Tax Tidbit 

State of the Union Look Ahead. President Joe Biden will make his first State of the Union address tonight before a joint session of Congress. As of this writing, the speech has not been made available to the public. While tax policy is not expected to take center stage, a few related items could make an appearance.
 
Below is an overview of those policies likeliest to be mentioned and a prediction of what President Biden might say:

 
Honorable Mention: While less likely, President Biden could also lend his support for cannabis reform. Senate Majority Leader Chuck Schumer (D-NY) announced last month that he and Sen. Ron Wyden (D-OR), chair of the Senate Finance Committee, have been crafting legislation that would legalize cannabis and impose federal taxes on cannabis products. Schumer said he hopes to advance the bill in the coming months, and it is possible he asked the president Bto highlight the issue in tonight’s address.
 
Brownstein will be following along with President Biden’s speech and will release conclusions and analysis shortly thereafter.

Legislative Lowdown

Ongoing Appropriations Season. Congress passed another continuing resolution (CR), extending government funding to March 11. Appropriations subcommittees have since been engaging in negotiations to iron out differences between the two parties that will allow them to pass an omnibus package ahead of the next deadline, avert a government shutdown and enact spending levels more aligned with President Joe Biden’s budgetary objectives for the first time since he assumed office.
 
Although appropriators have reached a “framework” agreement, there is “still much work to do,” according to Sen. Pat Leahy (D-VT), who chairs the Senate Appropriations Committee. Earlier this month, Leahy said he hopes to present a “final agreement [to] members to review in the coming weeks,” or at the beginning of March. Reports indicate that House Majority Leader Steny Hoyer (D-MD) privately told Democratic members he plans a floor vote on Tuesday, March 8.
 
Lawmakers on the tax committees have reportedly eyed the appropriations package as a potential vehicle to move extenders. However, Sen. Ron Wyden (D-OR), the Senate Finance Committee chair, said earlier this month that it is yet to be decided whether any of the extenders will be included in the omnibus or the Build Back Better Act. This has not deterred Sen. Maggie Hassan (D-NH), however, who hopes to attach her American Innovation and Jobs Act, which would reinstate 100% expensing of research and development costs, to the omnibus package. She and Sen. Todd Young (R-IN) are leading the effort to advance the legislation, and Hassan recently said there were “ongoing discussions” about it.
 
Lawmakers to IRS: Clear that Backlog. In mid-February, a bicameral group of 45 Democrats sent a letter to IRS Commissioner Charles Rettig urging the agency to address the ever-growing processing backlog. The lawmakers requested the IRS “pursue additional actions to maximize the IRS’ current workforce to address the backlog in order to reduce disruptions this filing season,” including  taking the following steps:   

• pursue maximum overtime options for staff who are working on the backlog;
• allow employees to voluntarily join surge teams, including those with prior account management experience or those who could be trained quickly; and
• extend overtime options for additional surge team employees.

Multiple members of the House Ways and Means Committee and the Senate Finance Committee signed the letter, including Reps. Earl Blumenauer (D-OR), Judy Chu (D-CA), Lloyd Doggett (D-TX), Bill Pascrell (D-NJ), Tom Suozzi (D-NY) and Sens. Ron Wyden (D-OR), Bob Menendez (D-NJ), Michael Bennet (D-CO), Ben Cardin (D-MD), Bob Casey (D-PA), Tom Carper (D-DE), Maggie Hassan (D-NH), Elizabeth Warren (D-MA), Debbie Stabenow (D-MI) and Sheldon Whitehouse (D-RI).
 
However, Doreen Greenwald, executive vice president of the National Treasury Employees Union, observed later in the week that these and similar suggestions to reassign workers could result in other workflow disruptions. She explained: “Those workers are needed in the area they currently work, so you’re basically moving people around to try and deal with where there’s currently a backlog and likely will end up creating a backlog somewhere else.”
 
Democratic Gas Tax Pause Losing Steam. A Democratic proposal to temporarily suspend the gas tax was introduced in February  to provide relief to taxpayers facing inflationary pressure. The Gas Prices Relief Act, introduced by Sen. Maggie Hassan (D-NH) in the Senate and Rep. Tom O’Halleran (D-AZ) in the House, would halt the 18.4-cent federal gas tax for the remainder of 2022. Shortly after its introduction, the bill won support from Sen. Ron Wyden (D-OR), chair of the Senate Finance Committee, and Senate Majority Leader Chuck Schumer (D-NY) said it was “one of the things, many things, that we’re looking at in terms of reducing costs.”
 
The effort is running into headwinds from Republicans, who largely oppose the idea and have referred to the proposal as a “gimmick,” as well as trucking and railroad industry stakeholders, who say infrastructure programs that rely on gas tax revenues would suffer if the tax were suspended. Sen. Joe Manchin (D-WV) also said the proposal, “made no sense.”
 
However, Hassan has pointed to the situation unfolding between Russia and Ukraine as a reason to adopt the gas tax suspension. Her rationale: the sanctions  imposed on Russia will increase gas prices for Americans. She recently said she urged President Joe Biden to support her bill to “limit the pain that Americans are experiencing at the pump,” as the president said during a speech on the Russia-Ukraine situation last week. As of this writing, the White House has not yet taken an official position on the proposal, but Press Secretary Jen Psaki indicated last week that “all options are on the table” to combat rising gas prices.

1111 Constitution Avenue

Issues with ID.me Continue. Following congressional and industry criticism about the partnership between the IRS and ID.me that would require taxpayers to submit “selfies” to access their online accounts, the IRS said last week taxpayers could opt out of facial recognition as a means  to access their accounts. The IRS said it will instead shift to a new verification system next year and announced it is already working with the General Services Administration to meet security standards and scale requirements for login.gov.
 
However, because the IRS signed a two-year contract with ID.me, those entities will continue working together, allowing taxpayers to voluntarily use the facial recognition feature. According to the IRS, “for taxpayers who select this option, new requirements are in place to ensure images provided by taxpayers are deleted for the account being created.” Additionally, to accommodate taxpayers who have already used the ID.me service but want the company to relinquish the data collected from them, the IRS said this data will “be permanently deleted over the course of the next few weeks.”
 
Taxpayers who do not want to use the facial recognition feature will be able to verify their identity through a live virtual interview with IRS employees, during which “no biometric data – including facial recognition—will be required,” according to the IRS announcement. This process will also be operated by ID.me, which will take about five to 10 minutes, in addition to any time spent waiting for an agent. To help streamline this 17-step process, ID.me announced it is hiring 750 new agents.
 
The congressional inquiry on this issue continues as well. Recently, Rep. Bill Pascrell (D-NJ), chair of the House Ways and Means Subcommittee Oversight,  sent a letterto ID.me CEO Blake Hall asking multiple questions about the company’s data collection and security practices and the status of the contract between ID.me and the IRS. Pascrell asked for a written response by March 2.
 
IRS Issues Final EA User Fee Regs. On Friday, the IRS issued final regulationsproviding guidance on the user fees relating to the enrolled agent special enrollment examination and the enrolled retirement plan agent special enrollment examination. The regulations increase the amount of user fees for each part of the special enrollment examination for enrolled agents from $81, plus amounts payable to a third-party contractor, to $99. At the same time, it removes the user fees for the special enrollment examination for enrolled retirement plan agents.

Global Getdown

OECD International Tax Updates. Treasury officials expressed confidence that Pillar One of the Organisation for Economic Cooperation and Development (OECD) Inclusive Framework, which would reallocate profits from multinational enterprise to countries in which they have consumers, can garner congressional support for implementation in the United States. Itai Ginberg, deputy assistant secretary for multilateral tax in Treasury’s Office of Tax Policy, said as much in February, explaining that the administration “fully believe[s] that a Pillar One instrument can move through the U.S. Congress and … that consultation is necessary in order to make that happen.”
 
Focusing on the Pillar Two global minimum tax, Republicans continue to call for additional information from the Treasury Department regarding how the rules for Pillar Two will be implemented. In a mid-February letter to Treasury Secretary Janet Yellen, Republican members of the Senate Finance Committee raised concerns about the “effect of the OECD agreement on U.S. competitiveness and tax revenue.”  The lawmakers specifically highlighted that the Pillar Two model rules released in December 2021 “would apply to U.S. companies far more broadly and adversely than the Treasury Department has represented.” They warned that under the OECD model rules “a U.S. company with operations abroad could face additional tax liability—referred to as a top-up tax—in those foreign jurisdictions if it was determined the U.S. company did not pay adequate tax on its U.S. profits because of the Rules’ treatment of U.S. tax credits and deductions.” As a result, “foreign countries could effectively capture the benefit of congressionally-provided tax credits and deductions targeted at domestic innovation, investment, and job creation.”
 
These concerns were shared in part by Neil Bradley, chief policy officer and head of strategic advocacy at the U.S. Chamber of Commerce, who said in February that the agreement would “fundamentally disadvantage” American multinational companies.
 
Looking ahead, the Republicans suggested the administration’s lead negotiators publicly testify before the committee, or at least appear for an in-person briefing to address the issues raised.
 
ACT Pushes for FTC Reg Reversal. The Alliance for Competitive Taxation (ACT)—a coalition representing companies like Google, the Coca-Cola Company, the Walt Disney Company, several banks and many other major companies—sent a letter last week to Treasury Secretary Janet Yellen asking the administration to withdraw the recent final regulations on foreign tax credits (FTC).
 
The FTC regulations that were finalized in December 2021 were intended, according to ACT, to deny FTCs “for novel extraterritorial taxes, such as digital services taxes (DSTs), which were considered outside the internationally recognized income tax system and a discriminatory tax similar to a tariff imposed by foreign jurisdictions.” ACT argues, however, that the final regulations “go well beyond this” and would deny FTCs “for taxes that have nothing to do with DSTs and that have been creditable for many years.” The potential for double taxation that U.S. companies may face as a result of the regulations, according to the group, could pose a significant economic threat.
 
Given the severity of these issues and the interaction with the proposed OECD global minimum tax, ACT urged the Treasury Department to withdraw the final regulations and issue new guidance after consulting closely with Congress. The letter was also sent to the Republican and Democratic leaders of the House Ways and Means Committee and the Senate Finance Committee. 
 
Senate Republican LIFO Letter. In a February letter to Treasury Secretary Janet Yellen, Senate Republicans urged relief for auto retailers that use the last-in, first-out (LIFO) inventory accounting method. Senate Democrats raised similar concerns along with a bipartisan group of House members in letters to Treasury in November 2021.
 
Under current law, companies using the LIFO inventory method can be subject to recapture taxes if their inventory levels fall below a certain threshold. This has become an issue for the inventory-heavy auto industry due to disruptions in the availability of semiconductors as a result of the current supply-chain crisis.
 
To address this issue, the lawmakers called on the Treasury Department to use its authority to provide relief to auto dealers subject to the recapture tax. According to the letter, the Treasury Department can use its “existing authority under Section 473 of the Internal Revenue Code to provide temporary and targeted LIFO relief to address the ‘major foreign trade interruption’ caused by the pandemic and related government intervention.”  
 
A bipartisan, bicameral group of lawmakers is also reported to be working on a statutory solution should Treasury relief not be forthcoming. The issue is a priority for auto dealers facing estimated tax payments as early as March 15 since new vehicles are  not available to replenish inventories depleted during the pandemic.

At a Glance

• Charitable Deductions in Focus. Under the Coronavirus Aid, Relief and Economic Security Act, lawmakers enacted a temporary above-the-line charitable deduction that expired at the end of the last year. Tax lawmakers, including Rep. Richard Neal (D-MA), who chairs the House Ways and Means Committee, and Sen. Ron Wyden (D-OR), the Senate Finance Committee chair, could use the upcoming omnibus package to extend the deduction for non-itemizing taxpayers.
   
• Newest SALT Bill. Reps. Tom Malinowski (D-NJ) and Katie Porter (D-CA) recently introduced legislation to provide a more generous state and local tax deduction. The Supporting Americans with Lower Taxes (SALT) Act would remove the $10,000 cap for taxpayers earning below $400,000 and raise the limit to $60,000 for those making above that threshold. For each $100,000-increase in annual earnings, the cap would fall by $10,000.

Brownstein Bookshelf

• Employer-Provided Child Care Credit. The Government Accountability Office (GAO) published a report on Thursday entitled “Employer-Provided Child Care Credit: Estimated Claims and Factors Limiting Wider Use.” GAO found that the employer-provided credit can save employers more in taxes than using a deduction alone and that employees can exclude some child care benefits from their taxable wages.
   
• Treasury, Account Firms Revolving Door. Sen. Elizabeth Warren (D-MA), a Senate Finance Committee member, and Rep. Pramila Jayapal (D-WA) sent a letter in February to Russell George, reasury Inspector General for Tax Administration, asking his office to investigate the “revolving door” between the top U.S. accounting firms and the Treasury Department.