Key Takeaways
- Congress is moving ahead on a partisan bill to fund certain agencies in Homeland Security.
- The bill likely won’t include tax matters, despite some speculation that it could.
- Some lawmakers are considering another bill over the summer to tackle taxes, but that could prove to be politically difficult.
- Distilling tax case could test Congressional taxing powers.
- Artificial intelligence has major implications for tax enforcement and policy.
Early yesterday morning, the Senate, by a narrow, party-line margin, took the first steps towards passing legislation to prefund Immigration and Customs Enforcement and Customs and Border Protection for several years. Without any Democratic support, Republicans are using the reconciliation procedure for the legislation, allowing them to bypass any potential filibusters.
As part of the process, the Senate also voted on several amendments, rejecting all of them. The resolution senators passed will only allow for $70 billion in new spending in certain areas, mostly related to border protection and immigration enforcement.
This means that despite some hopes (or fears), the reconciliation package likely won’t be a vehicle for new tax changes. Legislating is unpredictable, and at this point anything could happen. But Republican leaders—including Senate Majority Leader John Thune, House Speaker Mike Johnson, and even President Trump—have been vocal about their desire to keep the bill slim and focused. Extraneous issues could ultimately torpedo the effort, which is crucial to their plan to fund all of the Department of Homeland Security, which has been legally shut down for months.
There’s talk of another reconciliation bill, which would be the third for this Congress, to take up extra issues including taxes sometime later this summer. But this effort would have to overcome a mountain of skepticism that Congress could tackle such major legislation, so close to the mid-term elections.
IRS Funding
Even while Congress is still sorting out current funding for the government, it has also begun work on appropriations bills for the next federal fiscal year, which begins on Oct. 1.
On Wednesday the House Appropriations Committee approved a financial services appropriations bill with a 34-28 party-line vote. The bill would cut the Internal Revenue Service budget by $1 billion, or about 9 percent of its current budget. If enacted, this would just be the latest cut Congress made to the agency’s funding. Most of the cut is in the agency’s appropriation for enforcement.
Secretary of the Treasury Scott Bessent defended the administration’s request for steep budget cuts while testifying before the Senate Appropriations Committee on Wednesday, claiming the reductions targeted “inefficiency and duplicate spending.” New technology will allow the agency to improve services and enforcement efforts for less money, he said.
Recent Tax Pieces:
Congress’ Power In Focus With Distilling Circuit Split – James Matheson, Chris Cioffi and Erin Slowery, Bloomberg Tax:
“This is not about whiskey,” she said. “It is about whether Congress can regulate private, noncommercial conduct under the guise of protecting a tax system.”
OpenAI Challenges Tax Policymakers to Think About What’s Coming – Mindy Herzfeld, Tax Notes ($):
For those who believe that AI will lead to extensive job losses, these are concerns that should be taken seriously. Of the $4.9 trillion in revenue the federal government received in 2024, $2.4 trillion (or almost half) was from the individual income tax, with Social Security and Medicare taxes accounting for another approximately $1.7 trillion. In other words, income and payroll taxes on wages paid to people for labor represent over 80 percent of the federal budget. If one assumes that fewer people will be working — or that those who are working will be paid less — because of AI, that means that replacing people with computers could put a big hole in the government’s already strained budget.
Even for those who are more optimistic about the effect AI will have on jobs, the productivity increases under AI (that are necessary to justify the spending on the new technology) probably mean that a greater share of corporate profits will continue to accumulate to capital rather than labor.
IRS May Be Coming for Your Artificial Intelligence Chats – Nathan J. Richman, Tax Notes ($):
It might be a couple of years before CI’s special agents start searching taxpayers’ interactions with AI bots and agents, “but I have no doubt that we’re going to go there,” Ficco said.
And AI likely isn’t the only new technology on CI’s radar, Ficco said, suggesting the division’s potential use of unmanned drones.
IRS Notches Court Win Over ‘Project Soy’ Corporate Tax Maneuver – Richard Rubin, The Wall Street Journal:
“This partisan bill will cost taxpayers—not only in benefits and services but also in lost revenue,” said Financial Services Appropriations Subcommittee ranking member Steny Hoyer (D-Md.) in a statement.
IRS Will Revise Exempt Org Tax Form to Increase Transparency – Kelsey Brooks, Tax Notes ($):
“If an organization receives public funds or tax-deductible donations, it should be prepared to show who controls the money and where it goes,” said Ken Kies, Treasury assistant secretary and acting IRS chief counsel.
During a February 10 House Ways and Means Committee hearing, forensic accountant Bruce Dubinsky advocated for EOs reporting fiscal sponsorships and donor-advised funds on their annual information returns, saying that the current Form 990 fails to reveal potential financial misconduct.
