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Washington Tax Insight March 2022

By: Jason Carter |

Politics and Congressional Activity

President Biden gave his first State of the Union Address on March 1st and addressed the nation on the Russian war in Ukraine as well as domestic policy, including his Administration’s achievements to date and his key priorities for the months ahead. In addition to dealing with international priorities, the Administration will be working to advance the nomination of Judge Ketanji Brown Jackson to the Supreme Court.  The most critical issue for Congress has been to complete approval of funding for the federal government for the remainder of fiscal year 2022, since the current funding legislation expires on March 15, 2022.

The President is expected to release his fiscal year 2023 budget soon, and it will reflect his major policy objectives.  In connection with release of the budget, the Treasury Department is expected to release its “Greenbook,” which will include revenue raisers that the Administration is proposing to fund the initiatives included in his budget proposal.  Reports are that the Greenbook will include new tax proposals that may represent elements of a broad Administration tax policy plan rather than including only proposals that have been included in prior legislative proposals such as the Build Back Better Act (BBBA).  This does not mean that BBBA revenue raisers will not advance, but rather that the potential list of ideas to fund new legislation will expand. One area that may produce new revenue proposals is the international tax arena especially with regard to proposals that relate to the OECD international tax reform project, since the US has been a major player in recent months on proposals released by the OECD (discussed below).

Mid-term elections will take place this fall with the possibility that control of the House or Senate or both could switch from the Democrats to the Republicans.  Change in the control of even one body of Congress will have a significant impact on the Administration’s ability to advance their priorities as well as the fate of any new tax proposals.

Funding for Fiscal Year 2022

The House and Senate passed a $1.5 trillion omnibus spending bill, which includes $13.6 billion in humanitarian and security assistance to Ukraine in response to the ongoing invasion by Russia. President Biden has signed the bill. The bill will fund the government through Sept. 30, 2022, which is the remainder of the fiscal year. It did not contain tax extenders or other tax provisions.

The spending bill allocated $12.6 billion in funding to the IRS, which is less than the 14% increase that was previously proposed, but still $657 million more than the previous year and the largest increase since 2001.  The additional funds are primarily intended to boost taxpayer assistance services, increase hiring and reduce the backlog of unprocessed tax returns.

President Biden signed into law a new continuing resolution (CR) that will continue funding for the federal government at current levels through March 15th. The CR was necessary to avoid a government shutdown on March 11th and provide enough time for the President to sign the omnibus spending bill.

The Build Back Better Act

The BBBA is now being considered by the Senate, but action has stalled, and it appears that the current plan is to separate issues in the BBBA for inclusion in other pieces of legislation. Congressional leaders in the Senate continue to talk quietly about a possible schedule for consideration of the legislation with an eye toward the upcoming fall mid-term elections, with it likely that the August Congressional recess will mark the deadline for approval of some or all of the BBBA.

One issue that has bipartisan support is the effort to postpone changes to Section 174 related to the deduction of research expenditures. The Tax Cuts and Jobs Act (TCJA) included a provision that requires taxpayers to amortize research expenses over 5 years rather than deduct those costs immediately, which took effect on January 1, 2022. There is interest in delaying that change until 2025, which is a provision included in the BBBA legislation.

There is also consideration of including changes to the cryptocurrency reporting framework that was enacted as part of the 2021 infrastructure legislation. Treasury has indicated to Congress that its forthcoming regulations on this topic will not include crypto miners or stakers or those who sell hardware and software for crypto wallets, but some members of Congress believe it is still necessary for legislation to be enacted to codify the definition of “broker.”

If the BBBA legislation does not advance in its entirety this year, Congress will have to consider whether to take action on the package of “tax extenders,” which was not dealt with in 2021. In addition to the R&D issue discussed above, other issues from the TCJA that are of interest to taxpayers include the phase-out of bonus depreciation and changes to the calculation of the Section 163(j) interest expense deduction limitation.

Although the BBBA is unlikely to advance as a package, the individual provisions remain possible legislative options this year, and taxpayers should continue to monitor action on them. For more information about the provisions affecting individual taxpayers, please see this True Insight. For a detailed summary of the provisions of the House-approved bill affecting businesses and in the international area, please see this True Insight, and for information on the clean energy and infrastructure provisions, please see this True Insight. For a discussion of the SFC draft for the BBBA, please see this True Insight.

House/Ways & Means Committee

Bipartisan retirement legislation: Democratic and Republican leaders at the Ways & Means Committee continue to discuss the possibility of advancing key retirement legislation, called SECURE 2.0, by scheduling the legislation for a House Floor vote in 2022. The bill would modify retirement savings policy in several ways including expanding automatic enrollment of employees into retirement plans and allowing higher catch-up contribution limits for tax-advantaged retirement plans for employees nearing 65.

Hearing on Infrastructure: The Ways & Means Subcommittee on Select Revenue Measures held a hearing on the topic of  the “economic impact of federal infrastructure investment” on February 15th.

Senate/Senate Finance Committee

Employee Retention Credit: A bipartisan group of Senators introduced legislation to reinstate the Employee Retention Credit (ERC) for 4Q 2021.  The infrastructure legislation that was enacted in late 2021 repealed the ERC for the fourth quarter.

Comments on Excess Business Loss Deduction Limits: At a recent public tax conference, two staff members at the SFC suggested that excess business loss deduction limits that were suspended during the pandemic are likely to be allowed to take effect again when the suspension expires in March of 2022. The TCJA enacted Section 461(l), which limits deductions on excess business losses, but the 2020 and 2021 pandemic relief bills suspended the limits as a way to help struggling businesses.

Hearing on the IRS: The SFC held a hearing on IRS customer service challenges with testimony from the IRS’s National Taxpayer Advocate, Erin Collins.  She included several short-term solutions in her testimony for issues like the IRS backlog on unprocessed returns and difficulty reaching the IRS by telephone. The House Ways & Means Subcommittee on Oversight also held a hearing to hear Ms. Collins testimony.

Treasury and the IRS

Treasury Personnel

Treasury General Counsel: The Senate confirmed Neil MacBride to be General Counsel for Treasury.

IRS Chief of Staff: Tom Cullinan has been named acting Chief of Staff to IRS Commissioner Chuck Rettig.

Issues and Guidance

2021-2022 Priority Guidance Plan: The IRS issued the second quarter update to the 2021-2022 Priority Guidance Plan on February 22, 2022.  This Plan sets forth guidance priorities for Treasury and the IRS based on public input during the 12-month period from July 1, 2021, through June 30, 2022. The Plan included 193 projects of which 13 had been completed by August 31, 2021. The second quarter update to the Plan reflects 21 guidance projects which have been published or released from September 1, 2021, through December 31, 2021.  The update also includes 11 additional projects that were not included in the initial plan. At a recent conference, an IRS official noted that a working group is addressing cryptocurrency information reporting rules, and she commented that their focus has turned to pre-TCJA projects that are unfinished absent any new legislation that might take priority.

Opposition to Final Foreign Tax Credit Regulations: As summarized in the January issue of the Washington Tax Insight, the IRS issued final regulations on the foreign tax credit (FTC) and the foreign-derived intangible income (FDII) regime. The regulations provide guidance related to (1) the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction; (2) the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies; (3) the definition of a foreign income tax and a tax in lieu of an income tax and the definition of foreign branch category income; and (4) the time at which foreign taxes accrue and can be claimed as a credit. The rules also provide guidance that clarify the FDII rules. For a detailed discussion of key issues addressed in these regulations, see this True Insight.

Since the release of the final FTC regulations, there has been growing concern from some tax professionals and business groups about the impact of the new rules, which they argue will make US companies less competitive in the global market. The Alliance for Competitive Taxation, which represents several major multinational companies, sent a letter to Treasury and the two Congressional tax-writing committees asking that the regulations be withdrawn, arguing that they go beyond their original purpose, which purportedly was to deny a US FTC for novel extraterritorial taxes, such as digital services taxes (DSTs). The group’s letter states that the regulations have a much broader scope and will result in the denial of FTCs for taxes that have been creditable for many years. They also suggest that the regulations are inconsistent with the two-pillar OECD agreement on global taxation.

In addition, the US Council for International Business has also sent a letter to Treasury about the new regulations asking that the effective date of the new rules be delayed by at least one year.  The letter also recommends that Treasury do further study on the collateral impact of the new rules and that they consider drafting a list of per se creditable and non-creditable taxes.

IRS Drops Taxpayer Face ID Authentication Program: The IRS issued a statement that it will transition away from using a third-party service for facial recognition to help authenticate people creating new online accounts.  This program had been questioned by SFC Chair Wyden (D-OR) related to concerns about taxpayer privacy, ID theft, and fraud. The IRS stated that it will move to a different authentication process that does not involve facial recognition and work with its cross-government partners to develop authentication methods that protect taxpayer data and ensure broad access to online tools.

IRS Suspends Automatic Taxpayer Notices: In IR-2022-31, the IRS announced that it is suspending automated collection notices, unfiled tax return notices, withholding compliance letters, and balance due notices that are routinely sent to taxpayers while the agency works through the backlog of unprocessed returns. If a taxpayer does receive any of these notices and believes that they are accurate, it is advisable to act on them as interest and penalties will continue to accrue. As of mid-December, the IRS had more than 6 million unprocessed individual returns and 2.4 million unprocessed amended individual returns.  The agency also has 2.8 million unprocessed business returns, 427,000 unprocessed amended business returns, and 4.75 million pieces of unprocessed general taxpayer correspondence.

IRS Penalty Relief for the 2022 Filing Season:  IRS Commissioner Rettig recently said that the IRS is considering ways to provide taxpayers with penalty relief during the 2022 filing season, which is expected to be challenging due to IRS backlogs and budget constraints for the agency.  This information was provided in a letter sent to all members of Congress. Practitioner groups including the AICPA sent letters to the IRS urging relief this year from tax underpayments and late payments including penalty waivers and targeted relief related to estimated tax penalties.  In his letter, the Commissioner said that the IRS is evaluating penalty relief options and related systemic programming changes that would be needed to implement them.

Interest Rates on Overpayments and Underpayments: The IRS issued Revenue Ruling 2022-05, which provided that interest rates on overpayments and underpayments will increase for the calendar quarter beginning April 1, 2022. The rates will be:

  • 4% for overpayments (3% in the case of a corporation);
  • 1.5% for the portion of a corporate overpayment exceeding $10,000;
  • 4% for underpayments; and
  • 6% for large corporate underpayments.

2021 Recovery Rebate Credit FAQs: The IRS has announced that updates have been made to several frequently asked questions (FAQs) related to the 2021 Recovery Rebate Credit. This is a special tax credit for people who did not receive the full stimulus payment they were entitled to in 2021.  It can be used to reduce taxes owed or be included in a tax refund. The new guidance includes information on how to claim the credit, where to find information on received payments, and how people who have not had their 2020 tax return processed yet can file for the credit.

IRS Partnership Loss Limits Audit Campaign: The IRS Large Business and International Division (LB&I) has added a new compliance campaign on “Partnership Losses in Excess of Partner’s Basis.” The IRS notice stated that this campaign focuses on the following issue: Partners that report flow-through losses from partnerships must have adequate outside basis as determined pursuant to Section 705 to deduct the losses or else the losses are suspended per Section 704(d) to the extent they exceed the partner’s basis in the partnership interest.

Voluntary Disclosure Practice: The IRS announced that Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, has been revised, including the expansion of a section on reporting virtual currency.

Upcoming Guidance

Final Foreign Tax Credit Regulations/Multiple Disregarded Payments: The Treasury Department is looking for additional input on how to handle FTCs in cases where there are multiple disregarded payments. Final regulations on FTCs were issued in January 2022 (see True Insight), but applying the rules with multiple disregarded payments continues to be an area of uncertainty according to an attorney-adviser in the Treasury Office of Tax Policy. Disregarded payments are those made by entities that are not recognized as separate from their owner for tax purposes.

US Transfer Pricing Rules: At a recent tax conference, an IRS official commented that the IRS is considering the scope of an update to US transfer pricing rules under Section 482 and Section 367(d). Temporary rules were published in 2015 that allowed the IRS to use an aggregation method to value a multinational’s interrelated intercompany transactions, when that method provides a more reliable valuation.  These rules expired in 2018. The IRS Priority Guidance Plan for 2021-2022 includes several projects in this area, including the now-expired 2015 regulations.

Previously Taxed Earnings and Profits (PTEP): The IRS’s first set of proposed rules on previously taxed earnings and profits (PTEP) is forthcoming according to comments from the chief of Branch 4 of the Office of the Associate Chief Counsel (International). PTEP are foreign earnings that are brought back to the US after they have been taxed by other countries, and the proposed regulations are being actively worked on at the IRS. In a January 2019 notice, the IRS said that it would withdraw proposed 2006 PTEP regulations and propose new rules under Sections 959 and 961, and that the rules would be released in multiple sets. The IRS official said that the first set of rules will be a comprehensive framework for Section 959 and 961, and they will provide a foundation upon which future rules can build. The first set will generally provide the rules that were raised in Notice 2019-01 with some additional new rules that arose related to the TCJA.

International Issues

OECD – Adoption of a Global Minimum Tax & Digital Taxation

On December 20, 2021, the OECD issued its Global Anti-Base Erosion (GloBE) Model Rules under its Pillar Two proposal to impose a 15% minimum tax on a jurisdictional basis. The goal is for Pillar Two to be brought into law in 2022 and to be effective in 2023.

On February 4, 2022, the OECD released its initial “Draft Rules for Nexus and Revenue Sourcing under Pillar One Amount A.” The proposed plan introduces a new taxing right over a portion of the profit of large and highly profitable enterprise for jurisdictions in which goods or services are supplied or consumers are located.  Comments were due February 18th, and the request for comments stressed that stakeholder input is critical to balance accuracy and operational realities in the final rule.

On February 18, 2022, the OECD issued a new set of proposed rules for “Tax Base Determinations under Amount A of Pillar One.” Comments were due by March 4th. This draft guidance is intended to establish the profit or loss of an in-scope MNE that will be used for the Amount A calculations to reallocate a portion of its profits to market jurisdictions.

The OECD has also announced plans for future stakeholder input on a number of issues related to Amount A of Pillar One, Amount B of Pillar One, Pillar Two, and the Subject to Tax Rule (STTR) of Pillar Two.

United States: SFC Republicans sent a letter to Treasury Secretary Yellen raising several concerns about the commitments the US has made with respect to negotiations on the OECD project. The letter states that the members believe that recent developments have led to fears that the OECD deal will erode both US competitiveness and tax revenue.  It focuses on Pillar Two and raises concerns related to the Model Rules released by the OECD at the end of December suggesting that some countries have negotiated a better deal for their current tax regimes. It also criticizes Treasury and the Democratic majority in Congress for the failure to hold public consultations or hearings on the OECD deal and includes a request for Treasury officials to testify before the SFC.

European Union:  Transforming the OECD project into EU law is a high priority of the EU executive branch according to Tax Commissioner Paolo Gentiloni. All EU countries have said that in principle they support the deal, but tax law changes require unanimous agreement among EU member states. The EU plans to introduce a proposal on the redistribution of taxing rights this summer as soon as work at the OECD on Pillar One has advanced.

Canada DST: The Office of the US Trade Representative (USTR) has stated that it could revisit existing trade agreements with Canada if the country implements its digital services tax (DST). Canada’s Digital Services Tax Act would take effect only if the first pillar of a global tax deal agreed to in October is not implemented by 2024, and it would apply to tax years beginning in 2022. The USTR sent comments to the Canadian government saying the country should expect a challenge under Section 301 of the 1974 Trade Act if Canada moves ahead with the unilateral, retroactive 3% tax on revenue from certain digital services.

OECD – Miscellaneous

New Inclusive Framework on Carbon Pricing:  The OECD announced that it is creating a new global initiative on carbon pricing that will be modeled after the inclusive framework project on international taxation. A previous statement from OECD Secretary-General Cormann also discussed the new initiative. He commented that “the challenge is to ensure the level of ambition and effort in individual jurisdictions can be lifted to the level required to reach global net-zero by 2050.”

Cryptocurrency Reporting Framework: The OECD is planning to propose a cryptocurrency reporting framework in March that would expand on the current system used by tax authorities to exchange individuals’ financial information. The reporting framework would add to the OECD’s existing common reporting standard (CRS), which provides a template for countries to collect and exchange their residents’ financial data. Under the proposal, intermediaries would report information to tax authorities in relevant jurisdictions that would automatically exchange that data with other jurisdictions where the taxpayers are residents.

European Union

EU “Gray List”: The EU plans to add several countries to its warning list of those countries outside the EU that are not fully meeting international taxation norms but are not yet on the EU blacklist.  An EU official said that the additions are related to rules on the exchange of country-by-country reporting. The EU updates this list twice a year with the last update occurring in October 2021. This listing process is used to encourage countries outside the EU to comply with international tax norms, because EU-based companies that invest in jurisdictions placed on the blacklist can lose access to public funding.