Taxation & Representation, June 11, 2019
See all Insights

Taxation & Representation, June 11, 2019

Brownstein Client Alert, June 11, 2019


@irsnews. Look out Justin Bieber, Taylor Swift and President Trump—your days of social media dominance are numbered. It’s only a matter of time before the Internal Revenue Service (IRS) Instagram account is trending worldwide. After perusing all the agency’s posts, we’ve narrowed it down to our top three faves below:

The IRS has been active on social media for about a decade now on YouTube, Facebook and LinkedIn in an effort to provide taxpayers important information and boost its approval ratings. The IRS’s foray into Instagram is more recent — the page has been active since November 2018 and is part of the agency’s continued efforts to remake its image as a friendlier service-oriented agency.

Like many others, the IRS is learning that social media is a surprisingly effective way to boost approval ratings. According to a 2013 poll from the Pew Research Center, the IRS had a 47% favorable rating in 2010. That number has since jumped to 58%. Additionally, the IRS reported higher taxpayer satisfaction among those interacting with the federal tax collector earlier this year. Relative to 2017, taxpayers were more satisfied with their personal interactions with the IRS and believe it is allocating its resources effectively. While correlation doesn’t always prove causation, the social media presence is notable.

Overall, things are looking up for the agency — a potential funding increase may be on the horizon. In his budget proposal earlier this year, President Trump proposed a $200 million increase to the its funding. Last week, the House Appropriations Subcommittee on Financial Services and General Government advanced the fiscal year 2020 funding for the IRS.

The full House Appropriations Committee is likely to clear the bill this evening. The subcommittee version of the bill would allocate $697 million — a 6.2% bump from last year and $166 million more than the White House’s request — to the federal tax collector. The bill provides:

  • $5.2 billion for IRS enforcement activities — a $297 million increase — in the wake of the IRS posting its lowest auditing levels in many years
  • $400 million will be set aside to close the tax gap
  • $67 million for taxpayer services
  • $290 million to modernize business systems
  • $4 billion for operations support



Extended Invitation. Earlier today, House Ways and Means Committee Democrats convened to discuss a path forward on tax extenders legislation, tax breaks that expired that the end of 2017 and 2018, as well as those that expire at the end of this year. Democrats discussed the contours of potential legislation, including:

  • A three-year extension through the end of 2020 on several tax extenders provisions, including a credit for biodiesel, the New Markets Tax Credit, the Work Opportunity Tax Credit and a credit for short-line railroad tax maintenance.
  • Democrats are considering ending the Tax Cuts and Jobs Act reduction in the estate tax in 2023 instead of the provision’s current 2025 expiration date.
  • The bill may also include a two-year expansion of the following credits for working-class Americans:
    • Earned Income Tax Credit (EITC) focused on childless workers with a permanent match for Puerto Rico and other territories.
    • Child and Dependent Care Tax Credit (CDTC) with full refundability and an increase in an exclusion for employer-provided dependent care assistance.
    • Child Tax Credit (CTC) with full refundability and a permanent CTC match for Puerto Rico and other territories.

The three-year extensions to several expired tax extenders provisions largely tracks with the Senate’s Tax Extender and Disaster Relief Act (S.617), which was introduced in February by Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR). The bill’s expansions of the CTC and the CDCTC may track closely with several bills recently introduced by Democrats, including Rep. Rosa DeLauro’s (D-CT) American Family Act (H.R.1560).

The package outlined by House Ways and Means Chairman Richard Neal satisfies several priorities of different members: (1) larger tax cuts for working Americans and their families than for businesses; (2) additional extenders that encourage work and economic development that Democrats support; and (3) offsets for part or all of the package. The documents distributed did not include an increase in the corporate rate, but that was an option discussed.

Senators Antsy for Retirement. No, they’re not going anywhere — and neither is the Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R.1994) in the Senate. Since the House passed the bipartisan retirement package last month, it hit a wall in the upper chamber after Sen. Ted Cruz (R-TX) held the bill up, citing issues with the removal of provisions that would allow Sec. 529 funds to be used for homeschooling expenses. The hold from Cruz has emboldened a handful of other Republican senators with objections to the bill: Sen. Mike Lee (R-UT) expressed concerns with some of the pension bailouts in the bill, and Sens. Pat Toomey (R-PA) and Marco Rubio (R-FL) — who joined Cruz in placing a hold on the bill — oppose the legislation but have not publicly stated why.

Senate Finance Committee Chair Chuck Grassley (R-IA) is trying to corral the troops, and a growing number of Senate Republicans are getting on board. On Wednesday, the veteran tax writer said lawmakers are making progress on fixing some holes in the legislation. In the meantime, Senate Majority Leader Mitch McConnell (R-KY) has indicated he won’t bring the bill to the floor for a vote until the concerns have been addressed.

Free File, You’ve Been Chopped. Reps. John Lewis (D-GA) and Mike Kelly (R-PA) reintroduced the Taxpayer First Act on Thursday, absent the controversial provision that would have codified the IRS's Free File partnership program with private tax preparation companies. The codification of the Free File agreement in a prior version of the Taxpayer First Act is the reason why the legislation stalled in the Senate after initial passage in the House; however, House lawmakers passed the revamped bill on Monday by voice vote.

Senate Finance Chair Chuck Grassley (R-IA) anticipates no opposition to the reworked bill and a vote is expected as soon as next week.

The Free File program, which was started in 1998, has been the subject of widespread criticism after reports found that some tax filing businesses benefitted financially from customers who should have been able to utilize tax preparation software free of charge. According to longtime National Taxpayer Advocate Nina Olson, around 68% of all taxpayers who were eligible for the Free File program purchased “the same or comparable software” instead. The Free File program is currently under review by the IRS.

The Taxpayer First Act will make updates to IRS procedures and taxpayers rights, which have remained largely stagnant over the past 20 years. It will also ensure that people with an adjusted gross income at or below 200% of the poverty line and those with an income primarily earned from Supplemental Security Income benefits or disability insurance benefit payments cannot be referred to private debt collection companies for their unpaid tax debt.

Wyden’t You Just Play by the Rules? In response to the recent college admissions scandal, Senate Finance Committee Ranking Member Ron Wyden (D-OR) introduced legislation that would disallow certain tax-deductible donations to universities that are made to influence admissions decisions. The College Admissions Fairness Act, introduced on June 5, requires colleges and universities to create policies that bar consideration of family members’ donations or ability to donate as a factor in student admissions. The bill would also limit deductions to $100,000 of donations over a six-year period prior to or during a child’s college or university attendance. Any deductions taken for donations in excess of $100,000 during the six-year period preceding a child’s attendance would be recaptured. Additionally, the bill amends the Higher Education Act to institute reporting requirements for universities that receive federal funding to publicly disclose the ratio of admitted students whose parents were identified donors. Following the news of the college admissions scandal in March, in which 33 parents were accused of providing bribes to get their children into elite universities, Sen. Wyden had vowed to address what he described as a “corrupt system” of admission acceptances in higher education.



Need More SALT? Democrats from high-tax states are walking a fine line as they attempt to lift the $10,000 cap on state and local tax (SALT) deductions set by the Tax Cuts and Jobs Act in 2017. Lifting the cap stands to impact less than 10% of all households, with 20% of the highest earning households receiving 96% of the benefits. Frustrated Democrats, like New York Gov. Andrew Cuomo, have labeled the SALT cap as “economic civil war,” and several states have already attempted to draft workaround options to benefit residents. In 2018 the IRS released proposed guidance that targeted these workarounds, leaving displeased Democrats with few options aside from dismantling the cap at the federal level. The smattering of legislative proposals to address SALT includes a set from the New Jersey delegation to repeal the cap, Stop the Attack on Local Taxpayers Act (H.R. 1142, S. 437) and another from Illinois Democrats which would raise the cap and introduce different limits for individuals and couples (H.R. 1757), a feature absent from the current statute.

Income inequality is a frequent talking point for Democrats on the 2020 campaign trail, and lawmakers would have to supplement a repeal of the SALT cap with another $620 billion in other tax revenue in the next 10 years. Next up: the House Ways and Means Committee set a hearing for June 25 to discuss the deduction cap.



Penalties, Penalties, Where Art Thou? The IRS Large Business and International Division, tasked with imposing penalties on large companies that pay their taxes incorrectly, is in the hot seat following a review by the Treasury Inspector General for Tax Administration (TIGTA).

In a report released May 31, TIGTA found that the division applied these penalties at a rate of less than 8% from 2015 to 2017. Meanwhile, the Small Business/Self-Employed Division levied accuracy-related penalties at a markedly higher 25% rate. Additionally, a whopping 94% of the penalty amounts handed down by the Large Business and International Division, the price tag of which can range from 20 to 40% of the underpaid tax, were overturned or diminished on appeal. According to the TIGTA review, “If the IRS does not properly consider and propose the accuracy-related penalty, taxpayers may be treated inconsistently and unfairly, undermining tax system integrity and diminishing voluntary compliance.” In response to these claims, the IRS stressed that most large companies retain in-house tax consultants as a first line of defense but also announced plans to review cases where accuracy-related penalties for large companies were overturned.



Dial J5 for International Tax Police. The Joint Chiefs of Global Tax Enforcement (“J5”), which consists of the American, British, Canadian, Australian and Dutch tax authorities, have teamed up to investigate more than 50 international tax evasion cases in its first year. Investigations include but are not limited to banks and their intermediaries helping taxpayers conceal income and lawyers and accountants who have deliberately enabled tax evasions. Pending an increase in resources and funding, J5 leaders hope to begin investigations related to cybercrimes and cryptocurrency in the near future. IRS Criminal Investigation Chief Don Fort described the group as having a lot of success at addressing international tax evasion. Case information is exchanged internationally, raising concerns over information security, although Fort was quick to reassure reporters that the J5 is in compliance with all relevant privacy laws and statutes.

G-Unit Assembles. On June 8 and 9, finance ministers from the world’s 20 largest economies met in Fukuoka, Japan, and discussed ways to prevent technology companies from avoiding tax obligations by parking profits in low-tax jurisdictions. Digital companies provide services in several countries and can book sales in low-tax jurisdictions, leaving countries with no way to tax profits from certain activities, such as internet advertising.

The communiqué indicates that the G20 will redouble efforts to find a consensus-based solution with a final report by 2020.

Although not yet finalized, the finance ministers are considering a two-pillar approach to a digital service tax (DST). The first pillar would divide the rights to tax a company based on where its goods and services are sold, regardless of whether the company has a physical presence in the jurisdiction. The second pillar would apply a global minimum tax rate to companies that still find a way to park profits in low-tax jurisdictions.

The proposed regime would negatively affect the world’s largest technology companies, which are primarily located in the U.S. This has caused Treasury Secretary Steven Mnuchin to express significant concerns with the two corporate taxes proposed by France and the United Kingdom. Both countries have advocated for DSTs based on the local sales of search engines and digital marketplaces.

The G20 summit will be held on June 28 and 29 in Japan. Other top priorities include trade, debt transparency and the development of sustainable infrastructure.

The following members are expected to participate in the summit: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States and the European Union.



Booker Builds a Hous(ing Plan). Sen. Cory Booker’s (D-NJ) newly announced strategy to promote affordable housing is a renters’ tax credit, which would cover the difference between 30% of a person’s income and the fair-market rent in their neighborhood. The plan, released as part of the 2020 presidential hopeful’s slate of housing proposals, does not include an income cap to limit those who qualify — the median participating family would receive $4,800 per year at a national cost of $134 billion annually. Booker cited statistics from researchers at Columbia University who estimate that upwards of 50 million Americans could qualify for the tax credit, benefitting over 15 million children. Booker plans to pay for the tax credit by increasing tax rates on top-earning households, including a return of the estate tax, which was cut in the Tax Cuts and Jobs Act in 2017. Also included in his platform are calls for greater tenant protections, more funding for infrastructure, federal savings accounts for all citizens established at birth and other broad increases in investment across the country. The candidate drew on his time spent residing in public housing and his post-law school work as a tenants’ lawyer in drafting the policy. He joins fellow candidates Sens. Kamala Harris (D-CA) and Elizabeth Warren (D-MA), who also previously released housing-reform plans.



  • Neal Wants Change. House Ways and Means Chair Richard Neal (D-MA) wrote a letter to the IRS on June 3 to clarify federal guidance on “recently adopted family and medical leave laws of several states.” Neal described how several taxpayers will soon be subject to “mandatory contributions” with uncertain consequences as a result of laws passed in Massachusetts, Washington State and Washington, D.C.
  • IRS Summer of Love. Officials at the IRS have indicated that they expect a tranche of international regulations to be finalized this summer, including rulemaking by June 22 for taxes on offshore profits in “haven” countries. Among the prospective regulations include final rules on the base erosion and anti-abuse (BEAT) tax, the global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) regulations. An IRS hearing is scheduled for July 10 on both the GILTI and FDII provisions.
  • Coming Off the Press. Regulations on tax deductions for foreign-sourced dividends from international firms are likely to be released in the coming weeks, after the executive Office of Information and Regulatory Affairs (OIRA) sent their final recommendation to the Treasury Department on June 4. Sections 91 and 245A both provide domestic companies with unique guidelines for calculating gross income transfers and dividend deductions, respectively.



  • Get in the Opportunity Zone. Reading through extensive regulatory guidance can be tough, particularly with an issue as nuanced as opportunity zones. There must be an easier way to digest all that information. And there is: Brownstein’s Nicole Ament and Erik Jensen have the top 16 takeaways from the opportunity zone proposed regulations.
  • Latest ACA Battle. Since enacted into law, the Affordable Care Act has endured opposition from a number of stakeholders. Brownstein’s Michael King and Emily Felder have a look inside the law’s latest legal challenge.
  • Members' Day Free-For-All. On Tuesday, June 4, the House Ways and Means Committee convened for a nearly six-hour Members’ Day hearing that included discussion on over 50 bills addressing healthcare, pensions, tax and trade issues. Read Brownstein’s full hearing write-up here.
  • TECHnically, the Rate is Lower. The G20 finance ministers were busy over the weekend discussing how to ensure tech companies pay their fair share in taxes. How specifically do these firms skirt their tax obligations? Bloomberg has the answer.

Recent Insights