President Biden recently released a new $2 trillion “American Jobs Plan.” As part of this infrastructure plan, he also released a “Made in America Tax Plan” to help pay for the spending measures in the infrastructure plan. The goals of the tax plan are “to incentivize job creation and investment here in the United States, stop unfair and wasteful profit shifting to tax havens, and ensure that large corporations are paying their fair share.” These sweeping tax proposals would impact various industries and taxpayers.
The tax plan notes that a broader enforcement initiative will be announced in the coming weeks to address “tax evasion” among corporations and high-income Americans. The IRS dramatically ramped up enforcement in the early years of President Obama’s presidency. Large increases in funding led to an IRS hiring surge that increased enforcement efforts and brought in additional revenues. The tax plan follows a similar approach.
Key Takeaway: Although the increase in the enforcement budget may allow the IRS to increase its workforce, the IRS will likely face challenges to hire and train more qualified revenue agents due to its pay scale. Without an increase in pay, the IRS will continue to struggle to compete with the private workforce for qualified agents. We have found that less qualified agents may lead to less predictable results with the IRS failing to understand the complexity of certain issues or focusing on the wrong issues. Experienced tax controversy attorneys with a proven track record and established relationships with the IRS can help avoid this.
We can expect that increased IRS funding and focus on enforcement will lead to more audits across the spectrum of taxpayers. For example, the IRS recently unveiled a section of their website dedicated to partnership audits as the Bipartisan Budget Act of 2015 partnership audit rules are effective generally for tax years beginning after Jan. 1, 2018. In addition, the Tax Cuts and Jobs Acts of 2017 (TCJA) generally became effective for the 2018 tax year and beyond. The TCJA includes a number of provisions that the IRS will likely target in their round of enforcement initiatives. Taxpayers’ next audit cycles will likely see an increase in audits in both of these areas.
Key takeaway: As audit risk increases, it pays to be proactive in taking steps to minimize the costs of a potential audit. Among other things, taxpayers might consider taking the following proactive steps:
- Involve an experienced tax controversy lawyer at the planning and implementation stage. This can save a great deal of heartburn in the event of a future audit. Well-advised taxpayers can carefully document important facts that may later prove decisive in the defense of an audit.
- Obtain an opinion letter. This may allow a taxpayer to avoid penalties if a tax position is not successful. The cost of an opinion letter becomes more worthwhile when an audit is more likely to occur.
Many of the goals of the tax plan are to be accomplished through the expansion of existing tax credits and the creation of new tax credits. For example, the tax plan includes the following:
- An elimination of certain tax preferences for the fossil fuel industry.
- A 10-year extension and phase down of an expanded investment tax credit (ITC) and production tax credit (PTC) for clean energy generation and storage, as well as a direct-pay option.
- A revised and expanded section 45Q tax credit for carbon capture and sequestration, making the credit direct pay and easier to use in industrial applications, direct air capture activity, and retrofits of existing power plants.
- A new investment tax credit to incentivize buildout of high-voltage capacity power lines.
- A new production tax credit that would be available to clean energy investments, such as decarbonized hydrogen projects, if located in distressed communities.
Key takeaway: The IRS Examination Division has been very active in the tax credit space. IRS challenges have generally focused on the proper allocation of costs to eligible assets and activities. We expect continued scrutiny of cost allocations under these new and expanded tax credits. Given the tax plan’s emphasis on expanding investment in the U.S. while preventing the shifting of investment abroad, the IRS may also focus on ensuring that credits relate to costs incurred for activities in the U.S.
TCJA Tax Provisions
The tax plan also intends to raise significant additional revenues by the revocation or modification of a number of the provisions provided for in the TCJA, including:
- Increase the taxes imposed on global intangible low-taxed income (GILTI).
- Deny deductions to foreign corporations for payments that could allow them to move earnings out of the U.S. This proposal apparently would replace the base erosion and anti-abuse tax (BEAT) and would be coupled with efforts to encourage other countries to adopt a corporate minimum tax.
- Eliminate the corporate tax deduction for foreign-derived intangible income (FDII) and use the resulting revenue to expand “more effective” research and development investment incentives.
Key takeaway: If the tax plan is implemented, taxpayers may find that the IRS is particularly focused on these TCJA provisions for the years post-2017 given the Biden administration’s push to discourage the diversion of income away from the U.S. In addition, because these provisions are all new, taxpayers will likely need more guidance than usual on the most effective methods to reach a favorable outcome on audit for these issues.
Emphasis on Offshore Activities
In addition to the broader enforcement initiative, the focus on perceived offshore abuses in the tax plan suggests that enforcement with respect to foreign assets will continue to be a priority.
The following areas appear particularly likely to receive additional attention:
- Expansion of Global High Wealth Program. The IRS has announced an expansion of its global high wealth program, which covers audits of enterprises (both domestic and foreign partnerships, corporations, trusts, and similar structures) controlled by individuals with assets or earnings in the tens of millions of dollars. Last year the IRS’s Large Business and International (LB&I) Division publicly disclosed that it was getting ready to start audits of several hundred high wealth individuals through this program. This also dovetails into the LB&I “High Income Non-filer” campaign, amongst others.
- Foreign Account Tax Compliance Act (FATCA) and Related Issues. FATCA generally requires that foreign financial institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding. Several of the active LB&I campaigns show a focus on FATCA and related issues, including:
- ensuring that entities with FATCA reporting obligations comply with those obligations;
- addressing tax noncompliance related to foreign bank accounts (FBAR reporting);
- increasing tax compliance by nonresident aliens with respect to sales of real property in the U.S. and other issues relating to nonresident aliens; and
- addressing noncompliance with respect to reporting of foreign trusts.
- Virtual Currency Transactions. Another active LB&I campaign seeks to address tax-noncompliance involving virtual currency. The IRS has taken the position that virtual currency is treated as property for federal tax purposes and thus taxpayers recognize a gain or loss when selling or exchanging virtual currency, including non-fungible tokens (NFTs). The IRS has been actively seeking information on transactions in virtual currency by issuing summonses to virtual currency exchanges. The Financial Crimes Enforcement Network (FinCEN) also recently announced that it intends to propose regulations on the Report of Foreign Bank and Financial Accounts (FBAR) to include virtual currency as a type of reportable account.
The IRS may increase tax revenues by simply renewing collection efforts for amounts already due from taxpayers. Increased collection activity will lead to more foreclosures, judgments, levies, and liens against taxpayer assets. An experienced tax controversy lawyer may provide critical assistance in negotiating a suitable collection alternative.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Richard Husseini and Jon Feldhammer are partners at Baker Botts. Husseini chairs the firm’s tax department. Feldhammer, a former IRS senior trial attorney, works on complex tax controversies.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.