Summary
- Senate rejects clean CR passed by House, as Republicans and Democrats continue to clash on health insurance premium tax credits ahead of government funding deadline
- Committee on Ways and Means favorably reports IRS and Tax Court bills on bipartisan basis after partisan markup
- Treasury and the IRS issue proposed regulations on qualified tips under the OBBBA
- Assistant Treasury Secretary for Tax Policy Kevin Salinger previews regulatory agenda
- OECD pillars and DSTs
- Tax policy personnel
Appropriations and the ACA Health Insurance Premium Tax Credit
The federal government appears to be headed towards a shutdown at the beginning of the 2026 fiscal year starting on October 1.
On September 19, the House passed a continuing resolution (CR) to fund the government through November 21 by a margin of 217-212. The vote was mostly along party lines, except for Rep. Massie (R-KY) and Rep. Spatz (R-IN) voting against the CR, while Rep. Golden (D-ME) voted for it. The Senate took up but failed to pass either the House bill or a proposal by Senate Democrats to fund the government through October 31 combined with various health care policy changes, including extending the increased tax credit enacted in the 2021 American Rescue Plan Act for Affordable Care Act health insurance premiums scheduled to expire at the end of this year. The vote on the House-passed bill was 44-48, generally following party lines with the exceptions of Senators Paul (R-KY), Murkowski (R-AK) and Fetterman (D-PA). The vote on the proposal by Senate Democrats was 47-45. Senate procedural rules require 60 votes to move past the filibuster.
The House and Senate were scheduled to be out this week before coming back into session on September 29. But following the House vote to approve the CR, the House announced that it would not be in session on September 29 or 30. With Yom Kippur on October 1, the House is not scheduled to come back into session until October 7.
Each side now strongly believes that it is playing a winning hand, which could make for a lengthy shutdown. Other congressional activity is likely to be limited and very partisan should a shutdown occur.
Ways and Means September 17 Markup
On September 17, the House Committee on Ways and Means met to markup nine bills, including two tax bills: H.R. 5349, the “Tax Court Improvement Act”; and H.R. 5346, the “Fair and Accountable IRS Reviews Act.” W&M also marked up its Views and Estimates Letter, which outlines the Committee’s legislative and oversight priorities, to send to the Budget Committee. The mark-up session, which lasted well over seven hours, was quite partisan. However, the Committee voted overwhelmingly to favorably report all nine bills, with some of the bills, including the tax bills, not receiving any negative votes.
H.R. 5349, the Tax Court Improvement Act, would make multiple changes to the Tax Court’s procedural rules, including clarifying the application of equitable tolling to deficiency procedures. In the wake of the Supreme Court’s holding in Boechler v. Commissioner, 596 U.S. 199 (2022), several Circuit Courts have issued opinions finding that the Tax Court’s deficiency jurisdiction is also subject to equitable tolling. The bill would explicitly grant the Tax Court jurisdiction to toll both the 90- and 150-day periods for filing a petition to contest a notice of deficiency. The bill would also eliminate a lesser-known pitfall of equitable tolling in the deficiency context, its claim-preclusive effect. Under existing law, when the Tax Court dismisses a deficiency petition, the matter is res judicata with claim preclusive effect on any subsequent refund litigation. This means a taxpayer who tries and fails to obtain equitable tolling may not then pay the tax and sue the IRS for a refund. Under the bill, a taxpayer who files a deficiency petition late but does not qualify for equitable tolling may nevertheless pay the tax and file a refund suit in U.S. District Court or the Court of Federal Claims. The Tax Court Improvement Act would also expand the subpoena power of the Tax Court, expand the authority of special trial judges to hear cases order punishment for contempt of court, as well as subject Tax Court judges and special trial judges to mandatory recusal rules. The bill would be effective for filings made after the date of enactment.
The sponsor and lead co-sponsor of the Tax Court Improvements Act, Reps. Moran (R-TX) and Sewell (D-AL), made opening statements on the bill. Each described it as strengthening taxpayer rights by improving and streamlining judicial proceedings. Rep. Moran applauded the expansion of special trial judges’ authority to lessen case backlog at the Tax Court. Rep. Moran also spoke of the introduction of equitable tolling to deficiency jurisdiction as fixing inflexible technicalities. Rep. Sewell praised the bill as helping the Tax Court achieve an efficient, fair, and transparent process.
H.R. 5346, the Fair and Accountable IRS Reviews Act, would change existing requirements for IRS employees seeking to propose certain penalties against taxpayers. Currently, IRS employees seeking to propose certain penalties against a taxpayer must obtain supervisory approval prior to any “initial determination” with respect to the penalty. The existing statute does not provide a definition of “initial determination.” In litigation concerning this issue, the Tax Court has created varying benchmarks for when an employee must obtain supervisory approval for the assessment of a penalty. Since the Tax Court is a court of national jurisdiction, appeals to different circuits have resulted in a circuit split. The bill would resolve the split and require an IRS employee to obtain written supervisory approval prior to any written communication to the taxpayer. The bill would be effective for notices issued and penalties assessed after December 31, 2025. The bill is sponsored by Rep. Grothman (R-WI), who is not on W&M.
Democrats, led by Ranking Member Rep. Neal (R-MA), criticized Republicans for cutting IRS funding. They also criticized the OBBBA as providing tax cuts for the wealthy at the expense of other Americans. They said that H.R. 5346 would constitute an improvement over current law, but pales in comparison to the detrimental steps Republicans have taken to weaken the IRS and hurt low-income Americans.
The Joint Committee on Taxation’s Chief of Staff, Tom Barthold, testified on both bills, as is typically the case when W&M or the Senate Finance Committee marks up tax legislation. JCT estimated that over the 2026-2035 budget window, the net revenue effect for H.R. 5349 and H.E. 5346, respectively, would be $6 million and $117 million (a figure Mr. Barthold offered as a correction to the original estimate of $120 million in the JCT bill description, which he attributed to a mistake in understanding the bill’s effective date).
The Committee voted to favorably report the two bills as introduced, with minor clerical amendments contained in the Amendment in the Nature of a Substitute (AINS) to each of H.R. 5349 and H.R. 5346, from Chairman Smith (R-MO).
The Views and Estimates Letter to the Budget Committee states W&M will work closely with Treasury and the IRS on OBBBA implementation. The letter identifies “growth in the tax-exempt sector over the last several decades,” digital assets, and “ongoing international tax discussions with impacts to the U.S. tax code and revenue base” as areas of Committee focus with regards to tax policy and oversight. The Committee approved the letter by voice vote.
OECD Tax Pillars and DSTs
Several Republicans on W&M, led by Rep. Estes (R-KS), wrote President Trump on September 15 in connection with his trip to the UK requesting that he pressure the UK government to drop the UK’s DST. The letter notes that the UK DST collected $1 billion in 2024, almost entirely from American companies. The UK has said that 90% of the DST is paid by five companies, which the U.S. Trade Representative has indicated are likely all American. The letter expresses appreciation for the Trump administration’s efforts in this area thus far, which has resulted in India ending its DST, Canada committing to do so, and New Zealand withdrawing its DST legislation. There was no reporting of any DST discussions between the countries during President Trump’s trip. The letter called for the U.S. to reopen the Section 301 trade investigation into the UK DST if the UK does not abolish the tax.
At a September 18 CFE Tax Symposium in Belgium, Benjamin Angel, director for direct taxation at the European Commission, said that “there is certainly a good will on all sides to try to make [a side-by-side arrangement with regards to the U.S. and Pillar 2] work.”
Félicie Bonnet, head of unit for international tax coordination at the OECD, said, “We are working towards a resolution of those issues by the end of the year.” She strongly opposed any effort to rollback Pillar 2, saying “when you say, well, will Pillar 2 go away, we can see that actually it’s not an easy proposition as it can seem given the work that has already been done.”
Estonia called for ending Pillar 2, arguing it is too complex, especially compared to the actual revenue the rules are likely to raise. Helen Pahapill, tax policy adviser at the Estonian Finance Ministry, said, “From our perspective, the Pillar Two directive is way too complicated. We don’t see additional revenues.”
European Union Commissioner for Democracy, Justice, the Rule of Law and Consumer Protection, Michael McGrath, said that the EU does not plan to introduce a EU-wide DST. EU officials have previously floated imposing a DST to fund the EU, but were unable to win support from the EU member countries. McGrath also expressed hope that an agreement with the United States on Pillar 2 would resuscitate negotiations over Pillar 1, which have been stalled since the OECD released the draft of a multilateral treaty to implement Pillar 1 in October 2023 containing bracketed language with regards to areas of disagreement. However, McGrath indicated that the EU would reconsider a DST should the negotiations fail: “Our focus is on global agreement. We will work in good faith to achieve an overall balance and fair outcome—it is too early to say what the EU might do in the event such a global agreement is not reached.”
Treasury Plans on Guidance
On September 18, Deputy Assistant Secretary for Tax Policy Kevin Salinger said that Treasury and the IRS plan to release their priority guidance plan (PGP) for the coming 2026 fiscal year in the next several weeks. The plan has usually contained a very long list of projects that Treasury and the IRS have been working on, some of which have been on the list for years and have little prospect of actually being finished that year. Salinger said that Treasury plans to clean up the list so that it contains items that the government actually plans to execute during the upcoming fiscal year. “Some of [the items] have been on there for a decade or more. So we have cleaned the slate and started afresh. My hope is when you see the PGP it will actually be the things that you can expect to see coming out of Treasury over the next year.”
Salinger highlighted that in May, Treasury and the IRS set up dedicated teams of lawyers and economists working on the different guidance projects that will be needed to implement the OBBBA. He said that Treasury and the IRS are planning two additional pieces of guidance on the corporate alternative minimum books tax (CAMT). “We’re trying to make things easier for taxpayers in that area.” He said Treasury and the IRS are preparing guidance on digital assets and focusing on the Trump administration’s general deregulatory agenda from a tax perspective.
Treasury Personnel
On September 18, Holly Paz, the commissioner of the IRS Large Business and International Division, who was suspended in July, filed suit in the United States District Court for the District of Columbia against the IRS and the Treasury Department for allegedly violating her rights under the Privacy Act of 1974 by leaking information from her Privacy Act Systems of Records.
Senator Grassley (R-IA) said on September 17 that he is withdrawing holds he had placed on Brian Morrissey to be Treasury’s general counsel, Jonathan McKernan to be undersecretary for domestic finance, and Francis Brooke to be assistant secretary for international trade and development. The three were not on the list of nominees that were approved by the Senate on September 18. However, the three are on a list of 108 nominees to be considered en bloc by the Senate that was placed on the Senate’s executive calendar by Senator Thune (R-SD) on September 18.
Public hearings of the Taxpayer Advocacy Panel, which has around 75 members and provides recommendations to the IRS and the National Taxpayer Advocate, have been suspended, pending background checks from the White House. The next hearing had been scheduled for September 25.
Proposed Regulations on Qualified Tips
On September 19, Treasury and the IRS issued proposed regulations on the OBBBA provision providing a deduction for qualified tips. More specifically, Section 70201 of the OBBBA adds a new Section 224 to the Tax Code allowing as a deduction qualified tips not exceeding $25,000 in any year from 2025 through 2028. The deduction starts phasing out at modified adjusted gross income of $150,000 ($300,000 for joint filers).
Qualified tips are “cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.” Section 223(d)(1). In addition, qualified tips:
do not include any amount received by an individual unless — (A) such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor, (B) the trade or business in the course of which the individual receives such amount is not a specified service trade or business [SSTB] (as defined in section 199A(d)(2)), and (C) such other requirements as may be established by the Secretary in regulations or other guidance are satisfied.
Section 223(d)(2).
The proposed regulations provide that “tips are amounts paid by customers for services that are in excess of the amount agreed to, required, charged, or otherwise reasonably expected to have to be paid for the services in an arm’s-length transaction.”
Under the proposed regulations, cash tips “are paid in a cash medium of exchange, including by cash, check, credit card, debit card, gift card, tangible or intangible tokens that are readily exchangeable for a fixed amount in cash (such as casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash.” However, “items paid in any medium other than cash or charge” that are assets not “exchangeable for a fixed amount in cash (such as most digital assets)” do not qualify as cash tips. Nonqualifying items include event tickets, meals, and services.
Because tips must be voluntarily paid under the statute, the proposed regulations would provide that “service charges, automatic gratuities and other mandatory amounts automatically added to a customer’s bill by the vendor or establishment” do not qualify.
Under the proposed regulations, qualified tips do not include tips received while performing a service that is a felony or misdemeanor, pornography, or prostitution. The proposed regulations provide a taxpayer-friendly rule that the MAGI phaseout is applied after applying the $25,000 limit to the deduction.
Only non-owner employees qualify for the deduction, not employees with ownership interests. In addition, tips received from an employer do not qualify.
The list of occupations that customarily and regularly received tips is the same as those contained in a list previously released by Treasury on September 2, as noted in S&C’s September 8 Tax Policy Update. The proposed regulations create a Treasury Tipped Occupation Code for qualifying occupations consisting of three digits. The eight general categories of qualifying occupations are:
- 100s – Beverage and Food Service
- 200s – Entertainment and Events
- 300s – Hospitality and Guest Services
- 400s – Home Services
- 500s – Personal Services
- 600s – Personal Appearance and Wellness
- 700s – Recreation and Instruction
- 800s – Transportation and Delivery
The list runs from bartenders and wait staff to rickshaw drivers and home movers, and includes over 15 examples.
Treasury and the IRS requested comments on all aspects of the proposed regulations. In particular, they requested comments on whether the existing SSTB rules under Treas. Reg. Sec. 1.199A-5(b) “should be refined to better align with the anti-abuse provision in section 224 and the congressional directive for the Secretary to publish a list of occupations that customarily and regularly received tips on or before December 31, 2024.” Treasury and the IRS also requested comments on addressing their concerns that taxpayers might misclassify income as tips. Comments must be submitted by October 22, which is 30 days after publication of the proposed regulations in the Federal Register (September 22). A public hearing has been scheduled for October 23 at 10 a.m., which will be cancelled if there are no requests to speak at the hearing.
The proposed regulations are proposed to apply to taxable years beginning after December 31, 2024, and can be relied upon from such date through the date on which final regulations are issued provided that the taxpayer followed the proposed regulations “in their entirety and in a consistent manner.”