Debt-Ceiling Deal Update, Bipartisan 1099-K Proposal, Supreme Court Ruling, and More

Negotiators Highlight Progress on Debt-Ceiling Deal Despite Lack of Public Agreement on Legislative Framework. President Joe Biden and House Speaker Kevin McCarthy (R-CA) emerged from the latest round of negotiations last night still without a deal to raise the debt ceiling before the impending federal default. Notwithstanding the absence of a finalized agreement, both leaders described the meeting as “productive,” with Speaker McCarthy noting that “the tone [Monday night] was better than any other time [they] have had discussions.” Speaker McCarthy had previously indicated that he hoped to reach a preliminary deal framework by Sunday, May 21. Estimates on when the federal government will be unable to fulfill all of its obligations are dependent on incoming tax receipts, and Treasury Secretary Janet Yellen recently reiterated that it may occur as early as June 1.

Following the meeting, discussions will continue between staff regarding the details of a potential bipartisan package. Democratic negotiators have reportedly embraced GOP proposals to claw back approximately $30 billion in unspent COVID-19 economic relief funds. President Biden has also signaled that he may accept the establishment of statutory caps on discretionary spending. Republicans’ initial proposal offered in the House-passed Limit, Save, Grow (LSG) Act would set the spending cap at Fiscal Year (FY)2022 levels and restrict annual growth at 1% for a decade thereafter, although Democrats have sought to soften such limitations.

Negotiations continue over certain proposals opposed by progressives that may ultimately be included in a final debt-ceiling compromise. The White House has reportedly indicated some willingness to agree to limited work requirements for federal entitlement programs, albeit on a much smaller scale than proposed in the LSG Act. Most Republicans and several Democrats, including Senate Energy and Natural Resources Committee Chairman Joe Manchin (D-WV), also support the inclusion of provisions to reform the energy-infrastructure permitting process in the deal. However, this effort may be limited or postponed to provide lawmakers more time to reach a mutually agreeable compromise.

Other proposals offered in the LSG Act have been outright rejected by Democrats. Included in this category is House Republicans’ proposal to cut $72 billion in supplemental Internal Revenue Service (IRS) funding provided by the Inflation Reduction Act (IRA). Senate Finance Committee Chairman Ron Wyden (D-OR) held a hearing on the topic last week, in which he argued that the proposed cut would lead to “tax evasion by the rich, worse taxpayer service for law-abiding Americans and fewer prosecutions of drug cartel members, sex criminals, sanctions evaders and money launderers.” GOP proposals to repeal certain IRA clean-energy tax credits and reverse student loan forgiveness efforts—two central elements of the Biden administration’s legislative agenda—are also reportedly off the table.

Last weekend, President Biden said that he hoped Republicans may accept tax provisions to eliminate perceived “loopholes.” Speaker McCarthy subsequently squashed expectations of tax reform in the deal, informing reporters, “No, [they] are not looking at revenues.”

GOP leadership previously pledged to allow House lawmakers at least 72 hours to examine the final legislative proposal, and Speaker McCarthy has said that he does not intend to waive the rule. With the potential deadline looming, Secretary Yellen has reportedly requested that certain federal agencies formulate strategies to temporarily reduce or delay upcoming payments to provide lawmakers additional time to reach a deal. Despite myriad outstanding factors complicating the process, President Biden highlighted that both he and Speaker McCarthy are “optimistic [they] may be able to make some progress, because [they] both agreed default is not really on the table.”

Brown and Cassidy Introduce Bipartisan 1099-K Proposal. Last week, Sens. Sherrod Brown (D-OH) and Bill Cassidy (R-LA) introduced the Red Tape Reduction Act, which would increase the reporting threshold for third-party payment platforms to issue a Form 1099-K. In reporting year 2023, payment settlement entities must provide their users with a 1099-K form unless the payee has fewer than $600 in total transaction value for the year. The Brown-Cassidy bill would increase this de minimis exception to exempt filing requirements for payees with either fewer than $10,000 in annual aggregate transaction value or less than 50 total transactions.

Before 2022, the reporting threshold was $20,000 in annual aggregate transaction value or 200 total transactions. However, the American Rescue Plan Act (ARPA) included a revenue-raising provision intended to crack down on perceived tax avoidance by lowering the threshold to its current $600 amount and entirely eliminating the transaction-count exception after Dec. 31, 2021. While the provision was projected to reduce the deficit by $8.4 billion over 10 years, it has since attracted bipartisan condemnation from certain lawmakers who believe the lower threshold imposes an undue administrative burden on small businesses and individual sellers.

After last-minute legislative efforts last December failed to delay or modify the imminent lowering of the third-party reporting threshold, the Internal Revenue Service (IRS) announced that it would delay all 1099-K modifications until 2023. Then Acting IRS Commissioner Doug O’Donnell said this decision was made to “reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”

Regarding his proposal, Sen. Brown told reporters that he “expects Republicans to join [him] on [the Red Tape Reduction Act],” and although “some people want to do a different number, … $10,000 seems to be an agreed-upon number.” Several other lawmakers have introduced proposals in recent years to increase the reporting threshold; Reps. Carol Miller (R-WV) and Michelle Steel (R-CA) have offered bills to restore the threshold to its full pre-ARPA amount.

At a House Ways and Means Committee hearing last month, Rep. Miller questioned IRS Commissioner Daniel Werfel on efforts to reduce compliance burdens resulting from the lowered threshold for taxpayers to receive a Form 1099-K. While Werfel would not opine on the merits of specific legislative proposals to modify the provision, he confirmed the “IRS would have an easier time” with tax administration if the threshold was raised.

IRS to Move Forward with “Scaled” Direct File Tool for 2024. On May 16, the Internal Revenue Service (IRS) sent its Report to Congress (the “Report”) evaluating the viability of an IRS-run Direct e-File option for taxpayers, as was required by the Inflation Reduction Act. The IRS also announced that it is taking steps to begin a “scaled” Direct File pilot project for the 2024 tax-filing season following a directive from the Treasury Department.

Supreme Court Ruling Upholds IRS’s Tax-Enforcement Authority. In a decision delivered on May 18 by Chief Justice John Roberts, the Supreme Court ruled that the Internal Revenue Service (IRS) can access financial records from third-party institutions without notifying taxpayers if the requests are made “in aid of collecting” taxes. The decision is a significant victory for the IRS, validating the agency’s power to probe taxpayer records without providing notice. Opponents have argued that the ruling affords the IRS excessive authority in tax enforcement and infringes on taxpayers’ privacy protection.

Werfel Confirms Evidence of “Apparent Racial Disparity” in Audit Selection. Internal Revenue Service (IRS) Commissioner Daniel Werfel issued a letter informing the Senate of evidence indicating the presence of racial biases in tax enforcement. The letter highlights preliminary data-collection efforts undertaken by the IRS that found “Black taxpayers may be audited at higher rates than would be expected given their share of the population.” Commissioner Werfel had previously pledged to investigate potential biases in his nomination hearing last February. The conclusion validates earlier findings from a Stanford Institute for Economic Policy Research paper that Black taxpayers receive IRS audit notices “at least 2.9 times more often than non-Black taxpayers.”

Smith Demands Briefing from IRS on Treatment of Hunter Biden Whistleblower. Last week, House Ways and Means Committee Chairman Jason Smith (R-MO) requested an “urgent briefing and explanation” from IRS Commissioner Daniel Werfel on apparent retaliation against a whistleblower. The letter concerns new allegations made by the whistleblower’s lawyer that the agent was removed from an ongoing investigation into Hunter Biden’s potential illicit tax activities, which they believe constitutes retaliation from the Biden administration. Chairman Smith noted that Commissioner Werfel had previously promised to protect whistleblowers from reprisal at his nomination hearing last February. Commissioner Werfel reportedly responded to the accusation by informing Chairman Smith that the matter had been referred to the Treasury Inspector General for Tax Administration (TIGTA), and “TIGTA confirmed that [Werfel’s] role as Commissioner in any whistleblower proceeding is not an investigative one.”

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