Tax Tidbit
Regulators have until June 22 to finalize guidance on the Tax Cuts and Jobs Act (P.L.115-97). The 18-month mark since the legislation was signed into law is quickly approaching. The Treasury Department and Internal Revenue Service (IRS) must complete regulations by this date in order for the rules to be retroactively applied to Jan. 1, 2018. Officials are scrambling to meet this deadline. Check out our regulatory tracker below for updates!
Legislative Lowdown
Free File – Find If You Can? The Internal Revenue Service (IRS) is investigating allegations that some tax filing companies involved in the agency’s Free File program have been taking advantage of low-income taxpayers. Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) want answers. The senators sent a letter to Internal Revenue Service (IRS) Commissioner Chuck Rettig, asking the agency to review its agreement with Free File companies and “take any necessary actions to ensure the integrity and purpose of the Free File program, including amending the memorandum as necessary to bar whatever deceptive acts and practices the IRS might uncover as a result of its investigation.” On Thursday, House Ways and Means Committee Chair Richard Neal (D-MA), Ranking Member Kevin Brady (R-TX) and Oversight Subcommittee leaders John Lewis (D-GA) and Mike Kelly (R-PA) also wrote to Rettig requesting the results of the IRS’ investigation into the Free File program. The letter asked the IRS to specifically include in its response a review of its marketing practices, oversight of the program, and “additional opportunities to improve taxpayer participation in the program.” The congressional inquiry follows allegations that H&R Block and Intuit have been making it harder for lower-income taxpayers to find free tax prep offerings and instead steered taxpayers towards products they would have to purchase. As of Sunday, a class-action lawsuit was filed against Intuit in the U.S. District Court of Northern California alleging that impacted taxpayers “were intentionally misled and deprived of the opportunity to make an informed decision about their tax-filing service.”
Seize the Gap. The tax gap—or the difference between the amount of tax liability owed by taxpayers and the amount that is paid on time—has become a hot topic in recent weeks following an announcement by IRS Commissioner Charles Rettig that the agency plans to update its tax gap estimate next month for the years 2011 to 2014. In anticipation of the tax gap update, the House Ways and Means Committee held a hearing on May 9 entitled, “Understanding the Tax Gap and Taxpayer Noncompliance,” to explore the current gap, estimated to be between $400 and $460 billion.
The Committee heard testimony from a panel of witnesses representing the IRS, the Government Accountability Office (GAO), and the Department of the Treasury. The discussion centered around a number of topics including the appropriate level of funding for the IRS, the effectiveness of the IRS’s use of data and technology, the impact of the emerging gig economy on the tax gap, fairness in audits, and simplification of the tax code, among others.
All witnesses agreed that the IRS requires more funds to operate efficiently and to adequately address the tax gap. Democrats and Republicans on the Committee, however, disagreed on this point, with most Republicans instead suggesting that smarter audits and a simpler tax code are better solutions than increased funding. With regard to causes, it was widely agreed upon that underreporting makes up the bulk of the tax gap, with failing to meet the deadline and non-filing making up the rest. With regard to solutions, witnesses J. Russell George, Treasury Inspector General for Tax Administration (TIGTA), Benjamin Herndon, Chief Research and Analytics Officer, IRS, and a few members from both sides of the aisle discussed compliance program changes that can be made to address the gaps in payment from the gig economy, tip reporting and virtual currencies. Finally, there was significant discussion on fairness in audits and the impact it has on the tax gap. Specifically, there were questions as to why low-income individuals, particularly those receiving Earned Income Tax Credit (EITC) benefits, receive the lion’s share of audits, while higher-income individuals are subject to far fewer audits, despite their potential for a much greater return. According to a FY 2018 Treasury Report about one quarter of EITC claims were issued “improperly”. The high rate of “improper” payments is the reason the EITC is such a focus for the IRS. However, some tax experts—including the Taxpayer Advocate Service, an independent office within the IRS—argue the estimate is too high.
Retirement Kerfuffle. Excitement for a House retirement savings bill hit a snag this week as a coalition of education unions came out in opposition to one key aspect of the proposed legislation: expanded options for tax-advantaged 529 accounts.
The bipartisan Setting Every Community Up for Retirement Enhancement Act of 2019 (H.R. 1994) passed out of the House Ways and Means Committee by a unanimous voice vote on April 2. The bill would make various changes to how Americans access retirement savings accounts and maintain portability of lifetime income options from one plan to another. However, the National Education Association and American Federation of Teachers this week reportedly began pressuring Committee Chair and original sponsor Richard Neal (D-MA) to remove the 529 expansion provisions. Previously a contentious sticking point in Tax Cuts and Jobs Act (P.L. 115-97) deliberations, the bill would expand the benefits of 529 college savings plans, including:
- adding student loan repayments as a qualified expense
- allowing the same secondary expenses that are covered by Coverdell Education Savings Accounts (academic tutoring, textbooks, supplies, and equipment)
- allowing plans to be used to pay for apprenticeship programs and homeschooling
It is unclear as to whether Democrats will pull the 529 provisions from the bill. Doing so may come at the cost of losing Republican support for what was supposed to be a bipartisan bill. House Ways and Means Committee Ranking Member Kevin Brady (R-TX) has asked Democrats to keep the provisions, saying "I cannot comprehend a reason why anyone, especially educators, would object to families saving more for books and tutoring and what it takes to get kids to their highest potential today.”
Some Democratic staff have indicated the provisions will likely be stripped from the bill. A House vote may still be scheduled prior to Memorial Day recess.
The Senate is expected to consider its own version of the bill and the two chambers are will likely have to have to convene a conference committee to reconcile differences between the two bills. The Senate Finance Committee held a hearing on retirement savings today and discussed retirement issues, including the Retirement Savings and Enhancement Act and other priorities. Continue reading for a quick readout of the hearing!
Click here for a handy chart that compares various retirement savings proposals released by the House and the Senate.
Senate Finance Committee Holds Retirement Savings Hearing. On May 14, the Senate Finance Committee held a hearing to examine the state of the U.S. retirement system.
Testifying before the committee were the following witnesses:
- Joni Tibbetts, Vice President Of Product Management, Retirement & Income Solutions, The Principal Financial Group;
- Tobias Read, Treasurer, State of Oregon;
- Joan Ruff, Board Chair, AARP; and
- Lynn Dudley, Senior Vice President, Global Retirement & Compensation Policy, American Benefits Council
During the hearing, there was strong bipartisan support for the Retirement Enhancement and Savings Act (RESA) of 2019 (S.972), including its nondiscrimination testing reform and expanded multiemployer pensions (MEPs) provisions. A number of senators indicated they would like to approve additional retirement legislation after passing RESA.
Below are some additional topics discussed during the hearing:
OregonSaves
There was considerable focus on OregonSaves—a state-sponsored auto-enrollment Roth IRA retirement program, facilitated by employers and funded by voluntary employee investments via payroll deductions. Employees must opt-out of the program, which automatically directs 5% of their earnings into a Roth IRA. Employees are fully vested and the accounts are portable. There was bipartisan agreement on the committee that OregonSaves could serve as a model for federal legislation.
Part-Time Workers and Small Businesses
Many senators discussed the need to find a way for part-time workers to increase their retirement savings, particularly as the gig economy continues to grow. Sen. Mark Warner (D-VA) suggested the creation of a universal savings account granted at birth as a potential safety net. The panelists had not considered the proposal, but they seemed open to exploring the idea further.
There was also agreement that making it easier for small businesses to provide retirement plans is essential. Small businesses often have limited administrative resources and cannot focus on providing retirement plans for their employees. Reducing administrative burden and making it less prohibitive for small businesses to offer retirement plans for employees was a shared priority for many senators.
Paying off Student Debt While Saving for Retirement
The panelists highlighted the importance of educating workers on the value of saving early. Ranking Member Ron Wyden (D-OR) discussed the Retirement Parity for Student Loans Act (S.1428), which would allow 401(k), 403(b), SIMPLE and governmental 457(b) retirement plans to make matching contributions to a worker’s retirement plan as if their student loan payments were salary reduction contributions. In other words, the bill would allow employers—who are currently only allowed to match retirement contributions if the employee is contributing to their retirement plan—to make matching contributions to retirement accounts if their employees are paying off student loans. This would allow workers to save for retirement while paying off student loan debt at the same time.
Changing Age Requirements
There was discussion about decreasing the minimum age for a child to be able to make their own IRA contributions to 17 years. Under current law which varies by states, IRAs are held by parents for their children until the age of majority (usually 18 or 21). Lowering the age would permit individuals working at age 17 to be auto-enrolled in their employers’ plans.
To watch the full hearing and read the written testimony, please visit the committee’s webpage. Let us know if you are interested in a full hearing report from the Brownstein Tax Policy Team!
Zone Control. A bipartisan group of senators introduced legislation this week requiring the Treasury Department to monitor the effectiveness of Opportunity Zones by tracking and reporting data. Sens. Tim Scott (R-SC), Cory Booker (D-NJ), Maggie Hassan (D-NH) and Todd Young (R-IN) have expressed concerns about the lack of reporting requirements for Opportunity Zones, after that provision was removed from the Tax Cuts and Jobs Act (P.L. 115-97). Opportunity Zones incentivize private capital investment into low-income communities and have received significant support since their creation in the TCJA. Scott said that "it's imperative that we create reporting requirements to allow us to accurately measure the success of the initiative."
Bernie and AOC Target Credit Interest. Sen. Bernie Sanders (I-VT) is teaming up with Rep. Alexandria Ocasio-Cortex (D-NY) on a bill that would cap the “national usury rate” at 15% on credit cards and other consumer loans. The bill would also establish banking services at 31,000 post offices in the U.S., intended to provide low-income communities without easy access to banks more affordable financial services products, such as ATMs, paycheck cashing and checking accounts. An overview of the bill from Sanders’ office reports that credit card interest rate from stores like Macy’s or Kohl’s can reach up to 27%, allowing credit card companies to earn $180 billion in interest revenue last year alone. The duo even invoked Dante Alighieri’s Divine Comedy, saying “Dante reserved a special place in the Seventh Circle of Hell for people who charged usurious interest rates. Today we don’t need the hellfire, the pitchforks, or the rivers of boiling blood, but we do need a national usury law that caps interest rates on credit cards and consumer loans at 15%.”
The Senate is unlikely to pass the measure, which will be dubbed the Loan Shark Prevention Act. The Chair of the Senate Finance Committee, Sen. Chuck Grassley (R-IA) claimed that this bill would have some unintended consequences and “such action is going to have some low income people, who depend on credit cards, not be able to get credit.”
1111 Constitution Avenue
IRS Cybersecurity Lacking. Taxpayer information handled by third parties may not be entirely secure, according to a Government Accountability Office (GAO) report released last week. The government watchdog found the Internal Revenue Service (IRS) has not developed standards to adequately protect taxpayer information when used by tax preparers or e-filing providers, noting the standards established through the Security Summit are outdated. The report also found that in 2018, about 90% of taxpayers had their returns filed electronically by paid preparers or used tax-prep software to do it themselves, which has left many vulnerable to fraud and ID theft. The GAO says the IRS does not have the ability to regulate the security systems used by these paid preparers, and the few regulations in place are outdated. While IRS Commissioner Charles Rettig has indicated that bolstering the agency’s cybersecurity is a top priority, outlining a six-year plan to upgrade its technology. The IRS rejected a number of the GAO’s recommendations, saying it does not have the statutory authority to establish security requirements. The GAO, on the other hand, believes the IRS needs no additional authority to implement its recommendations.
2020 Vision
Trump Plays Sport. As the House Ways and Means Committee Democrats continue to fight for President Trump’s tax returns, the New York Times released a report last Tuesday highlighting details of the president’s tax information obtained from 1985 to 1994. In response to the article, President Trump said the tax write-offs and bad deals were part of the “sport” of business in the 1980s and 1990s. The article shows tax figures between 1985 and 1994. These figures indicate the president lost over $1 billion in business income, which resulted in him not having to pay federal income taxes for eight of the 10 years. President Trump said that “real estate developers in the 1980's & 1990's, more than 30 years ago, were entitled to massive write offs and depreciation which would, if one was actively building, show losses and tax losses in almost all cases." President Trump added that the report was “highly inaccurate.”
Klobuchar and TCJA. The Tax Cuts and Jobs Act (P.L.115-97), the signature legislative victory for Republicans last session, is a popular target for many Democratic lawmakers. However, during a campaign stop in Wisconsin last week, Sen. Amy Klobuchar (D-MN) struck a different tone when she said she would keep portions of the bill in place. Klobuchar added that she “would’ve brought that corporate tax rate down some, but not to where they brought it.” The tax code overhaul lowered the corporate tax rate from 35% to 21%, but Klobuchar—who voted against the bill in 2017—did not specify where she would have liked the corporate rate to be set.
At a Glance
- Up In Arms. On May 9, Rep. Brad Schneider (D-IL), of the Ways and Means Committee, wrote to IRS Commissioner Charles Rettig on Thursday to investigate the National Rifle Association’s (NRA) tax-exempt status following recent reports that the organization engaged in “egregious self-dealing” and “deceptive billing practices.” Schneider asked the IRS to review if the allegations ultimately “warrant reconsideration of the organization’s tax-exempt status.”
- Let’s Get Digital. Brian Jenn, a senior official in the international tax policy office at the Department of the Treasury and one of the lead U.S. negotiators on a multilateral digital revenue tax, warned last week of “political consequences” for countries that establish their own tax regime ahead of forthcoming Organization for Economic Cooperation and Development (OECD) negotiations. Jean said these unilateral moves are “perceived by the U.S. as politically motivated” against top American tech firms.
- IRS Changes Foreign Currency Rules. The IRS on Friday rescinded temporary rules dictating asset and liability partnership allocations for business transactions in foreign currencies. The original rule was put in place on December 2016, but had drawn the ire of the Trump administration for being onerous and distorting gain and loss calculations under Section 987 of the Internal Revenue Code.
Brownstein Bookshelf
- X’s and O’s. The Wall Street Journal’s editorial board describes that despite the rising federal deficit, recent economic growth has driven a boost in federal tax revenues.
- Tax Cuts Boost Wages? Georgetown Professor and former Labor Department economist Harry J. Holzer writes in the Washington Post how cuts to corporate taxes can raise wages for its workers.
