Tax Staffers Discuss State of Tax Policy. At a tax conference last week, top officials from the Biden administration and key congressional staffers discussed the latest in tax policy. One panel, which was focused on the legislative landscape, featured the following Republican and Democratic staffers on the House Ways and Means Committee and the Senate Finance Committee:
- Bobby Andres (senior policy adviser, Senate Finance Committee Democrats)
- Courtney Connell (senior tax counsel, Senate Finance Committee Republicans)
- Beth Bell (staff director, Ways and Means Subcommittee on Select Revenue Measures Democrats)
- Derek Theurer (chief tax counsel, House Ways and Means Committee Republicans)
Among the topics discussed was the future of the Build Back Better Act (BBBA), which has remained stalled for months. Andres was not optimistic about the prospects of the package, saying the entire Democratic legislative agenda, including BBBA, is "murky." Nevertheless, he said there is an urgency among Democratic members to secure 50 votes on legislation Sen. Joe Manchin (D-WV) can support. Andres suggested a slimmed down version of the package focusing on energy provisions, revenue raisers and drug pricing reform could potentially pass before the end of the year. Andres said lawmakers "still feel confident that we can reach an agreement." Looking ahead, Andres said the next steps in the process will likely be the announcement of a framework, or a topline figure, which will indicate progress towards an agreement.
Inflation was an issue of concern for both parties, and the staffers agreed that tax legislation might not be the best way to address it. However, the Republicans on the panel said that bad tax policy could exacerbate inflation, explaining that tax increases would be unwise should a recession occur. Bell suggested Democrats could pursue legislation to combat the effects of inflation, such as sending checks to taxpayers, addressing corporate "windfall" profits and reducing the deficit.
The panel outlined several policies with bipartisan support that could be enacted this year. Those items included retirement security and the amortization of research and experimental expenditures. The panelists agreed there would likely be an extenders package, which Theurer said might be larger than in previous years because of the number of bipartisan provisions. Finally, Bell suggested other areas with bipartisan support could include economic development credits, tribal tax credit parity and family tax incentives.
Innovation Package Tax Title Outlook. There has been significant debate on whether lawmakers should include a tax title in the Bipartisan Innovation Act, the final product reconciling the U.S. Innovation and Competition Act (USICA, S.1260) and the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology and Economic Strength (COMPETES) Act (H.R.4521). Tax title proponents largely argue the Bipartisan Innovation Act remains one of the last few legislative vehicles to move tax legislation this year, while detractors say a tax title would unnecessarily complicate negotiations and threaten overall passage.
One of the top contenders for inclusion is the Facilitating American-Built Semiconductors (FABS) Act (S.2107), which would establish a 25% tax credit for domestic fabrication of semiconductors. The FABS Act was authored by Senate Finance Committee Chair Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID) and has the support of many other lawmakers. However, it was reported Monday that some House Democrats oppose inclusion of the FABS Act because it would benefit corporations—an optic progressive Democrats want to avoid this close to the midterm elections. As of this writing, it is unclear which House Democrats object to the provision.
Rep. Richard Neal (D-MA), chair of the House Ways and Means Committee Chair, is advocating for a different tax provision: the expanded Child Tax Credit enacted under the American Rescue Plan Act (P.L.117-2). However, while Neal said last week the conference is "nowhere at all with the tax title," he suggested he may be able to persuade the other conferees to accept one, saying that it is "a question of how we negotiate."
House Democrats Advocate SALT Relief. Several House Democrats sent a letter to Reps. Mike Quigley (D-IL) and Steve Womack (R-AR), the top Democrat and Republican on the House Appropriations Subcommittee on Financial Services and General Government, asking for report language offering relief to taxpayers on the state and local tax (SALT) deduction.
The letter—signed by Reps. Mikie Sherrill (D-NJ), Josh Gottheimer (D-NJ), Tom Malinowski (D-NJ), Katie Porter (D-CA) and Tom Suozzi (D-NY)—expressly requested Quigley and Womack to champion the inclusion of language prohibiting the IRS from using congressional funds to restrict state governments from delivering SALT relief to taxpayers.
The letter explained that following passage of the Tax Cuts and Jobs Act (TCJA, P.L.115-97), which instituted the SALT deduction cap, several states sought to enact legislation that would provide relief to affected taxpayers. However, the IRS responded by promulgating rules that prohibited the state policies from taking effect, making families unable to avoid the SALT deduction cap.
To overcome these issues, the lawmakers requested Quigley and Womack support report language that would prohibit the IRS from using congressional funds for activities "that restrict state governments from providing SALT deduction cap relief to taxpayers."
While not a member of the House Budget Committee, Rep. Richard Neal (D-MA), who chairs the House Ways and Means Committee , said separately he is "open to suggestions" on pursuing this as a potential solution.
Taxpayer Fairness at the IRS. The House Ways and Means Subcommittee on Oversight held a hearing Wednesday on taxpayer fairness at the IRS at which Ken Corbin, chief taxpayer experience officer at the IRS, and James McTigue, director of strategic issues at the Government Accountability Office, testified.
During the hearing, Corbin explained that to improve the filing experience for taxpayers, the IRS should provide taxpayers with education and interact with community partners—something he reiterated throughout his remarks. Corbin also addressed the longer-than-usual wait times for taxpayers calling the IRS for assistance. To address the delays, Corbin said the IRS should use call-back technology to reduce hold time.
Several others issues were discussed during the hearing, including IRS audit practices as they concern high- and low-income taxpayers and the processing backlog. Click here to read the summary from the Brownstein National Tax Policy Group.
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GAO Examines Household Demographics and Tax Data. In a report issued last week entitled "Lack of Data Limits Ability to Analyze Effects of Tax Policies on Households by Demographic Characteristics," the Government Accountability Office (GAO) explored the lack of clarity on the effects of tax policy across demographic characteristics, finding that little is known.
This is partially because the IRS does not consistently link tax data to household demographic information. While other agencies have information that could fill in the picture, federal agencies lack the authority to share this data. As a result, GAO suggested that if tax information could be linked to household demographic data in a way that ensures data security and privacy, lawmakers would be better able to analyze the effects of tax policy on various groups.
GAO recommended Congress consider revising existing laws to allow data sharing among agencies. Short of congressional action, GAO recommended the Treasury Department "evaluate the feasibility of other options to produce secure, linked taxpayer and demographic data," to which the Treasury Department said it is "focusing on imputation and has considered other options."
In response to the report, Senate Finance Committee Chair Ron Wyden (D-OR) issued a press release in which he welcomed the suggestions and said Congress needs a clearer picture if it is going to improve policies.
GAO Reports IRS Employees Wrongfully Access and Disclose Taxpayer Data. At the request of Sen. Mike Crapo (R-ID), who is the ranking member on the Senate Finance Committee, the GAO examined IRS processes for safeguarding federal tax information. The final report, which Crapo requested following the ProPublica leak of taxpayer information data, revealed that IRS employees have improperly accessed and disclosed taxpayer information.
The GAO found that from 2012 to 2021, the IRS investigated more than 1,700 employee misconduct cases involving access to and disclosure of taxpayer information. Of the cases investigated, 462—or about 17%--were found to be violations, 49 of which consisted of unauthorized disclosure of taxpayer information. The report notes that, while these cases originated in 15 separate IRS business organizations, employees in the Wage & Investment Division and Small Business/Self-Employed Division accounted for more than 86% of cases.
The average investigation time into these matters lasted about a year and a half, and most IRS employees were suspended, while others resigned or were removed by the agency.
GAO Report on Audit Trends. The GAO's third report of the week focused on IRS audit rates for various income levels. The office found that from 2010 to 2019, audit rates decreased for all income levels, with the average taxpayer over three times more likely to be audited in 2010 (0.9%) than in 2019 (0.25%). The largest decline over this period was seen for taxpayers who earn above $200,000, largely because these cases are more complicated and require more resources for the IRS to review. The GAO said that, while the IRS continued to audit higher-income taxpayers at higher rates than lower-income taxpayers, the audit rates decreased most for high-income taxpayers.
Congressional Democrats expressed outrage in response. For instance, Rep. Bill Pascrell (D-NJ), who chairs the House Ways and Means Subcommittee on Oversight, said that "accountability for the wealthiest tax cheats has plummeted so far it almost hits the floor." He expressed concern that "well-off taxpayers are not going to be pursued at the rate things are going."
In response, the IRS said the Earned Income Tax Credit (EITC) correspondence audits, which typically involve low-income taxpayers, should not be considered equivalent to standard audits because of the comparatively few resources those audits require relative to audits of high-income individuals.
IRS Commissioner Charles Rettig also defended the agency in a congressional hearing last week. During his remarks, Rettig said the IRS needs additional resources for audits for higher-income individuals having more complex transactions. He explained the IRS attempts to ensure compliance for everyone at the higher-income levels, which requires more experienced agents and resources.
Kevin Brady (R-TX), the top Republican on the House Ways and Means Committee, said the report "seems to be repackaging old information that had been debunked." He later added that his team "went through that report and just didn't find any new information."
Treasury Preparing FTC Regulatory Changes. Treasury Department officials suggested last week that change will be forthcoming later this year to the final foreign tax credit (FTC) regulations issued in December 2021. The FTC regulations have received significant pushback from industry, which has stressed that the new regulations change decades of precedent and substantially increase the risk of double taxation. For its part, the Treasury Department has been meeting with concerned stakeholders to receive feedback, particularly relating to the regulations' requirements regarding royalty payments, cost recovery and the arms-length standard.
Jose Murillo, deputy assistant secretary for international tax affairs, discussed the FTC regulations at the Tax Council Policy Institute's (TCPI) spring symposium last week, noting that the Treasury Department is continuing to receive feedback from stakeholders and is considering options to address industry concerns, which could include technical clarifications or newly proposed additional rules. The forthcoming guidance will likely address two main components of the final regulations related to royalty-withholding taxes and the cost-recovery requirement.
While he stressed that the Treasury Department would maintain the fundamental provisions of the new regulations, Murillo suggested a safe harbor may be provided under the royalty-payment rule, which would likely be issued through a new proposed regulation and provide a comment period for stakeholders. Murillo said the Treasury Department is "hearing a lot of very sympathetic cases being made and considering a safe harbor to the extent, for example, that if there is a license in place and the license only includes the right to use [intellectual property] in a particular jurisdiction and that's what actually happens, then you can deem the attribution rule to be met in that fact pattern and the credit would be allowed."
He conceded that any new rules would potentially be months away but are expected to be released this year. As for the cost-recovery requirement, he said the IRS is considering clarifications to the final rules, rather than a new proposed rule.
Lily Batchelder, assistant secretary for tax policy, confirmed this approach in separate remarks at last week's TCPI conference when she said there "could be a combination of new rules, clarifying changes to existing regulations and other guidance, and also might include examples illustrating how the final regulations are intended to apply to certain taxes."
Since publication of the final rule, businesses have been advocating for a one-year delay. Beth Bell, majority staff director for the House Ways and Means Subcommittee on Select Revenue Measures, and Courtney Connell, Republican senior tax counsel for the Senate Finance Committee, said there could be legislative movement on this front, especially in light of the bipartisan letter from members of the Ways and Means Committee calling on Treasury Secretary Janet Yellen to delay the implementation period for the FTC regulations. Although they said a one-year extension enjoys bipartisan support, no such legislation has been drafted.
IRS Russian Sanctions Enforcement. In testimony before the House Appropriations Subcommittee on Financial Services and General Government last week, IRS Commissioner Charles Rettig outlined the agency's work to enforce sanctions on Russian entities. The IRS is working primarily through the KleptoCapture interagency task force to pursue and locate real and financial assets belonging to sanctioned individuals, including Russian oligarchs.
According to Rettig, although the IRS has not yet received funding for this task, the agency has been undertaking these efforts since March. The IRS has been aggressive in "actively tracing cryptocurrency transactions" and "identifying digital assets of the sanctioned individuals and entities." Rettig said the efforts have already proven successful in identifying both real and financial hidden assets as well as cryptocurrency transactions. The IRS has 25 active investigations related to designated nationals and the blocked persons list, Rettig said.
At a Glance
- Wyden Launches Abbott Probe. Senate Finance Committee Chair Ron Wyden (D-OR) launched an investigation into the international tax practices of Abbott Laboratories last week. In a letter to the CEO, Wyden said he wants to "understand how much was spent by Abbott to prevent the closure of a critical infant formula processing plant" and "whether the billions of dollars in tax cuts" it received under the Tax Cuts and Jobs Act were spent on share repurchases.
- Republicans Oppose Windfall Tax. A group of 50 House Republicans, including Kevin Brady (R-TX), the House Ways and Means Committee ranking member, sent a letter last week to Treasury Secretary Janet Yellen expressing their opposition to a windfall profits tax on energy producers. The lawmakers argue that, with inflation above 8%, a new tax on oil and gas companies would only exacerbate prices for American consumers.
- CRS Examines Semiconductor Incentives. The Congressional Research Service recently issued a brief report on congressional efforts to support semiconductor fabrication with an investment tax credit, such as the FABS Act.
- Taxpayer Liability Increased. The University of Pennsylvania Wharton Budget Model released a study this week that found taxpayers owed more than $500 billion in taxes this year, an increase of about $200 billion from before the COVID-19 pandemic. The model primarily attributed the increase to capital gains.
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