Hard Part Begins for IRS and Treasury as Biden Signs Reconciliation Bill
With the Inflation Reduction Act officially law, former tax officials and other observers are cautioning that a difficult road lies ahead for Treasury and the IRS as they work to provide much-needed guidance on the law’s tax provisions.
President Biden signed the Inflation Reduction Act (H.R. 5376) into law at the White House August 16, marking a major political victory for the administration and congressional Democrats after months of setbacks and enshrining into law several significant tax proposals.
However, a key concern is the ability of the IRS and Treasury to issue guidance on those provisions before they go into effect. The list includes a new 15 percent corporate alternative minimum tax, a 1 percent tax on stock buybacks, and tax credits for clean energy use and production.
Eric Solomon, a former Treasury assistant secretary for tax policy under President George W. Bush, told Tax Notes it’s important for the IRS and Treasury to figure out which provisions are most in need of guidance, singling out the corporate AMT.
“It will have an effect on the planning and modeling for companies,” Solomon said of the tax, adding that firms will need to know soon if they are subject to it because it is effective at the start of 2023.
Solomon, now with Steptoe & Johnson LLP, also highlighted the organizational constraints at Treasury and the IRS. He said that because most of the tax measures in the law focus on domestic concerns, the guidance will largely be drafted by the Treasury Office of Tax Policy, which he said “doesn’t have a lot of people at the moment.”
As for the IRS, Solomon noted that most of the personnel in the Office of Chief Counsel are lawyers, not accountants, which could make issuing guidance on the corporate AMT difficult. “There will need to be a learning curve for people to become experts on financial statements and accounting,” he said.
Howard Gleckman of the Urban-Brookings Tax Policy Center pointed out that none of the additional IRS funding in the act is for new regulatory writing, adding, “They’re going to have to scramble to use the staff they have.”
Gleckman predicted that, judging by the timeline of guidance following enactment of the Tax Cuts and Jobs Act, regulatory guidance on the Inflation Reduction Act will be slow. “If you look at the TCJA, it took more than three years to write all the guidance regulations for that,” he said. “More and more, Congress passes legislation and leaves it to Treasury to fill in the blanks.”
Mark Mazur, a former Treasury assistant secretary for tax policy under Biden and under former President Obama, hailed the added funding for the IRS, saying the extra resources will help transform it.
“It’s a potential game changer for the IRS. . . . They have the opportunity to reimagine what they want to be like over the next decade,” he said , emphasizing the importance of “resurrecting” the agency’s enforcement resources.
But others warned of the potential challenges of a newly funded IRS.
Speaking on an August 16 webcast, David Sites of Grant Thornton LLP called the additional IRS funding the “sleeping giant” in the reconciliation bill and argued that the agency’s investment in technology will play a pivotal role in both return preparation and enforcement.
“It will be interesting to see how their technology development affects how firms respond,” Sites said, musing that many will wonder how to defend themselves in “a high-enforcement environment.”
Over the past several months, Treasury and IRS officials have lobbied Congress for more resources, saying the IRS is plagued by outdated technology and a lack of resources, leaving it unable to adequately combat tax fraud and clear a backlog of returns.
After Biden signed the legislation, IRS Commissioner Charles Rettig issued a statement calling the signing “a transformational moment for our agency — and an opportunity for the future of tax administration as well as IRS employees.”
However, Rettig cautioned that changes won’t happen overnight, noting that the funding is spread over 10 years. “Make no mistake—we have a lot of hard work in front of us to deliver on the high expectations this historic funding will provide,” he said.
At the bill signing ceremony, Biden promoted the Inflation Reduction Act’s corporate AMT and energy credits and said the bill wouldn’t raise taxes on Americans earning less than $400,000.
“We are cutting the deficit to fight inflation by having the wealthy and big corporations finally begin to pay part of their fair share,” Biden said.
Republicans have blasted the deal, saying the package will trigger a recession and that despite what Democrats say, it will actually increase taxes on those making less than $400,000 per year.