In case it is of interest to you, something I started doing in 2007 (same year I started this blog) was maintaining a website of tax reform hearings of the 110th Congress and have done so through today finally getting a webpage for the 118th Congress (which started in January 2023) posted today. I use the term “tax reform” broadly here as just about any tax hearing, even the typical April ones to debrief about the filing season can lead to reforms.
The website for the 118th Congress with links back to 110th is here – https://www.sjsu.edu/people/annette.nellen/website/118th-hearings.htm
Unfortunately, some older links on some of the pages are broken because the URLs were changed perhaps due to website redesigns or change in controlling party of the committees. But if you do a web search using the name of the committee, hearing and year, you likely will find the information.
Of interest for the 118th Congress so far is one on the child tax credit which was created in 1997 and its expansion continues to be debated along with other possible tax changes, perhaps as part of appropriation bills. There are also a few on international tax reform.
I started doing this because in my teaching, research and writing on tax policy and reform, I often find interesting items and ideas in the testimony as well as just viewing the topics covered. Having the website with the tax hearings all in one place is helpful – and I’m glad to share.
What do you think? Professor Annette Nellen
Here is another suggestion from the testimony I submitted for the written record of a Senate Finance Committee and Small Business and Entrepreneurship Committee roundtable held 6/7/23 (see links at my 8/13/23 post).
This one has also been suggested by the AICPA including in letters I signed when chairing the AICPA Tax Executive Committee a few years ago, so it has been around for awhile. It would be a terrific simplification because I think that since the Tax Reform Act of 1986 stated that a tax shelter as defined under IRC Section 448 must use the accrual method regardless of gross receipts level, I think this is likely one of the most overlooked provisions in the law. The additional accounting method simplification added by the TCJA of 2017 further highlighted that a “tax shelter” can’t use the favorable methods.
The simplification recommendation:
One way an entity might be a “tax shelter” is meeting the definition of a syndicate as defined at IRC Section 1256(e). This definition pre-dates state law changes that allow the LLC business entity. A business that meets the definition of a “tax shelter” will not be allowed to use simpler accounting methods but instead will be required to use the accrual method, inventory accounting rules, and the uniform capitalization rules of IRC Section 263A.
Today, a small business might be formed as an LLC with financing provided by some owners who will not be involved in running the business. If over 35% of losses are allocated to limited entrepreneurs (inactive owners), the entity is a tax shelter even though it is running a real business (and might just have start-up losses or some bad years). The definition needs to be modernized such as to only be defined as a tax shelter per IRC Section 6662(d) (having a significant purpose of tax avoidance or evasion).
What do you think? Professor Annette Nellen, San Jose State University
Yet more from the testimony I submitted for the written record of a Senate Finance Committee and Small Business and Entrepreneurship Committee roundtable held June 7, 2023 (see my posts of 7/9/23 and 7/2/23 and 6/25/23). Another way to simplify tax rules for small businesses (such as ones operating out of the owner’s home) and modernize tax rules is to remove the exclusive use requirement for the home office deduction.
Modern life makes it unlikely that anyone uses a home office only for business activities. Most people, for example, have a smartphone in their hands and might get a personal call or text message or use a weather app while in their home office.
An alternative would be to allow a home office deduction only if the space is used over 50% for business and to reduce the deduction based on the percentage of personal use of the space, such as based on time. Offering a standard home office deduction, such as allowed by Rev. Proc. 2013-13, would be helpful, with the amount adjusted annually for inflation (and no exclusive use requirement, but adjusting the standard deduction for the percent of personal versus business use of the space based on an average week of use).
What do you think? Professor Annette Nellen, San Jose State University.
A Tax Court Summary Opinion of June 26 on the mortgage interest deduction for 2019 when the taxpayer’s aggregate mortgage debt on their principal and second homes exceeded the debt limit included a subtle reminder about the role of IRS publications to support positions taken on tax returns. [McNamara, TC Summary Opinion 2023-22 (6/26/23)]
The taxpayer’s second home was only owned for 5 months of the year but in calculating the allowable mortgage interest deduction, performed the calculation as if owned 12 months. The taxpayer said they relied on IRS Publication 936, Home Mortgage Interest Deduction. The court relied on IRC Section 163(h) and related regulations, which it found “unambiguous” in determining the deduction as the IRS determined.
In noting that reliance on the IRS publication was “misguided,” the court added: See Miller, 114 TC 184, 195 (2000) which explains “that administrative guidance is not binding on the Court when the plain meaning of a statute is clear.” But the court did not include the quote on page 195 of that case. Here is is:
When we pay taxes, we likely think they are funding government based on the spending recommendations of elected officials as informed by the government agencies, such as the Dept. of Education, that propose budgets for funding. But this is not true for all tax revenues because some are earmarked to go to certain funds. One that might come to mind are gasoline excise taxes that primarily fund the Highway Trust Fund to build and maintain roads.
States also have various taxes often earmarked for particular causes. For example, in 1998, California voters passed Prop 10 to add a 50 cent excise tax on a pack of cigarettes. This additional tobacco excise tax was earmarked for the newly created California Children and Families First Commission for various education, health and child care projects to help children.
On July 21, 2023, CalMatters, a nonpartisan, nonprofit news organization, reported: “Californians are smoking less: Why that’s a problem for these early childhood services.” They report that by 2026, First 5 Association of California expects 30% less revenue compared to 2021. The First 5 program in Kern County also notes the funding decline in its 2022-2023 report, resulting in less services for children 5 and under.
So, it’s good that fewer people are smoking, but important programs lose funding as a result. What an odd system!
Continuing my current series of posts on addressing small business tax law complexity, here is another suggestion I included in what I submitted for the written record of a June 7, 2023 SFC and Small Business and Entrepreneurship Committee roundtable.
Promote Tax Literacy
We don’t teach about tax in K-12 or at universities other than accounting majors typically taking at least one taxation course and there might be some tax included in financial literacy curriculum available at some high schools and colleges. Given everyone’s role as a taxpayer, more is needed. To help small businesses, I suggest:
When a taxpayer requests an EIN for a new business, the IRS should at that time also send (electronically and/or by the U.S. Post Office) information about tax obligations of a business in a form understandable by a layperson.
Provide funding to the IRS and SBA to run live, online workshops for new business owners on specific topics relevant to helping the taxpayer understand their tax obligations and to ask questions.
While there are numerous publications at the IRS website that can help a new business owner understand their tax obligations, they can be overwhelming and sometimes not specific enough such as to explain estimated tax payments and information reporting obligations.
I think to generate simplification ideas, we need to look at every tax rule or calculation and ask at least two questions. First, should this rule even be part of this type of tax? After all, the federal income tax has over 160 “tax expenditures” which are special rules that are not part of the basic income tax structure (see OMB FY2024 report). Next, is there a different way to draft the rule or handle the computation? We get so used to certain rules, forms, and practices that we often act as if that is the only way something can be done.
I want to offer an example of an out of the box idea that does have some basis in an existing tax rule. I recently suggested this in comments I submitted for the written record of a June 7 joint hearing of the Senate Finance Committee and Small Business and Entrepreneurship Committee, on tackling tax complexity for small businesses. Among my suggestions, I offered this:
Allow co-owners of a start-up business to elect qualified joint venture status for the first few years.
IRC Section 761(f) allows a married couple to elect to treat a business they jointly own and operate as a “qualified joint venture” rather than as a partnership. The couple files two matching Schedules C rather than a Form 1065 partnership return. This is simpler for the couple and enables both spouses to pay into the Social Security system. [see IRS information]
Filing two Schedules C is much easier than filing a partnership return including a Schedule K-1 (as well as Schedule K-3) for each partner.
Inflation adjustments to tax rules such as the individual tax brackets and standard deduction make sense to avoid “bracket creep” where inflation might put an employee into a higher bracket despite no increased earning power and ensures an appropriate amount of income is removed from taxation (the role played by the standard deduction and personal and dependent exemptions).
But some figures, such as filing thresholds for information reports such as 1099-INT and 1099-NEC, should not be adjusted for inflation as doing so will increase non-reporting otherwise known as the tax gap (amount of tax owed less what is actually collected). There are often proposals to increase the 1099-NEC filing threshold from $600 which was set in 1954 to its inflation adjusted amount of about $7,000 today. For example, see the proposed Small Business Paperwork Savings Act introduced 6/9/23 to increase the filing threshold for Form 1099-NEC from $600 to $5,000.
According to the IRS, the tax gap is about $500 billion a year. It stems from non-reporting of income and non-payment, as well as various tax errors made in filing. The GAO, IRS and others have known for many years that “compliance is higher when there is a third-party information reporting and withholding” (page 3 of Pub 5364). More specifically, the IRS reports that where income is subject to both information reporting and withholding, the compliance rate is about 99%! In contrast, where there is little to no information reporting or withholding, the compliance rate is about 45%! [page 6 of Pub 5364]
A tax gap means that compliant taxpayers are paying more to cover what non-compliant taxpayers are not paying that they actually owe. Since it has been shown for many years that information reporting reduces the tax gap, raising the filing threshold for Form 1099-NEC will mean far fewer forms will be issued and some taxpayers such as those who keep poor records or think that if they don’t get an information form, the income isn’t taxable, will not report the income – the tax gap will rise. Compliant taxpayers will have to cover more of total taxes.
Prior to the Tax Cuts and Jobs Act made some changes to the treatment of qualified transportation fringe benefits (Section 132(f)), primarily making the employer costs non-deductible (Section 274(a)(4)), “qualified bicycle commuting reimbursement” was such a fringe benefit. That benefit was repealed for 8 years for some reason. It is not clear why it was repealed. I don’t believe its temporary repeal generated lots of revenue as it was as small fringe benefit (about $20 per month and only for 15 months per employee) and likely not offered by many employers or used by many employees.
The bicycle benefit covered the reasonable expenses of an employee for purchase of a bicycle, its improvements and repair and storage if regulary used by the employee to get from home to work and back.
Riding a bike to work isn’t an option for many workers who have long distances or unsafe routes or no biking option due to the need to use freeways to get to work. But for workers who can bike to work, isn’t that a benefit to many people? It means fewer cars on the road and less pollution. If there are already bike lanes available, better yet.
If a tax break is to be provided, why not offer a refundable credit for the purchase or a bike with reasonable cost limits and an income phase-out level?
Today marks the 16th year after I started this blog in 2007 while I was a fellow with the New America Foundation. My goal with this blog continues to be to analyze proposals and discuss ideas for helping our tax system to reflect how we live and do business today and to meet principles of good tax policy.
There are many inequities in our tax system such as special tax deductions, exclusions and exemptions that provide a larger benefit to higher income taxpayers relative to others. Examples include the mortgage interest deduction, exclusion of gains that exist at death, and the exclusion of employer-provided health insurance subsidies.
I think many of these exist because the vast majority of people don’t understand how they work. Tax literacy is low in the U.S. because we don’t teach about taxes in K-12 and even in college, accounting majors are likely the only ones to take a tax course. And tax and budget policy should be taught along with basics of how taxes work.
Today, let’s look at how the government, via our tax law, provides tax breaks for health insurance. The largest and more favorable tax benefit for obtaining health insurance is the exclusion for employer-provided health insurance. According to OMB and Treasury, the annual cost of this tax break (cost as in tax revenue not collected) is $237 billion for FY2024 (Table 3). At least 57% of individuals get health insurance from an employer. CBO estimates that 58% of employees under age 65 (156 million people) have health insurance from their employer or a family member’s employer.
This health insurance subsidy for employees is very favorable for many reasons:
The IRS started their return preparer regulation back around 2009. It was severely limited by the DC Court of Appeals 2014 decision in Loving v IRS, No. 13-5061 which concluded that 31 USC 330 did not provide the IRS or Treasury with the authority to regulate return preparers as preparing a return was not representing a taxpayer before the IRS.
Since then there have been proposals to change 31 USC 330 to give the IRS the authority to regulate return preparers. A current version of such as proposal is H.R. 2702 / S. 1209, Tax Refund Protection Act. While this sounds like something else, it would change 31 USC 330 to allow the IRS and Treasury to “certify the practice of tax return preparers” and require preparers to demonstrate competency to advise and assist person in preparing tax returns, claims for refund or other submissions related to Title 26. This should enable the IRS to resume their earlier program of requiring any paid preparer who is not an attorney, CPA or Enrolled Agent to become a registered tax return preparer by passing a test and being required to meet a specified number of hours of continuing education annually before renewing their PTIN. The proposal also specifically allows the IRS to impose an annual fee for the testing and training.
The bill goes further by imposing restrictions on refund anticipation loans and adding a new obligation at Section 7813, Disclosure requirements for tax return preparers, to provide specific information about any RAL offered to the client with a new penalty at Section 6720D, Failure to meet disclosure requirements for tax return preparers.
Why is it taking so long to make this change that has been supported by the Biden* and Trump** administrations, supported by National Taxpayer Advocates Nina Olson and Erin Collins (see background in NTA 2022 Annual Report to Congress noting the NTA recommendation dates back to 2002)?
*FY2024 Greenbook, page 181 includes a proposal to expand and increase penalties for noncompliant return prep and e-filing and authorize IRS oversight of paid preparers.
Special tax rules tend to be complex because they are “special” in that they are not part of the normal tax system and are not intended for all taxpayers and all activities. Drafting legislation and regulations to be sure the credits are used as intended, is challenging. We are seeing this with most of the energy credits added or modified by the Inflation Reducation Act of 2022. The IRS has to define many challenging terms that were not completely spelled out in the legislation, such as the value of critical minerals, battery components, and more.
I have written about some of this before and this blog post of 8/21/22 includes track changs for several of the revised credits such as the two home energy credits and the clean vehicle credit.
For the clean vehicle credit at IRC §30D, the “qualified manufacturer” has to verify most of the difficult provisions to know if the vehicle is “clean” and if it qualifies the buyer for the critical minerals credit of $3,750 and/or the battery components credit of $3,750. The provisions are complex, but some of that complexity is on the manufacturer rather than the buyer (and lots of complexity on the IRS).
For the two revised residential energy credits, the complexity falls on the homeowner (and for some elements of the credits, the tenant if they are incurring the costs). These rules are complex and are with us for the next 10 years to it is worth finding ways to simplify the process for individuals to know if they have purchased the proper property (meets the specified Energy Star or other standard). In addition, for the IRC §25C Energy Efficient Home Improvement Credit, there are different credit limits on doors versus windows versus biomass stoves, etc.
Here is one suggestion for making it simpler for individuals to know if they can qualify for the §25C credit which might also better encourage them to make home improvements that will reduce energy usage.