Between the release of long-awaited Supreme Court decisions, to a slew of new Treasury regulations, startling Employee Retention Credit findings and election politics, it’s been a busy few weeks for tax policy! Below we cover the highlights from the past month.
Supreme Court decisions
The Supreme Court wrapped up its term last week after issuing several decisions that could have significant, long-term tax policy implications:
- Moore v. United States – the Court ruled in favor of the constitutionality of the Tax Cuts and Jobs Act’s (TCJA’s) Mandatory Repatriation Tax. The decision was narrow and failed to address whether realization of income is required before it can be taxed. Learn more in our brief synopsis or by watching a more robust discussion of the issues in a playback of our June 27 webinar.
- Loper Bright Enterprises v. Raimondo and Relentless v. Chamber of Commerce – these linked disputes led the Court to overturn Chevron v. Natural Resources, dealing a blow to federal agency powers. The decision could have long-lasting implications for tax policy, including an increase in challenges to Treasury and IRS guidance. Read our FAQs for an overview and watch our video for additional discussion and insights.
- Corner Post Inc. v. Board of Governors of the Federal Reserve System – the Court held that, under the Administrative Procedure Act, the statute of limitations for a facial challenge to a federal agency rule (broadly, a challenge to the rule’s constitutionality) doesn’t begin until the plaintiff is injured by the final agency action (e.g. – the date a rule is published). Prior to the ruling, most previous circuit courts held the statute began on the date of the final agency action, rather than the date the plaintiff was injured. This ruling may also provide taxpayers with opportunities to challenge old tax regulations.
Treasury regulations
We’ve seen a steady flow of regulations issued over the last several weeks. Some of the more pervasive guidance we’ve received is summarized below:
- Partnership basis shifting – in June the IRS issued proposed regulations along with two other pieces of guidance, targeting related-party basis shifting. The proposed regulations define “transactions of interest” and require disclosures by “material advisers.” More on these developments can be found in our related alert. The guidance package is part of a larger enforcement effort, which is discussed in more detail below.
- Stock buyback tax – just a few months after the issuance of proposed regulations, the IRS finalized the regulations relating to the reporting and payment of the excise tax. For more detail, please visit our recent alert. IRS has yet to issue final regulations on the calculation and application of the new tax.
- Cryptocurrency – the IRS issued final regulations that govern transaction reporting for centralized cryptocurrency brokers but delayed finalizing guidance on decentralized cryptocurrency exchanges, whose operations are often more varied and complex. The rules for centralized exchanges will require affected taxpayers to report sales beginning in 2025 (on statements will be issued in early 2026) and certain tax basis information beginning in 2026 (on statements that will be issued in early 2027).
- Employee Retention Credit (ERC) – proposed regulations provide that the IRS will treat any interest paid to a taxpayer on an erroneous ERC, paid sick leave credit or paid family leave credit as an underpayment of tax. This allows the IRS to assess and collect on the interest paid with the credit claim.
- Inflation Reduction Act (IRA) energy credits – final regulations covering compliance with the prevailing wage and apprenticeship requirements were released and are generally consistent with the proposed rules. Additional information can be found in our recent alert.
IRS activity
The IRS continues to advance enforcement efforts to reduce the tax gap by launching new and expanding existing initiatives. Efforts continue to focus on large corporations, complex partnerships and high-income individuals.
In June, the IRS announced a significant regulatory campaign focused on abusive partnership transactions. In addition to issuing basis shifting guidance, the IRS announced two new groups:
- A new group within the Office of Chief Counsel that will focus on developing partnership guidance, including closing perceived loopholes, and
- A new pass-through group within the IRS’s Large Business and International division the IRS is establishing, effective this fall.
Treasury estimates that enforcement of the recent basis shifting guidance alone could generate up to $50 billion over 10 years.
IRS funding debate
Republicans continue to look for opportunities to decrease IRS funding, particularly related to enforcement efforts. Earlier this year, as part of a bipartisan deal, Republicans were able to secure a claw back of $20 billion of the $80 billion provided to the IRS by the IRA.
In June, the House Appropriations Committee advanced the Financial Services and General Government spending bill for fiscal year 2025 (FY25) along a party-line vote. The draft legislation proposed $11.86 billion in IRS funding for FY25, an amount that is $2.32 billion (or 16.3%) below the agency’s FY24 funding and $2.5 billion (or 17.4%) below the President’s FY25 proposal. Almost all of the reductions came from funding for enforcement.
The bill faces democratic opposition, rendering it dead in the Senate and with the White House. Senator Steny Hoyer (D-MD), the ranking member on the subcommittee that approved the bill, spoke out against it noting that the IRS generates between $5 and $9 in revenue for every $1 spent on enforcement.
We expect the debate on IRS funding will continue through FY25 appropriations negotiations and into the larger TCJA debate.
Employee Retention Credit
Recently, the IRS released staggering information on the current state of ERC claims. After a review of over one million outstanding claims the IRS found they fell into the following risk profiles:
| Relative Risk Level | Percentage | Risk Criteria |
| Highest Risk | 10 – 20% | Showed “clear signs of being erroneous” |
| Medium Risk | 60 – 70% | Showed “an unacceptable level of risk” |
| Lowest Risk | 10 – 20% | Showed “no eligibility warning signs” |
The highest risk claims will be denied, the IRS will begin paying the lowest risk claims on a first-in-first-out basis, albeit at a slower pace than refunds paid during the pandemic, and the medium risk claims will be subject to additional scrutiny and analysis. The current backlog of eligible claims totals 1.4 million. Meanwhile the moratorium on claims submitted after Sept. 14, 2023, remains in place.
Read our recent alert for a more detailed analysis of the current state of the ERC program, including processing concerns, the withdrawal program and IRS enforcement activities.
Election politics
In the June edition, we discussed the TCJA’s expiring provisions, political platforms heading into the 2024 election and the potential impact of both on future tax policy.
In recent weeks, candidates and party leaders have offered commentary and suggestions for changes to the tax code, often focusing on the impending fiscal cliff the US will face in 2025 due to sunsetting TCJA provisions. While there is some variation among proposals, most candidates and lawmakers generally align with their party platforms (which you can read more about in our June edition).
Regardless of the outcome of the 2024 election, negotiations over the extension of TCJA policies are likely to prove difficult. With a price tag of $4.6 trillion over 10 years, as estimated by the nonpartisan Congressional Budget Office, even a Republican sweep is unlikely to result in a blanket extension of the TJCA. Everything, even current permanent tax policies, will be on the table during negotiations. Lawmakers will need a bicameral, and possibly bipartisan, compromise addressing key questions, including:
- What do we want to extend? What can we let expire?
- How much of the package needs to be paid for? How much are we willing to deficit finance?
- What revenue raisers, if any, will be most effective and can get the requisite votes to pass both chambers?
And while there is hope and an urgent need to address this looming fiscal cliff, we must also consider the possibility that Congress will not be able to come to a resolution before the sunsets take effect.
We will continue to provide additional details and analysis of tax proposals as the general election approaches and on the state of negotiations thereafter.
Questions?
If you have questions, please reach out to your Baker Tilly tax advisor to discuss the impact of our tax policy updates.
Publisher’s Note: We will not have an August Policy Pulse edition. We’ll be back in September with more key tax policy news and analysis on legislative and regulatory tax developments.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
