Narrow tax guidance on some parts of recently enacted coronavirus relief has sparked criticism that the IRS and Treasury aren’t interpreting the law correctly.
Initial guidance limiting the benefits of two measures—a tax break for businesses that retain employees and a new loan program for small businesses—drew the ire of lawmakers on both sides of the aisle and, in one of those cases, forced Treasury to reverse its position. Meanwhile, scholars and tax practitioners have expressed skepticism about FAQs that say incarcerated and recently deceased people aren’t eligible for stimulus payments and should return that money.
Some of the IRS and Treasury interpretations don’t align with what Congress intended and threaten to take pandemic relief out of the hands of those who need it the most, lawmakers have said in letters to officials. Disagreements on these issues, especially if they lead to changes to informal guidance like FAQs that aren’t always widely publicized, can make it difficult for businesses to make decisions about their workforce and operations, according to tax practitioners that formerly worked in the government and on Capitol Hill.
The disconnect between Treasury and IRS and lawmakers highlights the challenge department officials often face with new laws—interpreting aspects that aren’t 100% clear, while staying within the bounds of what they believe they’re legally authorized to do.
“When I was at Treasury and we were writing regulations, sometimes Congress would hammer us,” said Tom West, a former Treasury official who now works as a principal in KPMG LLP’s Washington National Tax practice.
It is difficult for Treasury and the IRS to win in these situations “because if they go very broad, sometimes they get congressional pushback, and if they go too narrow, they get pushback,” West said.
It is a little surprising that the IRS and Treasury weren’t more aligned with Congress on some of these stimulus measures, because interpretive issues are often hashed out before anything is released publicly, said Ronald Dabrowski, a principal in KPMG LLP’s Washington National Tax practice who formerly worked at Treasury and as a Senate Finance Committee staffer.
The IRS didn’t return requests for comment on the guidance that lawmakers and others have criticized as being too narrow.
Treasury’s usual inclination is to start narrow to avoid potential abuse, and then to expand guidance as it gets comments, but these aren’t normal times, West said. That is why some people may have assumed the department would be more liberal interpreting the new laws, knowing from a policy perspective the stimulus measures were meant to be generous and to shore up businesses that are struggling because of Covid-19, he said.
The IRS and Treasury did reverse course on the employee retention credit, meant to encourage businesses to keep employees on their payroll during the coronavirus pandemic. The agency updated its FAQs May 7, after getting a letter from House and Senate leaders criticizing the initial guidance, which barred employers from receiving the credit if they continued to provide health insurance, but no other wages, to furloughed workers.
A Treasury spokesperson said that, with respect to the employee retention credit, the department is continuously working closely with members of Congress, and issuing guidance as needed to ensure the relief is working as intended to benefit Americans.
Treasury has been slower when it comes to a concern about its decision in a recent notice to bar businesses from deducting expenses that are normally deductible under the tax code if they are reimbursed by a Paycheck Protection Program loan that was forgiven. The department in a letter May 7 said it would consider concerns lawmakers have raised but made no promises to change its guidance.
Kevin M. Jacobs, a former IRS official who is now managing director and National Tax Office practice leader at Alvarez & Marsal Taxand LLC, said he understood why the agency took the approach it did initially with both provisions, especially with deductible expenses covered by PPP loans.
Congress didn’t turn off the application of tax code Section 265, which prohibits deductions for expenses that are allocated to income that isn’t subject to tax. It’s easy to see why the IRS and Treasury determined they didn’t have authority to allow deductions for expenses reimbursed by PPP loans, Jacobs said.
Payments to Incarcerated, Deceased
FAQs on stimulus payments established in the CARES Act (Public Law 116-136) have also received criticism from some scholars and practitioners for instructing incarcerated and deceased individuals to return money they have received.
“There’s nothing in the language of the CARES Act that bars prisoners,” said Samuel Brunson, a professor at Loyola University Chicago School of Law.
He said the FAQs suggest the IRS is basing its position on the Social Security Act, which bars certain monthly Social Security payments from going to some prisoners.
“But that provision isn’t referenced in the CARES Act and it isn’t referenced in the Internal Revenue Code,” Brunson said.
Incarcerated individuals can consider keeping their payments because of the “complete lack of statutory authority” to force them to return the money, said Patrick W. Thomas, director of Notre Dame Law School’s Tax Clinic.
Thomas was also skeptical of rescinding payments made to individuals who died in 2020.
“There’s nothing in the statute that would restrict the refundable credit for the tax year 2020 for those taxpayers,” he said.
Former National Taxpayer Advocate Nina Olson said it wasn’t clear why qualifying widows or widowers, who are able to retain the benefits of filing a joint return for two years after the year their spouse dies, wouldn’t be eligible for the payment meant for their deceased husband or wife.
The government should provide a legal explanation for why such individuals should return the money, Olson said.
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