Taxation & Representation, February 8, 2022 | Brownstein Hyatt Farber Schreck


Legislative Lowdown

Build Back Better Reboot. Rep. Richard Neal (D-MA), the House Ways and Means Committee chair, and Sen. Ron Wyden (D-OR), chair of Senate Finance Committee, are cautiously optimistic negotiations over the Build Back Better Act (BBBA) can resume after Sen. Joe Manchin (D-WV) retracted statements earlier in the week that the package was “dead.”
 
Last week, hours after Manchin somewhat spontaneously told reporters that BBBA was “dead,” he clarified that he was referring to the version of the package he dismissed in December 2021. Not to be confusing, Manchin later said he remained open to alternative packages that may, for instance, be smaller or less costly.
 
Manchin has maintained, as recently as last week, that one of his top priorities is to “fix the tax code” and that he is willing to accomplish this through budget reconciliation because “it’s the reason we have reconciliation.” Faithful Taxation & Representation readers will remember that Manchin was and is still willing to accept the following tax provisions:

  • Increasing the corporate tax rate to 25%;
  • Imposing a 15% corporate minimum tax;
  • Establishing a 28% “all in” capital gains tax;
  • Eliminating “tax loopholes such as carried interest”; and
  • Raising rates on wealthy taxpayers.

Neal was encouraged that Manchin swiftly clarified his statements regarding the status of the BBBA discussions. Because Manchin “did it immediately; he didn’t do it like two days later,” Neal has since pushed for a “reset” in discussions.
 
In the Senate, Wyden has said of the issues Manchin has prioritized, “virtually all of them go through the Finance Committee.” Like Manchin, Wyden has also remained open to compromise, saying he is “trying to meet [Manchin] where he is,” adding that there are policies on which there could be “common ground,” such as tax permanence, revising the Tax Cuts and Jobs Act (TCJA, P.L.115-97), prescription drugs and climate change. In fact, it was reported last week that Democrats have begun discussing alternative revenue raisers and spending offsets in the bill that will more effectively address deficit reduction, a perennial concern for Manchin.
 
While Neal and Wyden have acknowledged that lawmakers should try and make enough headway on BBBA for President Biden to announce progress during the State of the Union on March 1, both dismissed the idea of setting another artificial deadline for action. Manchin also has other short-term priorities that will delay movement on BBBA, such as appropriations. Speaking on the Sunday news shows, Manchin said that Congress must “get a budget bill first” before moving onto BBBA.
 
CTC Extension Efforts Endure. With BBBA discussions ebbing and flowing, members of Congress and their aides are searching for a more reliable vehicle to extend the Advanced Child Tax Credit (CTC) that expired at the end of last year. Although the Advanced CTC has been included in some versions of the BBBA, it has been specifically targeted by Sen. Joe Manchin (D-WV) as a provision that might be too costly for the package. As a result, lawmakers have been exploring other avenues to advance an extension. (The White House and congressional Democrats renewed their push for the CTC and the Earned Income Tax Credit in twin press conferences today. However, as of this writing, those events have not yet occurred.) 

Even if the extension moves through another package—in fact, especially if it does—Democrats will need to garner support from Manchin and multiple Senate Republicans. Because of this, Democratic aides from both the House and Senate told reporters last week they are considering changes to the credit that might make it more palatable to potential holdouts. Such changes could include lowering the eligibility threshold, imposing a work requirement and reducing the per-child value of the credit.

There is optimism among those on Capitol Hill pushing for the extension since some Republicans have displayed a willingness to partner with Democrats on the issue. Rep. Kevin Brady (R-TX), the ranking member on the House Ways and Means Committee, said Republicans could find “common ground” on a compromise that includes permanency for the CTC changes made under the TCJA. Likewise, Sen. Marco Rubio (R-FL) has long supported the credit and thinks “this should be bipartisan.”
 
White House Weighs COVID-19 Refill Package. Funding for COVID-19 testing, therapeutics and vaccines has been mostly exhausted, according to reports of confidential White House documents shared with congressional offices, causing the Biden administration to consider another legislative proposal to provide additional pandemic funding.
 
The documents reportedly did not contain detailed accounts of each spending category and a timeline for how long remaining funds will last. It is also unclear which congressional offices received the White House documents. Regardless, the White House could soon approach Congress for additional funds. Jeff Zients, for instance, who spearheads the White House COVID-19 response effort, recently said the administration “will be working with Congress as needed to make sure we have the funding to continue to fight this virus.”
 
However, stronger-than-expected economic numbers on Friday could provide fodder for those opposed to enacting more COVID-19 response legislation. Republicans are generally reluctant to embrace additional spending, arguing that previously allocated COVID-19 spending has not yet been fully expended or obligated. For example, Senate Minority Leader Mitch McConnell (R-KY) has said lawmakers should “start the discussion by talking about repurposing the hundreds of billions already sitting in the pipeline.”
 
Other Republicans are more prepared to accept another COVID-19 response package. For instance, Sen. Roy Blunt (R-MO), the ranking member on the Senate Appropriations Subcommittee on Labor, Health and Human Services, Education, and Related Agencies, recently said such a package will be necessary. At the same time, though, he said the White House has not yet sent Congress a request or explained why such a package is necessary. Speaking with reporters last week, Blunt said the administration is “going to have to explain why they need it,” adding that he would “be more enthused about a supplemental if it was part of an overall package that gets our work done.”
 
Other lawmakers are already working on a package to provide COVID-19 relief for small businesses and nonprofits. Sen. Ben Cardin (D-MD), the Senate Small Business Committee chair, said there is a group of senators, including Finance Committee Chair Ron Wyden (D-OR), interested in reinstating the Employee Retention Tax Credit (ERTC), a COVID-19-era break that was ended in September 2021. Cardin explained that the ERTC is “on the table depending on how we proceed on COVID relief, and it’s also on the table in terms of tax issues.” Wyden said he is considering such legislation, saying “it makes sense and I want to talk to my colleagues about what we can do.”
 
Wyden’s Republican counterpart on the Senate Finance Committee, Ranking Member Mike Crapo (R-ID), has not been involved in discussions, but he is open to the proposal. Saying as much, Crapo recently said, “I’m certainly not opposed,” before adding that “the employee retention program was a good program. The question I have is whether we need additional COVID packages right now while we’re still rolling out the previous packages.”
 
IRS Drops Facial Recognition After Congressional Scrutiny. Both Republican and Democratic senators raised issues with Internal Revenue Service (IRS) use of ID.me, a software company that provides identity proofing, authentication and group affiliation verification for government and private entities. After an onslaught of congressional activity in response to the IRS plans, including both legislation and letters, the agency
announced on Monday it would transition away from facial recognition. According to the IRS, “the transition will occur over the coming weeks in order to prevent larger disruptions to taxpayers during filing season.”
 
That may not put an end to the congressional inquiry, however, given the overwhelming interest from lawmakers. For example, two bills were introduced—one by Rep. Bill Huizenga (R-MI), who sits on the House Financial Services Committee, and another by Rep. Jackie Walorski (R-IN), a member of the House Ways and Means Committee. Both would prevent the IRS from requiring the use of facial recognition technology to access online accounts or services.
 
In addition to the legislative response, lawmakers probed the IRS for additional information. Last week, for instance, Senate Finance Committee Republicans, led by Ranking Member Mike Crapo (R-ID), sent a letter to IRS Commissioner Charles Rettig expressing their “serious concerns about how ID.me may affect confidential taxpayer information and fundamental civil liberties.” After listing the types of consumer data collected by ID.me—including passport, birth certificate, Form W-2, Social Security Numbers and “selfies”—the lawmakers noted that “government and private companies have an unfortunate history of data breaches.” The lawmakers asked the IRS to provide additional information about the IRS relationship with ID.me by Feb. 27 and for a subsequent briefing.
 
In a separate letter, Sens. Jeff Merkley (D-OR) and Roy Blunt (R-MO) expressed concern “about the IRS outsourcing biometric verification to third party vendor ID.me.” As a result, they specifically asked the IRS to “immediately discontinue any programs that collect, process, and store facial recognition or other types of biometric data of American taxpayers” and “implement a comprehensive ban on the use of such biometric data collection at the agency.” Similar to the Senate Finance Committee Republicans, Merkley and Blunt asked for the IRS to respond by Feb. 28.
 
As the top Republican on a committee with jurisdiction over data privacy matters, Sen. Roger Wicker (R-MS), ranking member on the Senate Commerce Committee, also initiated an inquiry into ID.me. He sent a letter to the IRS commissioner last week with several questions and, after noting his longstanding interest in data privacy, said, “The IRS must treat its responsibility to protect the privacy and security of American taxpayers’ data with the utmost seriousness.” He gave the IRS the least amount of time to respond, asking for additional information by Feb. 17.
 
Perhaps most importantly, though, Senate Finance Committee Chair Ron Wyden (D-OR) sent a letter on Monday to Rettig asking the agency to drop ID.me. In the letter, Wyden said, “While the IRS had the best of intentions—to prevent criminals from accessing Americans’ tax records, using them to commit identity theft, and make off with other people’s tax refunds—it is simply unacceptable to force Americans to submit to scans using facial recognition technology as a condition of interacting with the government online.”

1111 Constitution Avenue

Issue-Piling Filing Season. The 2022 filing season continues apace, and the issues keep coming. Many are long-term issues the IRS has faced for years: a lack of adequate funding, too few personnel, outdated technology and an ever-increasing backlog of tax returns and correspondence.
 
In the face of these difficulties, the IRS said it is willing to deploy all options. Last week, for instance, Paul Butler, deputy division counsel of the Small Business/Self-Employed Division, said “nothing is really off the table” when it comes to addressing tax filing season woes. To underscore his point, he later added that the agency “is considering lots of measures that probably have never been considered before.” Looking ahead, Butler said the IRS could alleviate personnel shortages by shifting workers from customer service centers to hand submission processing and accounts management.
 
In fact, the IRS took exactly this step late last week. IRS Commissioner Charles Rettig first explained that the agency is facing “unprecedented inventory levels,” which are contributing to “higher call volumes and related inquiries”—issues for which “current internal resources are not sufficient to overcome.” In response, he said there is an agency-wide initiative “to quickly establish an Inventory Surge Team that will help [the IRS] address the inventory.” This includes reassigning about 1,200 employees with prior accounts management experience to serve as customer service representatives and tax examiners. In these roles, the employees will be dedicated to reducing the backlog that has accrued.
 
The IRS took additional action on Friday, when the agency announced that Taxpayer Assistance Centers (TACs)—which were closed during the onset of the COVID-19 pandemic, an action considered to be a significant contributor to the current backlog—will be open on “special Saturdays for face-to-face help.” The IRS said certain TACs across the country will be open from 9 a.m. to 4 p.m. on Feb. 12, March 12, April 9 and May 14. Normally, these centers would be closed on Saturdays.
 
In addition to shifting resources and asking employees to work overtime, the IRS took additional steps on Monday to assist taxpayers this filing season. In a letter to House Speaker Nancy Pelosi (D-CA), Rettig said the agency is “suspending automated collection notices normally issued when a taxpayer owes additional tax or has no record of filing a tax return.”


Global Getdown

U.S. and European Industry Engagement. Multinational companies based in the United States and Europe are warning their respective governments of potential consequences that will likely result from the Organization for Economic Cooperation and Development (OECD) Inclusive Framework, based on the additional detail released by the OECD with respect to the global minimum tax under Pillar Two of the October 2021 OECD agreement.
 
In the United States, companies are warning that Pillar Two would reduce the value of domestic tax incentives, specifically noting the potential negative ramifications on research, exports and low-income housing and infrastructure investments, as well as pending tax incentives for green energy investment. In a letter last week to Treasury Secretary Janet Yellen, the Alliance for Competitive Taxation (ACT)—a group representing the largest of U.S. companies, such as Bank of America, Coca-Cola, Google and Disney, among many others—expressed “serious concerns regarding the recently released OECD Pillar Two Model Rules on Minimum Taxation,” issued in December 2021. The group specifically highlighted that the incongruity between the model rules and the existing U.S. tax code would “threaten the competitiveness of globally engaged U.S. companies” and “undermine long-standing tax incentives designed by Congress.”
 
ACT recommended the following to the Treasury Department, and indirectly to congressional Democrats, who are considering modifications to the U.S. international tax rules as part of the reconciliation legislation currently stalled in Congress:

  • The United States should not make any changes to its Global Intangible Low-Taxed Income (GILTI) regime until all G7 countries, India and China have implemented taxes that align with Pillar Two and the model rules.
  • Changes to GILTI should not make the U.S. tax rules more stringent than the model rules.
  • Model rules should be changed to prevent them from undermining U.S. tax incentives that strengthen the domestic economy and achieve social, economic and environmental objectives.
  • Pillar Two should be simplified through safe harbors, per se lists and other approaches “to address the vast majority of fact patterns in which tax is not distorting the economic decisions of companies.”

The Treasury Department is reportedly exploring whether and how to address the ACT concerns.
 
On the other side of the Atlantic, European companies are urging their own governments to take a similar wait-and-see approach, at least until other countries adopt tax regimes that align with the inclusive framework. In a position paper sent last week to EU Tax Commissioner Paolo Gentiloni, BusinessEurope—a Brussels-based group claiming to “speak for all-sized enterprises in 35 European countries”—stressed that “the OECD agreement must not end up as an ‘EU only’ agreement, with the United States not implementing either (or both) Pillar One or Pillar Two a particular risk.”
 
In terms of timing, BusinessEurope said it is “not confident that a successful implementation can be achieved by January 2023,” as contemplated in the October agreement since the “proposed timetable risks rolling out a minimum tax regime which neither businesses nor tax authorities may be fully prepared for.”
 
OECD Seeks Pillar One Feedback. The OECD released a public consultation document on Friday, Feb. 4 entitled “Pillar One – Amount A: Draft Model Rules for Nexus and Revenue Sourcing.” As the name implies, the document offers a framework for the nexus and revenue sourcing components of Pillar One, which proposes to reallocate the profits of large multinational enterprises among countries based on the location of their customers.
 
In short, the rules aim to clarify how affected multinational enterprises (MNEs) can identify market jurisdictions, how they should navigate difficult transactional information, and how potential compliance burdens might be addressed.
 
To allow MNEs “to identify the relevant market jurisdictions from which revenue is derived, and to apply the revenue-based allocation key,” for instance, the document details revenue sourcing rules to classify specific transaction categories.
 
The OECD also explained in the accompanying statement that the proposed rules seek to “identify the market jurisdiction and the associated revenue, while limiting and simplifying compliance burdens as much as possible.” Stakeholders were asked to provide input on the effectiveness of the rules in achieving these dual goals, with the OECD noting that “stakeholder input will be especially valuable in identifying cases where this balance could be better achieved.” The OECD set a deadline of Feb. 18, 2022, for interested parties to submit feedback.


At a Glance

  • Cryptocurrency Tax Bill. A bipartisan group of lawmakers introduced legislation last week to establish a structure for taxing virtual currency transactions. The Virtual Currency Tax Fairness Act, introduced by Reps. Suzan DelBene (D-WA) and David Schweikert (R-AZ), both of whom sit on the House Ways and Means Committee, would exempt personal transactions made with virtual currencies when gains are $200 or below.
  • Lawmakers Propose CTC and EITC Replacement. Reps. Rashida Tlaib (D-MI) and Mondaire Jones (D-NY) introduced legislation last week that would eliminate the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) and replace them with an alternative system. The End Child Poverty Act would instead provide (1) a universal monthly child allowance equal to the difference between the one-person poverty line and the two-person poverty line, (2) an annual $600 fully refundable credit for adult dependents and (3) an annual $600 fully refundable credit for single tax filers ($1,200 for married filers).
  • SAFE Banking Passes House—Again. The Secure and Fair Enforcement (SAFE) Banking Act, legislation that would allow cannabis businesses to have more access to banking services, was attached to the America COMPETES Act, a comprehensive innovation and competitiveness package that passed the House on Friday. Passage of SAFE Banking through this vehicle marks the sixth time the language has passed the House. The language has yet to pass the Senate, and the provision could come under fire during the cross-chamber conference process. Speaker Nancy Pelosi (D-CA) has assured Rep. Ed Perlmutter (D-CO), the author of SAFE Banking, she will advocate for the retention of SAFE Banking during negotiations with the Senate.

Brownstein Bookshelf

  • Former NTA Proposes Tax Season Solutions. Former National Taxpayer Advocate Nina Olson authored a Washington Post article last week in which she made several recommendations on how the IRS could improve the current tax filing season. She suggested, for example, naming IRS employees as “essential,” asking retirees to return to work, capitalizing on technology to reduce manual return reviews and a four-month pause on audit and collection notices.
  • Senators Push for Wayfair Hearing. A bipartisan duo on the Senate Finance Committee, Sens. Maggie Hassan (D-NH) and Steve Daines (R-MT), sent a letter last week to committee leadership asking for a committee hearing to examine “the impact on small businesses of the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc.” The senators say the ruling has forced many small online businesses to collect and remit sales tax on behalf of states in which they have no physical presence.
  • Autos Seek LIFO Line. The Alliance for Automotive Innovation sent a letter last week to Treasury Secretary Janet Yellen lending their support to a broader industry effort seeking tax relief “for new automobile and truck dealers who inventory their vehicles on a last-in/first-out (LIFO) basis and who are experiencing a significant decrease in inventories caused by the foreign trade interruption resulting from actions related to the COVID pandemic.”



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