Washington Tax Insight August 2021
Politics and Congressional Activity
The House already left for its August recess that began on August 2nd, and the Senate recess is scheduled to begin on August 9th. Congress is scheduled to return on September 10th. There is the possibility that the Senate will delay its August recess, especially considering the busy schedule facing Congress. Senate Majority Leader Schumer (D-NY) has warned his Senate colleagues that the recess will be deferred until the Senate passes both a bipartisan infrastructure bill and a budget resolution outlining the plan for a budget reconciliation bill that will include other Democratic policy priorities. House leadership has told Members that they may have to return to vote on infrastructure legislation or they may be called back in late August to deal with key issues. The current agenda includes infrastructure legislation, a budget reconciliation bill with a variety of Administration policy priorities, police reform legislation, government funding for the new fiscal year, and the debt limit issue.
Bipartisan Infrastructure Package
An infrastructure agreement that includes $550 billion in new spending over five years was agreed to by a bipartisan group of Senators with the Senate agreeing to start debate on the bill by a procedural vote of 67-32. The legislation will be H.R. 3684, the Bipartisan Infrastructure Investment and Jobs Act, with new federal spending for roads, bridges, rail, public transit, water, and broadband. Several revenue offsets in the bill cover the cost of the spending, including new cryptocurrency information reporting requirements, early termination of the Employee Retention Credit program, which now ends with 3Q 2021, and reinstatement of a Superfund tax on chemicals. Other offsets include redirecting unspent pandemic emergency relief funds, various user fees, Medicare savings, an extension of interest rate smoothing options for defined benefit plans, and projected revenue gains generated from the expected economic growth effects of infrastructure improvements.
There would be $28 billion raised from applying information reporting requirements to cryptocurrency for transactions in excess of $10,000. The proposal would impose more rules on cryptocurrency brokers to report transactions of digital assets, including virtual currencies, to the IRS. Digital assets would be added to current rules requiring businesses to report cash payments above $10,000, according to a Congressional summary of the bill. For more information on government activity targeting cryptocurrency transactions, see our True Insight 2021-2.
The legislation will be subject to amendments on the Senate Floor, and then it will be sent to the House for consideration and approval on the House Floor. Senate Majority Leader Schumer reiterated his intention of passing this bill and the budget resolution prior to the scheduled Senate recess date of August 9th. House Speaker Pelosi (D-CA) has not ruled out amending the bill when it comes to the House to reflect House issue priorities.
The Budget Reconciliation Legislation
The Senate Budget Committee continues to work on the proposed $3.5 trillion package that would move under the budget reconciliation rules and includes Democratic policy priorities that are not part of the bipartisan infrastructure bill. There has, however, been no vote on this package despite Senate Majority Leader Schumer’s attempts to set deadlines for action in the Senate. House Speaker Pelosi continues to wait for the Senate to act on the budget reconciliation bill and send the legislation to the House, where she says the House will likely make changes. The Speaker has continued to link the advancement of the bipartisan infrastructure bill and the budget reconciliation bill together in an effort to maintain unified Democratic support in the House where the Democratic margin of control is slim.
The Debt Limit
The Congressional Budget Office (CBO) has said that it expects the Treasury Department to be able to use “extraordinary measures” to keep the federal government running until October or November, but that schedule would give Congress very little time to deal with the issue after their return in mid-September from the August recess. Some of the options for action on this issue that are being considered include: (1) adding it to budget reconciliation legislation; (2) a standalone bill; (3) adding it to the budget agreement for FY 2022; or (4) adding it to a must-pass bill such as a continuing resolution.
Funding for Fiscal Year 2022
The House Appropriations Financial Services and General Government Subcommittee approved a fiscal year 2022 budget package for the government departments and agencies under its jurisdiction that includes a $13.6 billion allocation for the IRS, which is an increase of $1.7 billion over the level enacted for FY 2021. The funds allocated include $417 million that the Biden Administration requested as part of a multi-year effort to increase compliance and enforcement activities to narrow the “tax gap.” The comparable committee in the Senate held hearings on the Administration’s budget requests, but has not yet voted on a spending package.
The House has approved two of the fiscal year 2022 appropriations bills and is preparing for potential floor action this week on several more. The Senate is moving on a slower schedule with respect to the appropriations bills, but continues to work on holding hearings prior to the August recess.
Senate/Senate Finance Committee
Passthrough Business Income Deduction: SFC Chair Wyden (D-OR) released new legislation called the Small Business Tax Fairness Act that would revise the Section 199A passthrough business income deduction. The provision, which was enacted as part of the Tax Cuts and Jobs Act (TCJA), provides a deduction equal to 20 percent of qualified business income (QBI) from a domestic proprietorship, partnership, S corporation, trust or estate. He may try to include this legislation in the budget reconciliation bill Congress is expected to advance later this year. The summary of the legislation states that it would:
- Expand eligibility for middle-income services business owners by removing arbitrary restrictions on which industries qualify;
- Establish one threshold for determining whether the taxpayer gets the deduction and one simple definition of qualified business income that applies to all taxpayers. Small business owners would no longer have to calculate their deduction using formulas and limitations based on W2 wages paid and qualified investments; and
- Phase out the deduction for individuals earning more than $400,000.
Retirement Legislation: SFC Chair Wyden (D-OR) introduced new legislation called the Encouraging Americans to Save Act (EASA), which is designed to encourage retirement savings focusing on individual savings options rather than employer-based plans. The SFC held a hearing on the bill and other policy options on July 28th. The Joint Tax Committee issued a pamphlet in connection with the hearing, which details the varieties of tax-preferred employee-sponsored retirement plans and the use of the Social Security program for retirement. Congress approved a significant bipartisan retirement security bill – the Setting Every Community Up for Retirement Enhancement (SECURE) Act – in 2019. The House Ways & Means Committee approved a bipartisan proposal expanding the SECURE Act in May of 2021, but this bill has not yet been considered on the House Floor. The intention is to try once again to approve bipartisan legislation in this area this fall, but there are differences in opinion on some of the key issues such as the “saver’s credit.” Key House and Senate members from both parties are continuing to work together toward the goal of resolving their differences and enacting this legislation as a stand-alone bill in 2021.
Bipartisan Energy Tax Credit Legislation: A bipartisan group of lawmakers have introduced a bill that would create tax credits to encourage the use of clean energy and new technology. SFC Ranking Republican Crapo (R-ID) and Senator Whitehouse (D-RI) designed an energy sector innovation credit that would act as an investment tax credit or a production tax credit intended to boost generation and storage as well as carbon capture and hydrogen production. The credits would phase out for different technologies as they become more popular. Identical legislation has been introduced in the House.
Cryptocurrency Reporting Regime Legislation: A bipartisan group of Senators is planning to draft legislation that would establish a new tax reporting regime for cryptocurrency investments designed to strengthen the IRS and raise revenue. There is significant support for legislation that would make it clear that cryptocurrency brokers and exchanges must report data on an investor’s gains and losses on Form 1099-B under Section 6045. The IRS and Treasury are currently working on guidance on this type of tax information reporting.
Tax Court Petitions: The U.S. Tax Court has received so many petitions from taxpayers that it has resulted in a delay in serving the petitions on the IRS. The court has already received 24,000 petitions when it normally receives 23,000 to 26,000 in a year. The IRS cannot assess or collect a tax debt if a petitioner has filed a timely challenge with the court. The Tax Court is informing the IRS of petitions it has received but not served.
Remote Workers/States Ending Telework Tax Nexus Relief: An official of the Multistate Tax Commission has stated that states are beginning to end their policies of disregarding remote workers when determining whether to assert income or sales tax nexus on out-of-state businesses during the pandemic. California, Indiana, and other states have announced the sunsetting of their nexus relief, which means that employees who are working remotely in those states can create nexus for out-of-state employers.
Treasury and the IRS
Treasury Personnel and Policy Updates
The Senate approved Nellie Liang for the role of Treasury Undersecretary for Domestic Finance. The Senate has still not voted on the confirmation of three other Treasury officials including Lily Batchelder to be Assistant Secretary for Tax Policy.
COVID-19 Crisis Guidance & Related Issues
Employee Retention Credit Guidance: The IRS issued Notice 2021-49, which provides additional guidance on the Employee Retention Credit for wages paid after June 30, 2021 and other related issues that apply to both 2020 and 2021.
Tax Relief for Employer Leave Donation Programs: The IRS issued Notice 2021-42, which extends relief for employers whose employees forgo employment leave in exchange for charitable contributions toward victims of the COVID-19 pandemic. The guidance states that accrued leave converted to cash and donated to charities helping pandemic victims will not be considered taxable compensation for calendar year 2021. The guidance applies to cash payments made to Section 170(c) organizations after December 31, 2020, and before January 1, 2022. Employers can deduct the cash payments as either a business expense or as a charitable contribution deduction.
Pandemic Relief COBRA Premium Assistance: The IRS issued Notice 2021-46, which provides information on the American Rescue Plan’s relief for recently laid-off people receiving continuing coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985. The guidance clarifies eligibility for premium assistance and information on dental and vision coverage.
Transportation Services Grants and Tax Issues: The IRS issued Frequently Asked Questions (FAQs) to provide guidance to transportation service providers claiming pandemic relief. The Treasury Department will provide up to $2 billion in grants to motorcoach and school bus companies under the Coronavirus Economic Relief for Transportation Services (CERTS) Act, which was enacted in December 2020. The law authorizes relief to transportation providers that experienced pandemic-related revenue losses of 25% or more per year. The FAQs say that the grants are not excluded from a recipient’s gross income, and thus are taxable, but business costs covered by the grants are deductible.
Small Business Administration – interim rule on PPP forgiveness: The SBA released an interim rule that allows lenders to opt in to the alternative method for processing PPP loans, which reduces the burden on lenders to service forgiveness applications and allows business owners to apply for loan forgiveness directly through the SBA. The guidance applies to all PPP loans made in 2020 and second-draw loans in 2021. The rules also let lenders use a streamlined method of documenting a second-draw loan borrower’s revenue reduction known as the COVID Revenue Reduction Score. Finally, the rule extends loan repayment deferrals for PPP loans currently under appeal at the SBA.
Other Issues and Guidance
New Partnership Audit Initiative: The IRS will launch a new audit initiative focused on large partnership compliance that will operate similarly to the IRS large corporate compliance program. The agency is currently working to determine a number of criteria to define what qualifies as a large partnership, and then will identify that large population and engage in some data analysis to select taxpayers within that population that present the highest risk of noncompliance.
New Rules to Increase Electronic Filing: The IRS issued proposed regulations that would amend the electronic filing rules for taxpayers who file returns for partnerships, corporations, unrelated business income tax and withholding, as well as certain information returns, registration statements, disclosure statements, notifications, actuarial reports, and certain excise tax returns. The new rules reflect statutory changes made by the Taxpayer First Act to increase electronic filing. The rules would mandate electronic filing for those required to file at least 100 returns in 2022 and at least 10 returns in 2023 and later. They also propose mandating the electronic filing of additional forms including Form 8300, which reports cash payments of over $10,000. Comments are due 60 days after publication in the Federal Register.
IRS Questions on Cryptocurrency Activity: The IRS is proposing changes to a question that cryptocurrency users must answer when they file their 2021 taxes next year. In a draft of the 2021 Form 1040, the agency reworded the question on cryptocurrency transactions that must be disclosed. On the 2020 Form, the question read “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. The new draft removes the word “send” and replaces the phrase “otherwise acquire” with “otherwise dispose of.”
Transition Period Penalty Relief for New Reporting Forms by Passthroughs: The IRS issued Notice 2021-39, which provides transition relief regarding new Schedules K-2 and K-3, required for Forms 1065, U.S. Return of Partnership Income, 1120-S, U.S. Income Tax Return for an S Corporation, and 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. The IRS also released draft instructions to Schedules K-2 and K-3 for taxable years beginning in 2021 and has requested public comments. This guidance is intended to provide penalty relief this year for pass-through entities including partnerships and S corporations if the entities made a good faith effort to follow new reporting requirements on international tax matters.
No Surprises Act/Medical Bills: The IRS issued proposed regulations to implement the No Surprises Act, which protects consumers from surprise medical bills for emergency and other services from health-care providers outside of their networks. The proposed rule corresponds to an interim final rule released July 1st by four agencies to implement the 2020 legislation, and it will take effect in 2022.
Digital Authorization Features for Taxpayers and Tax Professionals: The IRS introduced a new feature that allows taxpayers and tax professionals to access and share records and submit authorizations online. Taxpayers can now digitally initiate power of attorney privileges and tax information authorizations.
Relief from Physical Presence Requirement for Plan Elections: The IRS issued Notice 2021-40, which suspends for another 12 months the physical presence requirement for employee plan participant elections required to be witnessed by a plan representative or a notary public. The additional year of relief covers the period from July 1, 2021, through June 30, 2022. The IRS is also soliciting public comments by September 30th on whether permanent guidance modifying the physical presence requirement should be issued.
Safe Harbor for Renewable Energy Projects: The IRS issued Notice 2021-41, which provides deadline relief for project start delays affecting the beginning of construction requirement for the production tax credit for qualified facilities under Section 45 and the investment tax credit for energy property under Section 48. This guidance allows additional time to satisfy the Continuity Safe Harbor for projects for which construction began in 2016 through 2020.
Expansion of Plan Correction Options: The IRS issued Revenue Procedure 2021-30, which provides several updates to the Employee Plans Compliance Resolution System (EPCRS) related to the correction of plan failures. The guidance amends the methods by which eligible retirement plan sponsors can recoup overpayments by adding two new benefit overpayment correction methods.
Memorandum on Post-Altera Treatment of Cost-Sharing Arrangements: The IRS released a memorandum on how to treat a company’s tax arrangements in light of the 2019 Altera court decision in which the U.S. Court of Appeals for the Ninth Circuit upheld 2003 Treasury regulations that required Altera to include stock-based compensation in the costs it shared with its foreign subsidiary. The memorandum addresses when and how the IRS may made adjustments under Section 482 in such reverse claw-back cases.
IRS Practice Units: The IRS outlined the key concepts for calculating foreign tax credit (FTC) redeterminations in a Practice Unit released June 30, 2021. A foreign tax redetermination occurs when there is a change in a taxpayer’s foreign tax liability that affects the taxpayer’s FTC previously. The IRS issued another Practice Unit on July 8th that outlined determining the intangible income a domestic corporation is deemed to produce and what part of the intangible is foreign derived to calculate the Foreign-Derived Intangible Income Deduction under Section 250. The IRS issued an additional Practice Unit on July 26th that outlines functional currency issues with regard to Section 987 and branch operations regardless of methodologies used to comply with the statute.
IRS Audit Technique Guide on Treatment of Deferred Amounts: The IRS released Publication 5528, which provides technical guidance on auditing nonqualified deferred compensation (NQDC) plans, addressing when deferred amounts are includible in employee’s gross income, when they are deductible by the employer, and when they are considered for employment tax purposes.
Revenue Procedure 94-69/Coordinated Examination Procedure taxpayers: The IRS announced that it plans to issue guidance in 2021 on Revenue Procedure 94-69, which allows certain large corporations that are subject to the (former) Coordinated Examination Program to avoid potential penalties by disclosing changes in tax positions after the commencement of an IRS examination. When requesting comments last year, the IRS said it was considering “obsoleting” Rev. Proc. 94-69 because it creates a disparity between a small group of large corporate taxpayers and the rest of the tax filing population.
Guidance with respect to IRS FAQs: The IRS announced that it plans to issue guidance related to penalty relief for taxpayers who rely on IRS Frequently Asked Questions (FAQs). The IRS Acting Chief Counsel, William Paul, said “The IRS is comfortable with the view that if a taxpayer relies in good faith on an FAQ and that reliance is reasonable under all the facts and circumstances, the taxpayer should have a reasonable cause defense and should not be subject to a negligence penalty or other accuracy-related penalty.” The IRS and taxpayers will not, however, be able to rely on FAQs to support or refute positions taken on a tax return, because the FAQs are not published in the Internal Revenue Bulletin. Also, the IRS plans to create a system to help people search for FAQs that will also archive older versions of FAQs so taxpayers can track changes and the date they were made.
Corporate Transparency Act: A Treasury official stated that a notice of proposed rulemaking on beneficial ownership requirements of the Corporate Transparency Act will be issued in 2021 to ensure that a January deadline for issuing regulations is met. The notice follows an advance rulemaking notice that solicited comments through May 5th on the prospective requirements. Along with a companion law, the Anti-Money Laundering Act of 2020, the Corporate Transparency Act is intended to deter anonymous owners of business entities from facilitating money laundering, financing of terrorism, tax fraud and other crimes.
Increased Hiring in the IRS Small Business/Self-Employed Division: The IRS announced that it will hire up to 2,000 new employees, including 1,300 revenue agents, in its Small Business/Self-Employed Division in 2021 to work on collections.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The G-20 Finance Ministers endorsed the OECD Inclusive Framework statement that was issued on July 1, 2021, which outlines the overall proposal agreed to by nearly all of the Inclusive Framework member countries. The G20 plans to finalize the details at a summit in late October.
Considerable progress has been made toward agreeing on some of the key aspects of Pillar One and Pillar Two, but there are still many key details and implementation issues that must be addressed before the effect of Pillar One and Pillar Two is seen in practice around the world. Proposals will have to be agreed to by the US Congress, and the EU will have to implement the changes with the requirement for unanimity (if a EU Directive is used), and those are significant hurdles that must be faced once the design of the two Pillars is agreed.
Countries are working on resolving the final details of the proposal approved by 132 jurisdictions, which includes both a 15% global minimum tax and a reallocation of taxing rights to countries that have customers but where companies lack a taxable physical presence.
European Union: A proposed European digital tax has been taken off the European Commission’s agenda of meetings for the rest of 2021. This aligns with a statement from the EU that it was postponing the tax to allow for completion of the OECD global talks.
OECD – Miscellaneous
A group of tax officials known as the Mutual Agreement Procedure (MAP) Forum, which is part of the OECD’s Forum on Tax Administration, is studying how to increase access to MAP for taxpayers. Partners to a bilateral tax treaty use MAP to resolve disputes between countries over how to tax a company doing cross-border business.
Money-Laundering: The European Commission announced several new rules designed to harmonize and strengthen their anti-money-laundering rules and plans to launch an EU-wide authority, that is expected to be operational in 2024. It will start its direct supervision at a later date, once the EU Directive has been written into domestic law and the new regulatory framework starts to apply.
Value-Added Tax: The European Commission will be given new powers to adopt technical rules on value-added tax under a resolution approved by the European Parliament. Currently the EC can only issue guidance on technical VAT issues, which has created differing interpretations in different EU countries. The draft rules would allow the EC in a limited number of cases to issue binding VAT interpretations, bypassing the requirement for unanimous agreement of EU countries that usually applies to taxation. The draft rule, however, must be approved by a unanimous vote in order to be effective.