Schumer (D-NY) confirmed that the chamber will hold hearings to discuss the ramifications of the bill’s proposals later this month.
Tax Worldview
Senate Expected to Consider House-Passed Solar-Tariff Legislation. Last Friday, April 28, the House of Representatives voted 221-202 to approve a Joint Resolution that would reinstate tariffs on Southeast Asian solar panel manufacturers. The resolution was sponsored by Rep. Bill Posey (R-FL) and supported by 12 Democratic lawmakers who sided with the majority of the Republican conference to pass the resolution. The effort utilizes the Congressional Review Act (CRA) to rescind a September 2022 Commerce Department rule that had suspended tariffs against panels assembled in Cambodia, Malaysia, Thailand or Vietnam using parts and components manufactured in China.
Previously, the CRA resolution was approved by the House Ways and Means Committee mostly along party lines in a 26-13 vote at an April 19 markup. At that markup, committee Chairman Jason Smith (R-MO) spoke in support of the resolution accusing China of shipping products through certain Southeast Asian countries in “a scheme that cheats American workers and consumers.” In opposition to this sentiment, a majority of Democrats said the tariff suspension was necessary as “a short-term bridge” while domestic solar producers expanded production using grant and tax-credit funding from the Inflation Reduction Act and Infrastructure Investment and Jobs Act.
In the Senate, a companion resolution has been introduced by Sen. Rick Scott (R-FL). This week, the Senate is expected to take up the resolution, and Sens. Joe Manchin (D-WV), Ron Wyden (D-OR), Sherrod Brown (D-OH) and Bob Casey (D-PA) have indicated that they will support its passage. Conversely, other Democrats, such as Sen. Jacky Rosen (D-NV), have argued that deploying the duties would inhibit the domestic industry’s ability to meet consumer demands and could delay the nation’s clean-energy transition.
Notwithstanding the congressional effort, President Joe Biden has pledged to veto the legislation, should it be passed by Congress. In a statement of administration policy issued April 24, the Biden administration said the postponement was necessary in order to “satisfy the demand for reliable and clean energy while ensuring Commerce is able to rigorously enforce U.S. trade laws, hold trading partners accountable and defend U.S. industries and workers from unfair trade actions.” However, the Biden administration has also indicated that it does not intend to extend the tariff pause when its 24-month duration ends in June 2024.
1111 Constitution Avenue
Treasury Department and IRS Officials Provide Tax Implementation Updates at IFA Conference. Last week, the U.S. Branch of the International Fiscal Association (IFA) held its annual international tax conference in Chicago. Several Treasury Department and Internal Revenue Service (IRS) officials spoke throughout the event regarding myriad ongoing tax implementation efforts. As reported by Bloomberg, speakers discussed topics including:
Ongoing Global Tax Negotiations: Treasury Deputy Assistant Secretary for International Affairs Michael Plowgian confirmed that negotiators were still resolving aspects of the Organisation for Economic Co-operation and Development (OECD) Pillar One rules. Specifically, Plowgian noted the ongoing development of the marketing and distribution profits safe harbor, which is designed to limit double taxation when a multinational reporting group has already established a taxing right in a jurisdiction due to physical presence. Plowgian also discussed debates over the treatment of withholding taxes under the proposal.
In discussing Pillar Two, Plowgian also said that the OECD is unlikely to revisit “the basic framework” of tax rules to modify the current unfavorable treatment of certain U.S. tax incentives. Instead, Plowgian said negotiators were looking to other solutions, which may include action from Congress to ensure U.S. taxpayers can still monetize the incentives under the global minimum-tax regime. This could include, among other proposed solutions, providing taxpayers the option to claim certain incentives as refundable credits.
Modifications to Stock Buyback Tax Rules: Brenda Zent, Treasury Department special adviser on international taxation, spoke on a panel regarding the implementation of the Inflation Reduction Act corporate alternative minimum and stock buyback excise tax rules. Zent specifically referenced the “per se” rule, which governs stock repurchases that are designated to be made for the “principal purpose” of avoiding the excise tax. Zent said that the Treasury Department is “thinking about modifying the per se rule to allow [taxpayers] to provide a rebuttable presumption.” Zent also explained that the per se rule had “generated the most comments and the most discussion” of regulations included in the December 2022 proposed regulations regarding the excise tax.
Upcoming Guidance on TCJA Changes to Model Tax Treaty Provisions: Lara Banjanin, senior counsel at the office of associate chief counsel at the IRS, said the agency is in the process of drafting guidance to modify the U.S. Model Income Tax Convention. These changes are required due to tax provisions included in the 2017 Tax Cuts and Jobs Act, which significantly overhauled U.S. taxation of multinational corporations. The IRS and Treasury Department are expected to release the technical guidance in the coming months, although Banjanin did not provide an exact timeline.
Upcoming Guidance on Transfer of Intangible Property: Laura Williams, branch chief at the IRS Office of Associate Chief Counsel (international), confirmed that the Treasury Department and IRS plan to promulgate additional regulations regarding section 367(d) in the coming weeks. Williams noted that these regulations will specifically govern the transfer of intangible property back to the United States. The proposed rule was subsequently posted on May 2. Williams also previewed forthcoming regulations concerning timing issues for section 961 basis adjustments.
At a Glance
Warren and Carper Request IRS to Expand Filing Options. On April 25, Sens. Elizabeth Warren (D-MA) and Tom Carper (D-DE) led a letter to Internal Revenue Service (IRS) Commissioner Danny Werfel requesting that the agency simplify the tax-filing process and expedite the consideration of an IRS-operated e-filing program. The lawmakers noted that the current IRS Free-File Program is used by only 2% of taxpayers, despite the fact that the vast majority of Americans qualify for the option. Referencing this figure as “unacceptably low,” the lawmakers urged the IRS to consider adopting other free online tools to reduce costs and time spent by taxpayers throughout the filing process. The letter also highlights the ongoing free e-file feasibility study, urging the IRS “to roll [the system] out as quickly as possible” if the report concludes that “such a system is feasible.” The letter was signed by 29 other Democratic senators, including Senate Finance Committee Chairman Ron Wyden (D-OR).
House GOP Sets Preliminary Appropriations Markup Schedule. On April 27, House Appropriations Committee Chairwoman Kay Granger (R-TX) sent a letter to committee members outlining the expected schedule for the markup of the fiscal year 2024 appropriations bills. As the letter notes, Granger plans to hold subcommittee and full committee markups in the month between May 17 and June 15. The letter also discusses the changes that Republicans made to the appropriations process, including increasing requirements for the Community Project Funding program. Throughout the upcoming hearings, GOP lawmakers are expected to propose significant cuts to federal spending to align with provisions in the House-passed Limit, Save, Grow Act that would return total discretionary spending to fiscal year 2022 levels.
IRS Transitioning to Hybrid Public Hearings on Proposed Rules. On April 28, the Treasury Department and IRS announced that public hearings on notices of proposed rulemaking will once again have an option for stakeholders to attend in-person beginning on May 11. However, a telephone option will remain open for individuals who prefer to attend or testify remotely. Participants were initially prevented from attending hearings in March 2020 after the COVID-19 pandemic declaration. Following this transition to hybrid operations, individuals who plan to testify must specify whether they wish to attend in-person or remotely when registering.
Brownstein Bookshelf
Yellen Issues New Debt-Limit Projection. On Monday, Treasury Secretary Janet Yellen sent a letter to members of Congress cautioning that the United States “will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit.”
Manchin Threatens to Support GOP Efforts to Repeal IRA Energy Incentives. On April 24, Senate Energy and Natural Resources Committee Chairman Joe Manchin (D-WV) threatened to vote to repeal the Inflation Reduction Act energy tax credits if the Biden administration “does not honor what it said it would do” in implementing the incentives.
Casey Introduces LIHTC Reform Bill. On April 27, Sen. Bob Casey (D-PA) sponsored legislation to increase funding for the Low-Income Housing Tax Credit (LIHTC) program and require that at least 40% of units constructed with LIHTC funding are accessible to disabled individuals.
Wyden Investigation of Possible Tax Fraud in Gifts to Supreme Court Justice. On April 24, Senate Finance Committee Chairman Ron Wyden (D-OR) sent a letter to Harlan Crow requesting “a full accounting” of gifts provided to Supreme Court Justice Clarence Thomas since 1991.
Hearings and Events
House Ways and Means Committee
The committee has no upcoming hearings scheduled for this week.
Senate Finance Committee
On Wednesday, the full committee will hold a hearing entitled “Barriers to Mental Health Care: Improving Provider Directory Accuracy to Reduce the Prevalence of Ghost Networks.” The following witnesses will testify:
- Keris Myrick, Inseparable
- Jack Resneck Jr., American Medical Association
- Robert Trestman, Carilion Clinic and Virginia Tech Carilion School of Medicine
- Mary Giliberti, Mental Health America
- Jeff Rideout, Integrated Healthcare Association
Private Sector
Tuesday, May 2
The Heritage Foundation
Income-Driven Repayment Overhaul: The Backdoor Student Loan “Forgiveness” the Media Isn’t Talking About
Wednesday, May 3
Urban Institute
In Conversation with Matt Desmond: How We Can End Poverty in America
Thursday, May 4–Saturday, May 6
The American Bar Association
2023 May Tax Meeting
Friday, May 5
The Washington International Trade Association
Finding Synergies on Carbon Border Adjustment Mechanisms