Summary
- Government appropriations negotiations amidst clashes on pocket rescissions and nominations
- IRS funding and management
- Revenue Procedure 2025-28 – research under OBBBA
- OECD pillars, DSTs and trade
Congress comes back into session for three weeks with funding the government, including the IRS, at the top of its agenda. Funding for the Federal government runs out starting on October 1, 2025, the start of Fiscal Year 2026. Reaching agreement on funding the government may be further complicated by last week’s rescissions move by President Trump and a partisan dispute in the Senate over the pace at which President Trump’s nominees are being considered.
Senate rules provide for certain amounts of time for Floor debate of presidential nominees and require procedural votes to proceed to a final vote on nominees. The procedures for specific nominees or groups of nominees can be shortened through unanimous consent of all senators. President Trump and Republican senators have accused Democrats of unduly holding up his nominees. Negotiations between the White House and the Senate on the nomination confirmation process, such as by agreeing to expeditiously allow consideration of certain nominees, seemed to be making progress in late July, but then fell apart. Senate Republicans are threatening to change the Senate rules through a simple majority vote (known as the nuclear option) unless Senate Democrats agree to changes in the process or to allow more votes on nominees.
On Thursday, President Trump notified Congress he is exercising a pocket rescission under the Impoundment Control Act to cancel $4.9 billion in foreign aid and international organization funding. In general, the Impoundment Control Act gives Congress 45 days to respond to a president sending Congress proposed funding rescissions during which time the president may hold up the funding. The president may ultimately make the rescissions only if Congress approves, but the measure is not subject to filibuster in the Senate, thus requiring only a majority. The Trump administration has argued that when a president sends such a request within 45 days of the end of the fiscal year and Congress does not act, the funds are rescinded. Democrats criticized the move, as did some Senate Republicans, such as Appropriations Committee Chairwoman Collins (D-ME). Senate Minority Leader Schumer (D-NY) stated the move makes a government shutdown more likely.
White House officials have said Congress should pass a continuing resolution (CR) to fund the government in the absence of a bipartisan bicameral agreement with the Trump administration on appropriations.
Tax legislation will take a back seat to the appropriations process in September. But negotiations will commence on a potential tax package for the end of the year. Congressional Republicans have floated enacting another partisan reconciliation bill this year. There is also the possibility of a bipartisan tax package. Some possible candidates for inclusion are:
- Expiring 2021 expansion of Affordable Care Act insurance premium tax credits
- Capital gains on sale of residence
- Gambling losses
- Taxation of Americans living abroad
- Tariff rebate
- Digital assets
IRS Funding and Management
One of the many appropriations decisions to be determined is the level of funding for the IRS. The Financial Services and General Government appropriations bill, which is where the level of funding for the IRS will be determined, is the only one of the 12 appropriations bills not to have been considered at the full committee level by either the House or the Senate.
The Trump administration has requested $9.8 billion in appropriations to fund the IRS. The House proposal (as approved by the Appropriations Subcommittee on July 21 in a party-line vote) would provide the IRS with $9.5 billion in FY 2026, as compared to $12.3 billion that was appropriated in FY 2025.
Most of the $79 billion funding boost for the IRS in the 2022 Inflation Reduction Act (IRA) has been spent or rescinded. The Trump administration has proposed rescinding an additional $16.5 billion in IRA funds, and using what would then remain, $2.2 billion, for information-technology modernization.
Rep. Schweikert (R-AZ), the Chairman of the Oversight Subcommittee of the House Ways and Means Committee is trying to add IRS reforms relating to improved technology utilization to the IRS appropriations bill.
The Department of the Treasury is requiring information technology employees to exercise “reflexive AI usage” according to a report in Bloomberg. The policy was contained in an August 19 memo by Samuel Corcos, Treasury’s chief information officer. Bloomberg reported that Treasury is also planning to reorganize administrative functions across the department by pulling employees from the IRS and other parts of Treasury into a new Treasury Common Services Center that would operate within Treasury’s Office of Management. The Services Center would include human resources processing, common information technology functions, and operations services like travel and acquisition. The plans were contained in an email from John York, Treasury’s assistant secretary for management.
Personnel
The last week of August was relatively quiet on the Treasury and IRS personnel front, with much more action elsewhere in government. However, there was some movement on the tax front, with IRS Associate Chief Counsel (Corporate) Mark Schneider stepping down.
OECD Pillars and DSTs: President Trump’s Truth, and an OECD “Side-by-Side” Draft
Some countries, including the members of the EU, have already enacted Pillar 2 into law. American-parented companies are effectively grandfathered from application of the Undertaxed Profits Rule (UTPR) for 2025, but will be subject to the UTPR for taxable years beginning in 2026 and later. An overlapping set of countries have also enacted Digital Services Taxes (DSTs), some of which are already in effect.
The original House-passed version of the OBBBA contained significant tax measures against residents of countries adopting extraterritorial and discriminatory taxes against American companies, such as DSTs and UTPRs, in a new Tax Code Section 899. The Senate Finance Committee’s OBBBA draft retained the provision with modifications. House Ways and Means Committee Chairman Smith (R-MO) and Senate Finance Committee Chairman Crapo (R-ID) pulled Section 899 from the OBBBA at the request of Treasury Secretary Bessent as part of an agreement at the G-7 for a “side-by-side system” that “would fully exclude U.S. parented groups from the UTPR and IIR.”
The G-7 statement did not address DSTs. OECD’s Pillar 1, bearing important similarities to DSTs, would generally shift the right to tax certain profits to the country where consumers reside (Amount A), and establish standardized rules for transfer pricing with regards to certain routine activities such as distribution and marketing (amount B), while also prohibiting DSTs. On October 11, 2023, the OECD released a draft of a multilateral treaty to implement Pillar One with some bracketed language where consensus could not be reached. Subsequent negotiations have not resulted in any further progress on the Pillar 1 treaty.
President Trump demands removal of Digital Services Taxes and other digital regulations
On August 25, President Trump demanded that foreign countries remove DSTs and other rules regarding digital services and markets (contained in the EU’s Digital Services Act (DSA) and Digital Markets Act (DMA)) that he said are designed to harm, or discriminate against, the U.S. and advantage China. The statement came via a Truth on Truth Social, stating:
“As the President of the United States, I will stand up to Countries that attack our incredible American Tech Companies. Digital Taxes, Digital Services Legislation, and Digital Markets Regulations are all designed to harm, or discriminate against, American Technology. They also, outrageously, give a complete pass to China's largest Tech Companies. This must end, and end NOW! With this TRUTH, I put all Countries with Digital Taxes, Legislation, Rules, or Regulations, on notice that unless these discriminatory actions are removed, I, as President of the United States, will impose substantial additional Tariffs on that Country's Exports to the U.S.A., and institute Export restrictions on our Highly Protected Technology and Chips. America, and American Technology Companies, are neither the ‘piggy bank’ nor the ‘doormat’ of the World any longer. Show respect to America and our amazing Tech Companies or, consider the consequences! Thank you for your attention to this matter.”
European Commission spokeswoman Paula Pinho responded that “It’s the sovereign right of the EU and its member states to regulate our economic activities on our territory that are consistent with our democratic values.”
European Commission spokesman Thomas Regnier said, “The DSA does not look at the color of a company, at the jurisdiction of a company, or at the owner of a company. The DSA and the DMA both apply to all platforms and companies operating in the EU irrespective of their place of establishment.”
Although some details of the recent trade agreements negotiated by the Trump administration have not been disclosed, and may still be in the process of being finalized, those trade agreements do not appear to have addressed DSTs.
The Federal Circuit Court of Appeals ruled Friday against President Trump’s use of the International Economic Emergency Act to enact tariffs. The decision is stayed until October 14, 2025, to allow the Trump administration to seek review by the Supreme Court. It is not clear how the ruling will impact trade agreements that were reached under the threat of the tariffs or other trade negotiations still in process. If the Supreme Court affirms the ruling or does not take the case, the Trump administration may increase the use of trade measures under other authorities. Given the connections between trade and tax policy, including the threatened use of trade measures to address foreign tax provisions that are discriminatory or extraterritorial, the litigation over tariffs could impact the state of play on the OECD pillars and DSTs.
For the latest trade developments, see the S&C Trade Tracker.
OECD Pillar 2 – “side-by-side”
According to several press reports, the OECD has circulated a 30-page draft by OECD’s Working Party 11 that would provide details on the brief G-7 statement on a side-by-side system. Under the draft, a country would qualify for a “side-by-side” exemption from the IIR and the UTPR if it meets three criteria: (1) a minimum rate [apparently unspecified in the document] on both domestic and foreign income earned by resident countries, (2) a CFC regime at a minimum [unspecified] rate, and (3) a foreign tax credit or “equivalent relief” for QDMTTs. OECD has asked for comments from those to whom the document was circulated by September 5. The press reports did not say whether the document was circulated to all of the (more than 140) countries in the OECD’s so-called Inclusive Framework.
Bloomberg reported on Monday, August 25 that more than 28 countries submitted comments expressing concerns with the “side-by-side” proposal, and that OECD compiled those comments into a document dated August 14.
Revenue Procedure 2025-28
On Thursday, August 28, the IRS released Revenue Procedure 2025-28 addressing the research and expenditure (R&E, although sometimes colloquially known as R&D) provisions of the OBBBA, especially those relating to various elections and changes of accounting methods. (Revenue Procedure 2025-28 should not be confused with Notice 2025-28 addressing partnerships under the corporate alternative minimum book tax, known as CAMT and summarized in Sullivan & Cromwell’s August 4 Tax Policy Update).
Under the Tax Cuts and Jobs Act of 2017, taxpayers were required to amortize R&E over ten years for domestic expenditures and 15 years for foreign expenditures. The provision was effective for tax years beginning after 2021.
The OBBBA restores expensing of domestic R&E for tax years beginning after December 31, 2024. Taxpayers may also elect to claim any unamortized domestic R&E amounts from 2022, 2023 and 2024 in the first tax year beginning after 2024, or in the first two tax years beginning after 2024. Small businesses, defined as those meeting the gross receipts test under Section 448 ($31 million or less in 2025) can elect to file amended returns to expense domestic R&E for 2022, 2023, and 2024. OBBBA provides one year after the date of enactment for this small business election, which the revenue procedure notes will be July 6, 2026, because July 4, 2026 falls on a Saturday. The revenue procedure also cautions that the existing statute of limitations rules on refund claims in Tax Code Section 6511 (generally, the later of three years from the time the return was filed, or two years from the time the tax was paid) was not changed in the OBBBA and thus applies to refund claims under this provision.
The IRS last issued guidance on accounting method changes to comply with the TCJA changes to Section 174 taking effect in 2022 in Section 7 of Rev. Proc. 2025-23 on June 9, 2025, which was after House passage of its initial version of the OBBBA but prior to Senate action.
Revenue Procedure 2025-28 changes procedures under Tax Code Section 446 and Treas. Reg. Sec. 1.446-1(e) for obtaining automatic consent of the IRS to (1) change accounting methods for R&E under Section 174 as in effect prior to enactment of the OBBBA; and (2) change accounting methods to comply with Section 174 as modified, and Section 174A as enacted, by the OBBBA. The revenue procedure also addresses elections under Section 174A(c) to amortize R&E paid or incurred in taxable years beginning after 2024. Furthermore, the revenue procedure grants an automatic extension of time to file superseding tax and information returns applying the revenue procedure for taxable years beginning in 2024 and ending prior to September 15, 2025, for which the due date (including extension) was before the latter date.