Washington Tax Update: Tax Reform Progress & IRS Layoffs
The month of February has brought a significant amount of news regarding both the push for new tax policy in the legislative agenda but also changes to the administrative arm of tax policy. While the news might insinuate that major changes are advancing quickly, the actual events are more nuanced. Here are some highlights and observations from the recent news coming out of Washington.
Advancing Tax Policy Legislation
The House Budget Committee recently approved a budget resolution directing the Ways and Means Committee to approve changes in tax law reducing revenues by $4.5 trillion. The budget resolution does not provide details of what changes are to be made to current tax law but rather provides budgetary placeholder amounts. Once the resolution is approved by the House, the tax writers will then begin to produce the specifics of the proposed new tax policies. The Senate Budget Committee also approved a resolution but did not include tax in the reconciliation instructions.
The challenges begin with reconciling the House approach and the Senate’s as the process requires the chambers to adopt the same resolution. The $4.5 trillion target falls well short of what many commentators have estimated the total package cost to be if everything from the campaign were included in the package. The Senate and House must come together on one bill vs. two among other issues such as some in the Senate want permanent extensions to certain provisions. The details of what will be in the agreed upon package represent more uncertainty as there are provisions that have the potential to slow down the process, such as the SALT cap among many other items.
Observation: The process is under way for tax reform, but the timeline will not be a rapid one as many have estimated that the policy adjustments could take well into the fall before the final package is ready. The bill will have more than tax included so the challenges are beyond just tax. Reconciling the policy wishes between the House and Senate members with the administration is significant, but how the provisions are scored for the rules of the budget reconciliation process will matter as well. Bottom line there are a lot of policy decisions to be made with a less than slim majority in Congress.
IRS Workforce and Budget
Prior to Trump’s inauguration, republicans have been clear on the wish to claw back additional IRS funding provided by the Inflation Reduction Act (IRA). To further the issues the IRS could face as we advance through 2025 is the administration’s push for governmental efficiency. This has impacted the IRS and its workforce through a hiring freeze, voluntary resignations, remote work changes, and now layoff announcements. The IRS will lay off over 6000 employees of which over half will come from the Small Business Self-Employed Division which focuses on taxpayers with less than $10 million in assets. The IRS has focused on hiring enforcement personnel as of late through IRA funding and hired more than 7000 to meet its 2024 goals.
Observation: The impact to examination capacity is unknown but it is important to point out that the layoffs will be from probationary employees who are new and likely still in training. The IRS had expanded to approximately 100,000 employees under the prior administration to ramp up enforcement. Taxpayers should be advised against predictions about the future of IRS enforcement as these probationary employees were likely not yet impacting the agency’s already ramping up enforcement.
