Weekly Washington Update: Taxes, Health Care, Immigration, and More

General Updates

Government Shutdown Just Days Away: Congress is barreling toward the first full-government shutdown in roughly five years after repeated attempts to enact short-term funding stopgaps stalled or failed. Existing levels of government funding expire at midnight on Saturday, Sept. 30.

Despite the rapidly approaching funding cliff, the House and Senate continue to pursue different paths. The Senate embraced a bipartisan 45-day continuing resolution (CR), despite some opposition from conservative members over the inclusion of $6 billion in Ukraine aid.

While Ukraine aid retains strong bipartisan support, some lawmakers favor enacting a clean CR and later passing a stand-alone Ukraine aid package. The Senate bill also includes $6 billion for the Federal Emergency Management Agency’s (FEMA) disaster relief fund. House Speaker Kevin McCarthy (R-CA) said the House will take up a last-ditch CR on Friday after failing to advance earlier versions last week. However, Speaker McCarthy said the House-version will include border security provisions that Democrats oppose as a concession to conservatives, essentially guaranteeing the bill will not be taken up in the Senate. Speaker McCarthy also said he would not bring the Senate’s CR to the House floor, setting up an impasse on the eve of a shutdown.

If the House and Senate fail to enact a funding agreement by midnight on Sept. 30, all federal agencies will have to stop non-essential work. Each agency will follow its individualized shutdown plan, but at a minimum, non-essential workers will be furloughed and federal workers will not receive paychecks for the duration of the shutdown. Agency operations considered non-essential will come to a halt, meaning that pending rulemakings will face delays and litigation may be put on hold. In general, expect major reductions in staffing and operations at agencies funded by the congressional appropriations process. Shutdowns lasting only hours or days are minimally impactful, but the longer they continue the more heavily agency operations will be curtailed.

There are several key exceptions to the shutdown’s impacts. Mandatory spending programs not subject to the annual appropriations process, such as Social Security, Medicare and Medicaid, will continue to function as normal. Additionally, services funded through user fees, such as immigration services funded by visa fees, will continue to operate while funds last. Some agencies may also temporarily make use of other previously appropriated funds that they have yet to fully deplete.

With a shutdown all but certain, the main variable at play in determining the impacts of the lapse will be how long it lasts. Once a shutdown begins, the House and Senate will need to agree on a CR to reopen the government and continue negotiations on a year-long funding deal. That means the same political drama around short-term funding could play out again at least once more before the end of the year. A final deal on full-year funding may not be reached until December. In the House, Speaker McCarthy’s negotiations are made more perilous by the constant threat of a motion to vacate, which would force a snap vote on his speakership unless the motion is tabled. The White House has largely stayed out of the funding negotiations to date, but President Biden and his advisors may become directly involved in the coming days.

For further analysis of how a shutdown will impact various industry areas, click here.

Tax

IRS Continues Efforts to Target Pass-Through Entities and Complex Partnerships: On Sept. 20, the Internal Revenue Service (IRS) issued Notice 2023-176, announcing that the agency would create a new unit housed within the Large Business and International (LB&I) division that would “focus on large or complex pass-through entities.” This announcement follows pronouncements made last week by the IRS that they would begin to devote more financial resources allocated by the Inflation Reduction Act (Pub. L. 117-169) to develop technology and increase audits on pass-through entities and large complex partnerships, and the agency’s plan to hire more than 3,700 individuals with experience in the financial services industry to work in this new division.

In the notice, IRS Commissioner Daniel Werfel stated that the creation of the new unit is a “part of our effort to ensure the IRS holds the nation’s wealthiest filers accountable to pay the full amount of what they owe,” and that noncompliance by wealthy filers and pass-through entities necessitates the need to create this new division. LB&I Commissioner Holly Paz clarified that the new group, along with the new hires, will also eventually pull from existing LB&I employees as well as employees in the Small Business/Self Employed Division to ensure an “efficient and effective transition.” Aiding in the transition, the IRS stated that they will also coordinate with the National Treasury Employees Union.

Along with efforts to ramp up audits on high earners, Commissioner Werfel stated in a letter to Senate Finance Committee Chair Ron Wyden (D-OR) that it will reduce correspondence audits of taxpayers claiming certain refundable credits such as the Earned Income Tax Credit, American Opportunity Tax Credit, Health Insurance Premium Tax Credit and Additional Child Tax Credit. These credits primarily benefit low- and middle-income taxpayers, and Werfel cited the IRS’s efforts toward “equitable and efficient tax administration” as a reason to reduce audits of taxpayers claiming these credits. The letter also cited other reasons, such as “achieving greater balance in our examination of different sources of non-compliance” and a recent Stanford University study finding substantially higher audit rates of Black taxpayers as a reason for their ongoing “rebalancing effort” that attempts to reconcile the audit rate disparities existing between low- to middle-income filers with high-income filers. Chair Wyden expressed approval for Werfel’s approach, stating that the IRS’s enforcement rebalancing effort “is exactly why Congress boosted funding for the IRS” and that he is “look[ing] forward to continued updates on the IRS’s progress in addressing … racial disparities.”

Smith Expresses Optimism for Year-End Tax Package While Wyden Remains Unsatisfied: Speaking at an event on Sept. 20, House Ways and Means Committee Chair Jason Smith (R-MO) expressed optimism and hope that a bipartisan tax package could eventually make its way to President Biden’s desk by the end of the year, citing the ongoing conversations he has had with Senate Finance Committee Chair Ron Wyden (D-OR). Chair Smith stated that the expired or soon-expiring tax extenders from the Tax Cuts and Jobs Act (Pub. L. 115-97)—namely the research and development amortization deduction, bonus depreciation and the net interest expensing deduction—are bipartisan and crucial to businesses. He also noted that the American Families and Jobs Act reported out by the Ways and Means Committee in a June markup includes these provisions. Smith mentioned the potential inclusion of a rum “cover-over” tax provision in a future package. Smith also sees common ground on potential non-extender tax credits, such as housing tax credits and the Child Tax Credit, which Wyden supports.

Wyden, however, remains apprehensive about Smith’s claims of bipartisanship: he believes the American Families and Jobs Act has disproportionately negative effects on working-class taxpayers compared to businesses. He has called that act “a tax break to businesses” and stated that an equal level of tax relief for businesses and families is his “key principle.”

Ways and Means Chair Questions U.S. Auto Manufacturers’ Partnerships with Foreign Companies: On Sept. 19, House Ways and Means Committee Chair Jason Smith (R-MO) wrote a letter to Treasury Secretary Janet Yellen requesting comment on whether certain electric vehicle production tax credits in the Inflation Reduction Act (Pub. L. 117-169) are inadvertently incentivizing certain U.S. auto manufacturers to partner with foreign companies with potential questionable ties to China and the Chinese Communist Party. In the letter, Chair Smith specifically questioned Ford’s partnership with the Chinese-owned battery manufacturer, Contemporary Amperex Technology Co. (CATL). He stated that, though the Internal Revenue Service (IRS) and Treasury Department issued regulations seeking to prevent “foreign entities of concern” from claiming the IRA’s clean vehicle credits, the regulations do not adequately address the Ford-CATL partnership and whether CATL meets the definition of a foreign entity of concern. The letter asks the Treasury Department to respond to whether the department will release stronger guidance regarding foreign entities of concern, and whether they will reevaluate standards and audit processes to ensure that “taxpayer dollars do not flow to entities that are controlled by, or will benefit, foreign adversaries such as China.” The letter requests a response by Oct. 7.

IRS Continues Digitization Initiatives with New Hiring Announcements: As part of the IRS’s ongoing initiative to fully digitize the filing and processing of tax returns, the IRS Independent Office of Appeals announced that they were looking to hire roughly 450 appeals officers, settlement officers and appeals team case leaders. The office has said that it is seeking employees to fill job roles that were previously lost to attrition and retirements, and that the office is digitizing records because working from home has increased during and following the COVID-19 pandemic.

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