Census Report Fuels Child Tax Credit Debate and More Updates

Legislative Lowdown

Census Poverty Report Renews Democratic Push for Child Tax Credit Expansion. The fight for a year-end tax deal may have just gotten a boost. On Sept. 12, the U.S. Census Bureau released three new reports including the Official Poverty Measure (OPM) and the Supplemental Poverty Measure (SPM) for 2022. The OPM is a measure of the country’s poverty rate based on cash resources, while the SPM includes cash and noncash resources and subtracts necessary expenses, like tax payments, and takes geographic variations into account. The report found an overall SPM of 12.4% in 2022, up from 2021’s SPM of 7.8%. Furthermore, the SPM for children more than doubled, from 5.2% in 2021 to 12.4% in 2022.

Left-leaning tax policy groups quickly pointed out a correlation between the expiration of expanded tax credits for families that were passed as part of the American Rescue Plan Act (ARPA, Pub. L. 117-2) and the 138% rise in the SPM child poverty rate. ARPA significantly increased and expanded eligibility of the Child Tax Credit (CTC) and the Child and Dependent Care Credit for Tax Year 2021. The Institute on Taxation and Economic Policy, a liberal tax policy think tank, stated that the “rise in child poverty last year was due to the lack of commitment from Congress to the most vulnerable members of the population,” and called for the restoration of an expanded CTC. A report by the Center on Budget and Policy Priorities estimated that 3 million children may have been kept out of poverty had ARPA tax credits been extended to 2022.

In response to the report, many Democratic lawmakers renewed calls to restore or partially restore pandemic-era tax credit expansions, especially the Child Tax Credit. Sen. Michael Bennet (D-CO) and Rep. Suzan DelBene (D-WA) stated that the increased child poverty rate demonstrated a loss of progress in combating the issue, and said they would continue calls for a re-inclusion of the CTC in a year-end tax bill. Senate Finance Committee Chair Ron Wyden (D-OR) reiterated in a press release that “[a]ny end of year tax package must include expansions to the child tax credit.” On Sept. 13, five of the six Democratic lawmakers of the so-called “CTC Six” held a press conference to discuss their reaction to the Census Bureau’s findings and to “urge Congress to restore the expanded, enhanced Child Tax Credit.”

Democrats in support of an expanded CTC will have to overcome hesitancy from congressional Republicans as well as Democrats like Sen. Joe Manchin (D-WV), who worry about the large government spending implications as well as the idea that a restoration of the CTC to ARPA levels may disincentivize work. However, potential compromise brokers, such as Sen. Maggie Hassan (D-NH), have indicated they are looking to forge a compromise that would include both a limited CTC expansion and an extension of several business-related provisions, with a focus on the research and development (R&D) amortization deduction, bonus depreciation and the net business interest deduction.

These negotiations on a year-end tax package are occurring against the backdrop of a potential government shutdown. Congress has six legislative days when both chambers are in session to fund the government before existing spending levels expire on Sept. 30. The situation is becoming more precarious by the day. A Republican-backed continuing resolution (CR) was derailed yesterday after Speaker Kevin McCarthy (R-CA) failed to secure enough votes to advance the bill, which would have been dead on arrival in the Senate even if did clear the House. Speaker McCarthy is also operating under the constant possibility of a motion to vacate, which would force a contentious snap vote on his speakership.

Across the Capitol, the Senate is hoping to break last week’s impasse on a three-bill appropriation minibus. Consideration stalled after Sen. Ron Johnson (R-WI) led several Republicans in demanding that the bills be considered individually, but Majority Leader Chuck Schumer (D-NY) is hopeful that the process will resume this week despite Sen. Roger Marshall’s (R-KS) demands that the chamber vote on the unrelated Credit Card Competition Act, a highly controversial bill he and Sen. Dick Durbin (D-IL) reintroduced in June.

Finance Committee Unanimously Approves Taiwan Tax Bill. On Sept. 14, the Senate Finance Committee approved the United States-Taiwan Expedited Double-Tax Relief Act by a unanimous 27-0 vote. The bill would provide substantial benefits to residents of Taiwan similar to those included in the 2016 United States Model Income Tax Convention, including reductions on the withholding tax rate for Taiwanese residents on U.S. source income and raising the threshold on income of Taiwanese residents and dual-resident individuals (Taiwan and the United States) subject to U.S. taxation. Senate Finance Committee Chair Ron Wyden (D-OR) stated during the markup that the bill was part of a broader legislative effort by the Senate to foster deeper trade and investment ties with Taiwan, and Ranking Member Mike Crapo (R-ID) noted that Taiwan’s status as a major manufacturer of advanced semiconductor chips necessitated stronger tax ties with the United States, as the United States continues to develop its semiconductor industry to counter ongoing aggression by China.

The bill’s markup and passage underscored an ongoing quarrel between the Finance Committee and the Senate Foreign Relations Committee over which committee has jurisdiction of the issue. Foreign Relations Committee Chair Bob Menendez (D-NJ) stated that the bill was inadequate and that he would seek to pass the bill alongside an earlier-approved Foreign Relations Committee bill. Menendez’s plan, while not being a tax treaty under the purview of the Finance Committee, includes foreign policy provisions outside the Finance Committee’s jurisdiction.

1111 Constitution Avenue

IRS Announces Moratorium on Employee Retention Tax Credit Claims Processing. On Sept. 14, the IRS announced that it is temporarily halting the processing of Employee Retention Tax Credit (ERTC) claims, citing rampant abuse of the credit and attempted fraud by third-party organizations maliciously assisting employers in claiming the credit. The moratorium will last until at least the end of the year. The ERTC was created by the CARES Act (Pub. L. 116-136) and was designed to help businesses retain employees on their payroll during the COVID-19 pandemic. The credit’s eligibility period lasted from the CARES Act’s implementation until the end of 2021, but businesses that did not initially claim the credit on their Tax Year 2020 or 2021 returns could still retroactively file amended returns until April 15, 2024, and April 15, 2025, respectively. On a press call, IRS Commissioner Daniel Werfel told reporters that the IRS was experiencing a “tsunami” of amended tax returns claiming the ERTC, stating that this was a significant indicator of fraud within the system instigated by third-party companies known as “ERTC mills.” ERTC mills typically scam businesses by advising them that they should amend their 2020 or 2021 returns in order to take advantage of the credit, regardless of whether the businesses actually qualify to receive the credit. Their aggressive marketing tactics and promises of “risk-free” submissions that could lead to extra revenue have proven enticing for companies, especially those struggling during and following the pandemic.

The implementation and execution of the ERTC has been widely criticized, as bipartisan lawmakers have noted the simultaneous phenomenon of fraudulent ERTC claims getting approved while legitimate claims remain unaddressed in an ever-growing backlog. In a House Ways and Means Committee hearing in July, Chair Jason Smith (R-MO) noted the backlog of more than 500,000 outstanding ERTC claims, and others on the committee criticized the IRS’s scant and confusing guidance on how businesses should self-assess whether they qualify for the ERTC and how they should navigate amending their return to claim the credit. The IRS also signaled in July that the agency would prioritize combating fraud and abuse over processing new claims.

The moratorium notice also stated that the IRS is actively working with the Department of Justice “to address fraud in the ERTC program as well as promoters who have been ignoring the rules and pushing businesses to apply.” Along with the moratorium, the IRS released an ERTC Eligibility Checklist as well as an accompanying notice warning businesses to remain vigilant of aggressive ERTC promotions, to prevent businesses from inadvertently submitting a fraudulent ERTC claim.

At a Glance

Foreign Tax Credit Relief Expected to be Extended. Temporary relief from the 2022 foreign tax credit (FTC) regulations is likely to be extended an additional year, according to IRS officials speaking at a Practicing Law Institute conference on Sept. 12. The 2022 regulations substantially revised the long-standing FTC rules, garnering considerable pushback from stakeholders regarding the complexity of the new rules and lack of time to implement such dramatic changes. In July, the IRS released Notice 2023-55, which largely suspended the 2022 FTC regulations for tax years beginning on or after Dec. 28, 2021, and ending on or before Dec. 31, 2023. While the relief provided a two-year reprieve for calendar-year taxpayers, fiscal year taxpayer relief generally was limited to one year.

During the conference on Sept. 13, Andrew J. Naughton of the IRS Office of Associate Chief Counsel (International) said, “We were certainly considering extending the temporary relief that has been described in the notice for another year, and we do anticipate doing so.” The extension would allow additional time for the Treasury Department and IRS to address issues raised concerning the 2022 FTC regulations while providing welcome relief for taxpayers with 2023 fiscal years not otherwise covered under Notice 2023-55.

Ways and Means Member Day Hearing Sees Variety of Bills Promoted. On Sept. 14, the House Ways and Means Committee held a Member Day hearing, which allowed members of Congress to promote specific pieces of legislation before the committee. Among the most common proposals members brought to the committee were bills calling for education and employment reform, including numerous modifications to 529 savings account plans and proposals for unemployment insurance and Social Security payment reform. In addition, bills intended to counter China’s growing influence were brought by members, including Reps. Neal Dunn (R-FL), Rudy Yakym (R-IN) and María Salazar (R-FL). Finally, numerous health care reform bills were mentioned at Member Day, including proposals by Reps. GT Thompson (R-PA), Victoria Spartz (R-IN), Buddy Carter (R-GA) and Mark Green (R-TN).

American Coalition for Taxpayer Rights Responds to Accusations by Democratic Lawmakers. The trade association for the nation’s largest retail tax preparers and do-it-yourself tax software companies, the American Coalition for Taxpayer Rights (ACTR), pushed back on criticisms of the industry by Sen. Elizabeth Warren (D-MA) and Rep. Katie Porter (D-CA) in a letter on Sept. 12. The letter questions the necessity, cost and utility of the IRS Direct File tool that Warren and Porter are promoting. “We believe that an inferior Direct File tool is unnecessary, the system’s costs will be significant and borne by the American taxpayer, and the project will distract the IRS from more pressing priorities,” said ACTR. Among other issues, ACTR noted that the IRS Direct File tool apparently will not offer taxpayers a simultaneous state tax return (as does virtually all commercial tax software); it will be “invitation-only” in January 2024; its costs will be far more significant than its supporters have acknowledged; and there is no statutory authority for Direct File under current law. The tax preparers also noted that the IRS Free File Program provides approximately 3 million free federal returns each year, and the industry provided 27 million free federal returns last year outside of the Free File Program. It remains to be seen who will be able to use the Direct File tool during the upcoming tax-filing season.

IRS Ramps Up Hiring Efforts for Enforcing Partnership Compliance. On Sept. 15, the IRS issued Notice 2023-172, announcing that they were seeking to hire 3,700 employees as part of their initiative to expand compliance and enforcement efforts against large corporations and complex partnerships. Applications opened for mid-level Internal Revenue Agents, which the IRS describes as “specialized technical positions that generally focus on audits.” This announcement follows last week’s IRS announcement that they would be using increased funding from the Inflation Reduction Act (IRA, Pub. L. 117-169) to prioritize auditing high-income partnerships and corporations. As IRS Commissioner Daniel Werfel noted, “Our first wave of hiring focused on taxpayer service positions to help improve our phone and in-person assistance. …These new employees will be focused on higher-income and complex tax areas like partnerships, not average taxpayers making less than $400,000.”

IRS Settles Easement Penalty Backdating Case. On Sept. 13, the IRS reached a settlement with the conservation easement donor plaintiff in Lakepoint Land II, LLC v. Commissioner. The agreement came after the plaintiff had claimed a $38 million deduction on a conservation easement that the IRS disallowed, levying a $15.2 million penalty. However, the IRS had admitted that an employee backdated the approval signature on the penalty form and misled the Tax Court about it.

IRS Again Delays Issuing Rules on Previously Taxed Earnings. On Sept. 13, IRS Office of Associate Chief Counsel announced that the agency would not be issuing proposed regulations on previously taxed earnings and profits (PTEP) until 2024, guidance that has been delayed several times since 2019. The PTEP rules concern the taxation of foreign income brought back to the United States after U.S. taxes have already been levied on it, and the PTEP process has been criticized for its complexity.

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