IRS Funding Cuts, Taxpayer Data, and Clean Electricity Tax Credits
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Tax Policy/News:
June 4: House GOP proposes IRS funding cuts, defunding free tax filing system
House Republicans are pushing to cut IRS funding and dismantle its newly established free online tax filing system.
The recent House Appropriations Committee's financial services bill intends to restrict any development of government-run tax software that hasn't been expressly authorized by Congress.
Additionally, it proposes a significant reduction in the IRS budget for 2025, lowering it by $2.2 billion from the previous year to $10.1 billion, with a notable $2 billion cut from enforcement funding.
This move has sparked strong opposition from Democrats, who criticize the potential elimination of the free IRS tax filing option and argue that the cuts will prevent effective enforcement and modernization of the tax system.
This plan follows a broader trend of trimming the IRS's budget, including a significant $20 billion reduction agreed upon last year to prevent U.S. debt default.
The IRS has decided to make Direct File a permanent option for filing federal tax returns starting in the 2025 tax season, following a successful pilot in 2024 that included 140,803 taxpayers across 12 states.
This decision is part of an effort to expand eligibility and enhance accessibility to more taxpayers nationwide, addressing a variety of tax situations and collaborating with all interested states.
Feedback from a wide range of stakeholders, including hundreds of organizations and Congress members, has highlighted the demand for a reliable, no-cost electronic filing option.
The IRS plans to continue refining Direct File, based on extensive data analysis and stakeholder feedback, emphasizing accuracy, user experience, and comprehensive tax credit uptake to ensure correct returns and optimal refunds.
The initiative is seen as a step forward in the IRS’s digital transformation, making tax filing easier and helping taxpayers save on preparation fees.
May 28: IRS update: Boosting alternative dispute resolution, and more
The Internal Revenue Service (IRS) is concerned about the underutilization of its Alternative Dispute Resolution (ADR) process, which is designed to resolve disputes more efficiently than the standard appeals process.
During the IRS's National Public Liaison meeting in Washington, D.C., it was noted that the ADR process not only resolves disputes more quickly but also enhances compliance from both parties.
Despite its advantages, usage of ADR is declining, prompting the IRS to form a cross-functional team to explore improvements and encourage more taxpayers to opt for this method.
The meeting also covered topics such as promoter investigations, the success of the filing season, and the role of the Stakeholder Liaison in aiding practitioners.
Additionally, there was a focus on the need for better public education and internal training to boost ADR engagement, and discussions on how the Office of Fraud Enforcement is working to clarify the line between tax planning and fraud.
Economic News/Policy:
May 31: Businesses take aggressive tax positions when IRS budget declines
A recent study published in the American Accounting Association's Journal of Forensic Accounting Research indicates that companies adapt their tax strategies based on the budget of the Internal Revenue Service (IRS), becoming more aggressive in their tax positions when the IRS budget is reduced.
The research, coauthored by professors Danielle Stanley and Hannah Smith Antinozzi, suggests that firms are likely to exploit lower IRS budgets to push bolder tax strategies, possibly increasing the risk and incidence of tax fraud.
The study examined data from nearly 11,000 companies over a decade, correlating their tax aggressiveness to IRS budget projections rather than past audit rates.
This shift in strategy in response to IRS funding cuts underscores the need for careful allocation of audit resources to deter tax fraud effectively.
The IRS, aware of these dynamics, is planning to enhance audits on large corporations and wealthy individuals, significantly bolstering its workforce and expertise to manage these challenges.
May 30: CBO Analysis of Taxpayer Race Data Shows Disparities
The Congressional Budget Office (CBO) reported that while more Black and Hispanic taxpayers received the Earned Income Tax Credit (EITC) than white taxpayers in 2018, white taxpayers received significantly higher total payments from it, amounting to approximately $10 billion more.
This discrepancy occurred despite the fact that over 30% of all filers with an adjusted gross income below $50,000 qualified for the EITC.
The CBO's findings, part of a broader effort to explore the intersections of race, ethnicity, and tax benefits, also align with earlier studies revealing racial disparities in tax expenditures.
The CBO detailed in their findings that, “on an overall per capita basis…the preferential rates for capital gains and dividends, deduction for pass-through income, charitable deduction, home mortgage interest deduction, and deduction for employer-provided health insurance disproportionately benefit White families” while, “in contrast, Black and Hispanic families, who make up a disproportionate share of low-wage workers, disproportionately benefit from the Earned Income Tax Credit, which is designed to help low- to moderate-income workers and their families.”
The CBO's ongoing work, which includes comparing different statistical methods and planning further research on household income distributions, aims to enhance understanding of how tax policies affect diverse demographic groups, responding to congressional inquiries about the racial and ethnic impacts of the U.S. tax system.
May 30: Trump tax cut extensions keep getting more expensive: Analysis
The Committee for a Responsible Federal Budget (CRFB) has highlighted an unexplained increase in the projected cost of extending former President Trump's tax cuts, now estimated at over $4 trillion by 2028, up from around $3 trillion when the tax laws were initially passed.
This 33 percent increase surpasses what would be expected from economic growth and inflation alone, with the cost as a share of GDP rising about 30 percent since 2018.
Factors contributing to this rise may include tax evasion and the misuse of revenue expanders from the 2017 tax legislation, particularly the abuse of the pass-through deduction and workarounds involving state and local tax caps.
Additionally, the IRS has recently intensified its compliance efforts by establishing a new department targeting uncollected taxes from pass-through entities and complex partnerships, responding to the increase in pass-through filings and a decline in corporate audits over the last decade.
Technology:
May 22: NSF’s pilot program to create partnerships between industry and researchers at emerging institutions
The U.S. National Science Foundation (NSF) has launched a $1.2 million pilot project, led by the AI-powered platform Halo, to foster new collaborations between emerging research institutions and industry innovators, particularly in materials science and engineering.
This initiative aims to enhance the commercialization of breakthrough technologies by democratizing access to industry partnerships for institutions traditionally receiving less than $50 million in federal research funding.
Through Halo, which has already engaged thousands of academic and industrial researchers since its 2020 inception, the NSF seeks to streamline the connection process between corporate R&D teams and academic scientists, overcoming the traditional barriers of geographic and reputational limitations.
This effort aligns with strategic goals outlined in the CHIPS and Science Act of 2022 and is viewed by the NSF as a testbed for improving its research funding and innovation strategies, with potential for scaling if successful.
Energy and Environmental Policy/News:
May 29: Imagining the far future of energy at the DOE’s ‘moonshot factory’
ARPA-E, the Energy Department's R&D wing, is actively seeking innovative solutions to reimagine the future of the U.S. energy landscape beyond fossil fuels, as explained by director Evelyn Wang.
The agency's initiative involves funding groundbreaking projects that explore both existing and emerging carbon-free energy sources, such as fusion and geologic hydrogen, and novel methods for their deployment.
Additionally, ARPA-E is focused on developing an efficient "intermodal superhighway" for transferring various forms of energy across the country with minimal loss, transitioning from traditional, polluting systems to more sustainable conduits like hydrogen pipelines or thermal energy networks.
Furthermore, the agency aims to revolutionize the production of materials currently derived from fossil fuels, potentially utilizing technologies that repurpose carbon or employing biological processes with microbes or algae.
This forward-thinking approach encourages open-ended proposals that could lead to significant advancements in clean energy and material science, reflecting ARPA-E's commitment to solving complex, long-term energy challenges.
May 29: Treasury, IRS propose guidance on clean electricity tax credits
The Treasury Department and IRS have unveiled proposed guidelines for the Clean Electricity Production Credit and Clean Electricity Investment Credit – essential components of the Inflation Reduction Act designed to stimulate renewable energy projects beginning after 2024.
Replacing existing tax credits, these new credits aim to support facilities that demonstrate net-zero greenhouse gas emissions, detailing qualifications for a broad spectrum of technologies, including wind, solar, hydropower, and nuclear.
The guidelines extend to the criteria for energy storage and necessitate a detailed lifecycle greenhouse gas analysis for technologies relying on combustion or gasification.
Importantly, the proposed rules retain the framework of previous credits to offer developers continuity and also address the financial inclusion of interconnection costs for clean energy facilities.
A public comment period and hearing are set for the next few months, emphasizing the administration's commitment to transparent development of these regulations and reinforcing the tax policy as a pivotal element of U.S. climate strategy.
May 28: Biden administration issues guidelines on carbon credit integrity
The Biden administration introduced new guidelines on Tuesday to enhance the credibility and effectiveness of carbon credits or offsets, which are voluntary tools used by individuals, businesses, and other entities to achieve net-zero emissions by investing in environmental projects like tree planting or preservation.
These guidelines emphasize that carbon credits must represent real, additional, and permanent reductions in carbon emissions, verified by independent third parties.
The administration also advocates for corporate purchasers to reduce their direct emissions and disclose their credit details transparently. These steps aim to address issues like double counting and the uncertainty about the permanence and effectiveness of tree preservation efforts.
National Climate Adviser Ali Zaidi emphasized that these principles would counteract greenwashing and mobilize significant capital towards meaningful emissions reduction and job creation.
The guidelines align closely with the principles of the Integrity Council for Voluntary Carbon Markets (IC-VCM), receiving support from influential figures like Treasury Secretary Janet Yellen, who highlighted the need for real emissions reductions and guardrails to minimize negative impacts and maximize local co-benefits.
For Fun:
May 28: Ancient Egyptians tried to treat cancer 4,000 years ago, cut-marked skull indicates
Researchers have uncovered evidence that ancient Egyptians attempted surgical treatments for cancer more than 4,000 years ago, as indicated by cut marks surrounding both primary and metastatic cancer lesions on a skull dating from between 2686 and 2345 B.C., part of the University of Cambridge's Duckworth Collection.
This discovery predates the earliest known references to cancer in the Edwin Smith Papyrus by over a thousand years.
Additionally, the analysis of another skull from a woman showing signs of trauma alongside cancerous lesions suggests that while ancient Egyptian medicine could manage trauma, effective cancer treatments eluded them.
These findings, published in the journal Frontiers in Medicine, may redefine the origins of modern medicine and highlight the long-standing human endeavor to understand and treat cancer.