Legislative Lowdown
Government Shutdown Averted at the 11th Hour; McCarthy Ousted from Speakership. On Sept. 30, Congress passed a 45-day continuing resolution (CR) with strong bipartisan support to fund the government until Nov. 17, averting a shutdown. The bill includes $16 billion in disaster relief funding, though it lacks any funding for Ukraine. The aversion effort was spearheaded by then-Speaker of the House Kevin McCarthy (R-CA), who bucked hardline Republicans in pushing the CR forward. Democrats expressed concerns about the elimination of funding for Ukraine in the CR. However, Senate Republicans who support a new tranche of funding for Ukraine believe they will have a better chance at moving that through Congress next month.
After threatening for months, on Oct. 2, Rep. Matt Gaetz (R-FL) filed a procedural motion to “vacate the chair” against McCarthy. Gaetz said he strongly disagreed with the way the McCarthy ran the legislative process in the House, accused him of working with Democrats to pass the CR, as well as allegedly violating earlier internal agreements. The vast majority of his Republican colleagues disagreed with Gaetz and his small band of followers who have long agitated for the removal of McCarthy.
On Oct. 3, joining all House Democrats and seven GOP colleagues, Gaetz was successful in removing McCarthy as the speaker with a vote of 216-210. As designated by McCarthy, Rep. Patrick McHenry (R-NC) will now serve as speaker pro tempore. As speaker pro tempore, McHenry will not be able to exercise the full powers of the speakership position. At an Oct. 3 conference meeting, McCarthy informed his colleagues that he would not run for the speakership again. As of this writing, it remains unclear who the next speaker of the House will be.
1111 Constitution Avenue
IRS Chief Counsel Nominee Fields Republican Concerns. On Sept. 28, the Senate Finance Committee held a hearing considering several nominations, including that of Marjorie A. Rollinson to be chief counsel for the Internal Revenue Service (IRS) and assistant general counsel in the Department of the Treasury. Rollinson was most recently a deputy director of national tax at Ernst & Young (EY) and previously served a stint at the IRS as the associate chief counsel (international). Rollinson’s nomination comes at a time when the IRS and the Treasury Department are under fire for alleged regulatory overreach that does not reflect congressional intent. The most controversial rulemaking has been in response to guidance issued on the energy-tax credits in the Inflation Reduction Act (Pub. L. 117-169). In response to a line of questioning from Finance Committee Ranking Member Mike Crapo (R-ID), who asked whether it was appropriate for the IRS to issue guidance that is inconsistent with statute, Rollinson was noncommittal to the assertion that the IRS was engaging in such activity, stating that the current role of the IRS is to interpret statute “within the parameters of the law” and that the Office of Chief Counsel would ensure that they would “advise fully” on proper interpretation of the law for guidance purposes.
Other questions Finance Committee Republicans brought up during the nomination hearing concerned whether the IRS and Treasury Department had statutory authority to field and maintain a Direct e-File program for preparing tax returns and to negotiate the ongoing Organisation for Economic Co-operation and Development (OECD) global tax deal. In addition, Sens. Marsha Blackburn (R-TN) and Steve Daines (R-MT) asked Rollinson whether she would ensure that taxpayers’ data and information are protected, in light of reports that the IRS destroyed 30 million Tax Year 2019 returns and has otherwise mishandled sensitive taxpayer information. Rollinson had stated that she is committed to safeguarding taxpayer information and is determined to restore any eroded public trust in the IRS but did not provide details on actions the Office of Chief Counsel would take under her tenure.
Rollinson also confirmed that she would make an effort to protect both “external” whistleblowers who flag tax noncompliance incidents to the IRS, as well as “internal” whistleblowers who publicize instances of IRS misconduct. She stated that whistleblowers play a crucial role in tax administration and that whistleblowers be treated with respect and without retaliation. In a line of questioning by Sen. Elizabeth Warren (D-MA), Rollinson also reaffirmed a commitment to recuse herself from matters related to any clients she served at EY in her first four years as chief counsel, as well as to not work for any clients, including EY, for four years after she vacates her role as chief counsel.
IRS Issues Fact Sheet, Holds Webinar on Low-Income Communities Bonus Credit Program; Applications Open on Oct. 19. On. Sept. 29, the IRS released FS-2023-21, reminding taxpayers about the increased energy investment credit (“credit”) available for “qualifying solar and wind facilities benefitting low-income communities.” This unique application-based program, known as the Low Income Communities Bonus Credit Program, requires taxpayers to apply for a “capacity limitation” allocation with respect to a qualifying facility and meet eligibility requirements within four years of receiving an allocation. Applicable facilities must come within one of four project categories: (1) Located in a low-income community, (2) located on Indian [tribal] land, (3) part of a qualified low-income residential building project, or (4) part of a qualified low-income economic benefit project. Annual capacity limitations apply for each category. Categories (1) and (2) are eligible for a 10-percentage-point increase to the credit, while categories (3) and (4) are eligible for a 20-percentage-point increase. The annual capacity limitation is 700 megawatts for categories (1) and (4) and 200 megawatts for categories (2) and (3). Applications for a credit allocation open on Oct. 19.
Also on Sept. 29, the Department of Energy and the Department of the Treasury hosted a webinar on the program. The webinar provided an overview of the bonus-credit program, including allocation and funding mechanisms as well as the application process and criteria for receiving a credit allocation under the program. Also discussed were the various program tools and resources to help applicants, including a public mapping tool and a help desk. An Applicant User Guide is expected soon and will be posted on the credit website, along with the slide deck and a recording of the webinar.
At a Glance
Smith, Schweikert Release Letter to IRS Demanding Action on ERTC. On Oct. 3, House Ways and Means Committee Chair Jason Smith (R-MO) and Oversight Subcommittee Chair David Schweikert (R-AZ) sent a letter to IRS Commissioner Daniel Werfel expressing ongoing concerns over the agency’s implementation of the Employee Retention Tax Credit (ERTC) and its recent decision to temporarily halt the processing of ERTC claims. The letter states that the moratorium will exacerbate an already-large backlog of outstanding claims and delay legitimate claimants from receiving payments. The letter also states that the IRS has not yet developed a plan to both combat fraud and improve efficiency during the moratorium, stating “it remains to be seen what changes will be made … to improve vetting measures for fraudulent claims while also making the processing time more efficient to lessen the backlog.” The letter requests that the IRS respond by Oct. 17 to inquiries regarding the current ERTC claims backlog, the agency’s plan to quicken processing times, and the fraud prevention measures the IRS will employ to combat ERTC fraud.
IRS Releases 2023-24 Priority Guidance Plan. On Sept. 29, the Department of the Treasury and Internal Revenue Service (IRS) released the 2023-24 Priority Guidance Plan (PGP), which lists 237 guidance projects that the Treasury Department and the IRS aim to address by June 30, 2024. The PGP provides insight into issues the Treasury Department and the IRS have identified as important, often at the behest of taxpayers and practitioners for clarity on particular issues within the tax code, which the Treasury Department and the IRS intend to pursue during the year. The PGP is used as a workflow document to prioritize the tax issues to be addressed through regulations, revenue rulings, notices, revenue procedures and other published administrative guidance. The current plan includes projects to implement the Inflation Reduction Act (IRA) energy provisions, which are a top priority of the Biden administration, along with new projects on international and corporate tax issues, including the IRA’s corporate alternative minimum tax and stock buyback excise tax. The plan also includes new projects relating to pass-through businesses, including guidance on the exception from Self-Employed Contributions Act (SECA) taxes applicable to certain limited partners and a project relating to the section 199A 20% deduction for pass-through business owners.
IRS Consultant Charged in 2021 Tax Return Data Leak. On Sept. 29, The Department of Justice (DOJ) charged Charles Littlejohn, an IRS consultant, with 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. The incident sparked widespread outrage at the IRS for not properly securing sensitive taxpayer information. In response to the DOJ’s announcement, Senate Finance Committee Ranking Member Mike Crapo (R-ID) argued that the IRS must ensure that the situation must be resolved promptly and further leaks must be prevented, stating “resolving these and other ongoing security issues at the IRS, as well as identifying and making whole the individuals impacted by this breach, must be the IRS’s highest priority.”
House Republicans Continue Probe on Deal Between Ford and CATL. Three House Republicans, including Ways and Means Committee Chair Jason Smith (R-MO), sent a letter to Ford Motor Company President and CEO James Farley, Jr. on Sept. 26, asking about Ford’s continued partnership with Chinese battery manufacturer Contemporary Amperex Technology Co. (CATL) to build an electric vehicle (EV) battery plant in Michigan. The Ford-CATL partnership has been intensely scrutinized by Republicans due to CATL’s potential ties to the Chinese Communist Party and the company’s record of human rights abuses, as well as the possibility that the Inflation Reduction Act’s various EV tax credits may be flowing to Chinese individuals and entities. The letter alleges that Ford has not responded to the Ways and Means and Energy and Commerce committees’ previous requests “with any meaningful detail or substance,” and requests Ford to preserve documents concerning its relationship with CATL. The letter also threatens that if Ford continues to not comply with the committees’ current and previous document requests, then the committees will “consider other means to obtain the documents” including a compulsory appearance before Congress. Currently, the project is on hold while Ford negotiates a new labor contract with the United Auto Workers union.
Senate Democrat Questions IRS Over Destroyed Tax Returns. In a Sept. 25 letter to IRS Commissioner Daniel Werfel, Sen. Sherrod Brown (D-OH) requested that the agency resolve issues caused by their 2021 destruction of a reported 30 million tax year 2019 returns. The letter states that the destruction meant that taxpayers trying to claim the Earned Income Tax Credit no longer had access to a proof of income from that tax year, meaning that these taxpayers either had to seek legal assistance or undergo an audit to claim the credit, or were unable to claim the credit at all. The letter requests the IRS to answer questions about how many taxpayers were affected by the document destruction and their plan to help adversely affected taxpayers.
Finance Committee Study of IRS Data Reveals Noncompliance Among Wealthy Tax Filers. On Sept. 28, Senate Finance Committee Chair Ron Wyden (D-OR) wrote a letter to IRS Commissioner Daniel Werfel discussing the results of a study by the Finance Committee finding widespread tax evasion by certain wealthy filers. According to the letter, newly released IRS data show that “nearly 1,000 taxpayers making more than $1 million per year have failed to file tax returns over multiple recent years.” Furthermore, the Finance Committee found that 2,000 unfiled tax returns from tax years 2017 through 2020 from the highest-earning 500 non-filers found that these taxpayers owed roughly $923 million in taxes, with only two under criminal investigation. The letter encourages the IRS to use increased financial resources from Inflation Reduction Act funding to increase enforcement compliance among wealthy non-filers.
Manchin Threatens Legal Action (Again) Over EV Tax Credit Implementation. On Sept. 28, Sen. Joe Manchin (D-WV) stated that he was preparing to sue the Biden administration for its implementation of the electric vehicle tax credits in the Inflation Reduction Act. He alleged that the administration intentionally sought broad interpretations of the credit in order to “try to get more out quicker and be more dependent on China,” and indicated that he may sue once the Treasury Department implements a final ruling concerning the credits. A Treasury Department spokesperson said in a statement that IRA credit implementation has “followed the law” and that public comment is carefully considered before rule finalization.
Ford, GM Battle for EV Tax Credit. This fall, the Biden administration is expected to deliver guidance interpreting a rule barring electric vehicles (EVs) containing battery components sourced from “foreign entities of concern” from qualifying for a $7,500 consumer tax credit. The potential interpretation has fueled a lobbying battle between Ford Motor Company and General Motors (GM), as Ford would favor a looser interpretation given its ongoing partnership with Chinese battery manufacturer Contemporary Amperex Technology Co. (CATL) to build electric vehicles. Ford argues that a loose interpretation will enable the United States to compete with China in the battery and EV arena, whereas GM states that a loose interpretation would increase China’s control over the U.S. car manufacturing industry. The interpretation would also have economic and political implications: a strict interpretation may disincentivize the purchase—and thus, the building—of EVs, while a loose interpretation would draw ire from China skeptics.
Brownstein Bookshelf
IRS Releases Guidance on New Energy Efficient Home Credit. On Sept. 27, the IRS issued Notice 2023-65, which clarifies requirements for Internal Revenue Section 45L, the New Energy Efficient Home Credit, which was expanded under the Inflation Reduction Act (Pub. L. 117-169). The guidance states that contractors are eligible for up to a $5,000 credit per home they constructor rehabilitate if the home qualifies for certain Energy Star programs. Multifamily residences also must meet prevailing wage credits to qualify.
Hearings and Events
House Ways and Means Committee
On Oct. 4, the House Ways and Means Committee will hold a markup of four 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.