Congressional leaders face a dwindling number of legislative days to advance must-pass legislation, and it remains to be seen if tax legislation will make the cut.
What Went Down:
- Congress’s legislative plate is full and so far it does not seem to include tax legislation. The days to get things done are few. Odds seem unlikely that Congress will pass tax legislation before the congressional year-end.
- Tax Prep firms go under the microscope as Senator Mike Crapo (R-Idaho) blasts IRS becoming a tax preparer.
- Call to tax crypto.
Let’s Get To It:
Tax Action?
Congress has until September 30th to pass tax legislation before the congressional year ends. Between then and now, the House and Senate are in session together for roughly 20 days. In that timeframe, the legislative priorities that congressional leaders want to pass are:
- Spending bills for the next fiscal year, which begins on October 1, 2023. Failure to do this by October will force the federal government to partially shutdown.
- The National Defense Authorization Act, which has passed Congress along bipartisan lines for over 60 years. (Tax amendments could be added to the bill.)
- Farm legislation, which provides funds to farms and oversees food access in communities.
- Aviation legislation that provides funding and rules for air traffic in U.S. (This bill is expected to include tax provisions, like gas taxes.)
- Creating rules for artificial intelligence.
Passing these bills is expected to be fraught with partisan disagreements between the House and Senate. This means it will take a lot of time to get them approved – and remember, lawmakers aren’t around much between now and September 30th.
There are also smaller projects that lawmakers would like to make progress on before the end of the congressional year. These projects include:
- Allowing banks to accept money from legal pot dealers.
- Lowering prescription drug costs.
- Streamlining permits for energy projects.
- Taxing crypto.
Tax legislation that passed the House Ways and Means Committee in June is not a part of either bullet-pointed list. But that doesn’t mean it’s not important. One lawmaker defined the tax bills as a priority, just less than the others mentioned above.
Also, the tax legislation could be amended to any of these bills. Doing so, however, could create headaches.
The tax legislation approved by the House Ways and Means Committee included provisions that allows R&D expensing, broadens the 163(j) interest deduction and ups Bonus Depreciation to 100%. These measures have bipartisan, bicameral support.
Expanding the Child Tax Credit was not included in the legislation, and it does not have bipartisan, bicameral support. That being said, those who support expanding the credit are diehards. (Senators on the Finance Committee held a July 13th hearing on how valuable the Child Tax Credit is. During the hearing, members noted that the Child Tax Credit used to have bipartisan, bicameral support.)
Omitting a Child Tax Credit measure from the current tax bill will make it more difficult to pass any legislation that includes the tax provisions. Several lawmakers have vowed to oppose any legislation that includes business tax breaks but ignores the Child Tax Credit.
The number of lawmakers who have made this vow is large enough to tank any bill that includes the business tax breaks but not the Child Tax Credit. This reality begs the question for why lawmakers would add tax provisions to must-pass legislation – which are already problematic – that would worsen its odds for passage. For example, adding tax provisions to legislation funding the federal government could cause a government shutdown.
Legislative Outlook: If (a big ‘if’) a tax bill passes Congress, it will likely be closer to the calendar year-end.
Shortly before House Ways and Means Chairman Jason Smith (R-Mo.) released his tax legislation, he addressed a group in D.C. He said that he expected his legislation to pass Congress before year-end – not the congressional year-end. He reasoned that the Senate would take a while to pass his bill – and probably amend it. (Currently, Senate Majority Leader Chuck Schumer (D-NY) is not expected to take up Smith’s tax bill – ever.)
Smith also cautioned that if his tax bill does not pass Congress this year there will not be another opportunity to move tax legislation until the next Congress, which begins in January of 2025 – the year that several individual tax provisions from the 2017 tax reform bill expire.
The year 2025 could be a very big year for tax legislation. And very expensive. Internal calculations for lawmakers show that extending all the individual provisions that expire in 2025 will cost the federal government roughly $2.3 trillion over ten years.
Tax Prep Fret:
Senator Elizabeth Warren (D-Mass) issued a report on July 11th that stated certain tax prep firms were sharing taxpayer information with tech companies. (Eide Bailly is not a part of this mess.)
The report shows that the information shared includes full names, email, personal addresses, gender, filing status, AGI, refund amount, dependents’ names, taxes owed – to name a few.
CNN’s coverage of the report:
The report highlights what legal experts described to CNN as a ‘five-alarm fire’ for taxpayer privacy that could lead to government and private lawsuits, criminal penalties or perhaps even a ‘mortal blow’ for some industry giants involved in the probe…
Warren sits on the tax-writing Senate Finance Committee and has a seat on its Taxation and IRS Oversight Subcommittee. The odds seem quite likely that the findings from this report will get a hearing.
The Senator's report also found that taxpayers who used the Free File Program had their information shared. The Free File Program is a joint effort between certain tax prep firms and the IRS.
Speaking of the IRS providing tax prep services…
Senator Mike Crapo (R-Idaho) on July 10th republished his column that Fox News published on June 29th. The piece plainly states that the IRS should not prepare tax returns.
Its first line:
The IRS should stay out of the tax preparation business.
The tax agency in May released a report spelling out how they could prepare tax returns. Crapo points out that the IRS plan pertains to federal returns only:
You are on your own to figure out how to file your state income tax return. The glaring absence of a critical piece of tax compliance will cause taxpayers confusion, expense and even more time filling out tax forms.
Two studies were recently issued on IRS tax preparation.
The National Bureau of Economic Research found that the IRS could populate less than half of all returns using tax return information from current and prior years:
To lower and redistribute the filing burden, researchers and policymakers have proposed having the IRS prepopulate tax returns for individuals. We evaluate this hypothetical policy using a large, nationally representative sample of returns filed for tax year 2019. Our baseline results indicate that between 66 and 75 million returns (42 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return.
Would giving the IRS more taxpayer data be required to better populate tax returns? Given the above-mentioned privacy concerns, is giving the IRS more taxpayer information a good idea?
A second report from the Tax Foundation found that the tax code is too complicated for the IRS to prepopulate tax returns:
While a prefilled tax return may sound like it would make filing season less stressful, the current U.S. tax code is too complicated for it to work. Lawmakers should focus first on simplifying the tax code and strengthening existing taxpayer service before implementing a direct file program.
Legislative Outlook: Given the long priority list and the short amount of time that lawmakers have to move those initiatives, it seems unlikely that Congress will tackle the IRS tax prep issue this congressional year.
Taxing Crypto:
Senate Finance Chairman Ron Wyden (D-Ore.) and Ranking Member Mike Crapo (R-Idaho) on July 11th asked experts in digital assets to help them understand how their industry works and how it can be taxed.
From their letter:
‘The rapid emergence of digital assets has raised novel regulatory issues, including the appropriate treatment under our federal tax law. The [tax code] draws distinctions between types of property, with no straightforward classification for digital assets. This uncertainty creates complex reporting issues for taxpayers, and warrants examining how the [code] can provide clearer guidance for taxpayers on the treatment of digital asset transactions,’ Wyden and Crapo wrote… ‘Today, we seek your help to better understand how Congress can address the tax challenges and opportunities presented by digital assets.’
Their questions focused on:
- Marking-to-Market for Traders and Dealers (IRC Section 475)
- Trading Safe Harbor (IRC Section 864(b)(2))
- Treatment of Loans of Digital Assets (IRC Section 1058)
- Wash Sales (IRC Section 1091)
- Constructive Sales (IRC Section 1259)
- Timing and Source of Income Earned from Staking and Mining
- Nonfunctional Currency (IRC Section 988(e))
- FATCA and FBAR Reporting (IRC Sections 6038D, 1471-1474, 6050I, and 31 U.S.C. Section 5311 et seq.)
- Valuation and Substantiation (IRC Section 170)
Kudos to the Senators for admitting they aren’t experts in this area. Back in the day, there was a Senator who described the Internet as a ‘series of tubes.’ He was obviously trying to sound like an expert on a topic of which he knew little.
Legislative Outlook: This appears to be the beginning of the investigation. It will likely take time for legislation to be produced. And if the chambers remain politically divided, that legislation is unlikely to pass Congress.
Also, tax bills start in the House. Wyden and Crapo will need House lawmakers to introduce legislation for it to become law (there are workarounds for Congress to enact a Senate tax bill, but that hasn’t happened for a while.)
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!
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