Treasury Assistant Secretary for Tax Policy Ken Kies said at a conference on March 10 that Treasury does not anticipate proposing any new tax provisions when the administration releases its budget proposal this spring.
“Right now, the administration feels very comfortable with the bill enacted by the president July 4,” Kies said.
Kies’ comments underscore the tough road ahead for the enactment of tax legislation this year as congressional action bogs down. Democrats unveiled three bills on tax issues before the midterm elections that are unlikely to move. Bipartisan action remains possible – for example, the Senate recently passed a bill targeting Russian foreign tax credits. But increasingly, lawmakers are turning to messaging bills as IRS action takes center stage. Treasury and IRS officials doubled down on the current leadership structure despite legal concerns, and they are focused on guidance, enforcement, and global negotiations.
Congressional Morass
The Senate spent the week of March 16 debating the Safeguard American Voter Eligibility Act, which Democrats strenuously oppose, and disagreement over that bill could potentially hold up other legislation. President Donald Trump urged Senate Republicans to change Senate rules to require a “talking” filibuster and threatened not to sign any legislation until the SAVE Act is enacted. But Senate Majority Leader John Thune, R-S.D., has indicated he will likely move on to other legislative priorities after ending consideration of the SAVE Act.
Funding for the Department of Homeland Security lapsed on February 14 and negotiations remain sluggish. Travel delays tied to staffing shortages at the Transportation Security Administration could increase pressure on lawmakers to reach a compromise. The Senate passed a bipartisan housing bill on March 12 by an 89-10 vote, but major differences between the House and Senate versions are threatening to derail the measure. Republicans have discussed adding tax proposals to address housing affordability, but so far there are no tax provisions on either the House or Senate bill.
Thune said on March 8 that he wants to make progress on a digital asset market structure bill after voting on the SAVE Act, which could create a vehicle for tax legislation. A dispute between banks and the crypto industry over stablecoin rules has held up the bill. If broader digital asset legislation advances, action on tax issues could follow:
BDO Insight
Tax administration provisions, extenders, and digital asset legislation remain the most plausible tax priorities to move this year, but action will only become more difficult as the midterm elections approach.
Senate Passes Bill Denying FTC for Russian Taxes
In a rare moment of bipartisan agreement, the Senate on March 10 approved legislation (S. 327) by unanimous consent that would deny taxpayers a deduction or foreign tax credit for taxes paid to Russia. The bill would be effective for FTC purposes for periods beginning 30 days after enactment.
BDO Insight
House action is possible this year, but no vote has been scheduled. The bill would be effective for deduction purposes for taxes paid or accrued 90 days after enactment.
Reconciliation
House Republicans emerged from a Florida retreat on March 9 pledging to pursue a second reconciliation bill, but there is little agreement on what to include or how to fund it. The administration does not appear to be pursuing a new tax platform, and House Ways and Means Committee Chair Jason Smith, R-Mo., has been consistently dismissive of the effort. Thune has expressed both openness to the idea and skepticism that it is feasible. Republicans have recently discussed pursuing a narrower bill focused on a single issue, such as providing Iran military funding, increasing other defense spending, or pursuing targeted spending cuts.
BDO Insight
Republicans’ razor-thin House majority will make it difficult to move a reconciliation bill. Tax does not appear to be the focus of legislative efforts for now, but any reconciliation bill could provide an opportunity to advance tax provisions.
Democratic Priorities
Democrats have unveiled two new tax bills highlighting key priorities following the wealth tax proposal offered by Sen. Bernie Sanders, I-Vt., and Rep. Ro Khanna, D-Calif. The Keep Your Pay Act from Sen. Cory Booker, D-N.J., would more than double the standard deduction and increase the child tax credit and earned income tax credit. Booker’s announcement indicated it would be “fully paid for” by “closing unfair tax loopholes,” but the bill’s text is not yet available. The Working Americans’ Tax Cut Act offered by several Democrats would use a surtax on income exceeding $1 million to provide exemptions for lower-income taxpayers.
Client Implications: The bills are largely messaging exercises while Trump remains in office, but they could draw attention ahead of the midterm elections and the next presidential cycle.
Treasury Secretary Drops Acting IRS Commissioner Title
The IRS has announced that Treasury Secretary Scott Bessent is no longer acting IRS commissioner after surpassing the 210-day limit under the Federal Vacancies Act. The IRS said that as Treasury secretary, Bessent retains the authority to perform the functions and duties of the IRS commissioner, but that IRS CEO Frank Bisignano will continue to run day-to-day operations. Kies said recently that Bisignano can perform all the functions of the commissioner except for three that cannot be delegated.
“It’s a permanent situation for the foreseeable future,” Kies said recently of Bisignano running the IRS as CEO.
Bisignano came under fire from lawmakers of both parties at a hearing before the House Ways and Means Committee on March 4. The IRS CEO defended the cancellation of collective bargaining agreements with IRS and Treasury employees, stating it would not negatively affect them. The IRS has reassigned thousands of IT and human resources employees as tax examiners or customer service representatives for the filing season. Bisignano also denied receiving instructions from the White House to target colleges and universities for tax-exempt audits based on race and admissions.
BDO Insight
Bessent shedding the title of acting commissioner likely avoids concerns that IRS actions could have been invalidated when he exceeded the 210-day limit in the role. Democrats have also argued that the administration is skirting the nomination process, but the controversy has had little practical impact on taxpayers.
Kies Warns of Partnership Enforcement
Kies also said at a recent conference that despite the reversal of basis-shifting guidance, the IRS is “actively pursuing” partnership transactions that violate the economic substance doctrine.
BDO Insight
The comments suggest that the IRS may not plan to rescind Rev. Rul. 2024-14, which applies the economic substance doctrine to basis transactions and has been criticized by taxpayers. Despite recent IRS job losses and funding cuts, partnership enforcement remains an agency priority. Partnerships should verify that they are properly tracking capital accounts and addressing other partnership issues.
Treasury Seeks to Reset Pillar One Talks
Treasury officials indicated recently that the administration wants to start from scratch on global discussions over taxing the digital economy.
“Let’s challenge the assumptions, let’s challenge whether the problem we thought we were solving for exists — is different, is bigger, is smaller,” said Rebecca Burch, deputy assistant secretary for international tax affairs at the Treasury Department.
Pillar One is an initiative from the Organisation for Economic Co-operation and Development (OECD) to reach a global agreement on digital taxation, but the effort stalled years ago.
BDO Insight
Given the effort involved in the first failed attempt and the delicate state of global trade matters, other countries may have little appetite to re-engage in global talks on digital taxation. In the absence of a global agreement, many foreign countries will continue to impose or pursue unilateral digital services taxes.