Summary
- Appropriations showdown as shutdown looms, with further government reorganization on the horizon
- Senate Finance Committee notices a crypto hearing for Wednesday
- National Security Memorandum orders IRS to investigate nonprofits
- Forthcoming guidance on the OBBBA international tax provisions effective this year
Appropriations Showdown
A shutdown of the federal government appears to be a near-certainty as annual appropriations expire at the beginning of the 2026 fiscal year starting on October 1. On September 27, President Trump announced that he would meet on September 29 with the leaders of each party in the Senate and House, but the sides appear as far apart as ever. There is no obvious path to avoid a shutdown nor a clear route out if a shutdown happens.
Republicans are insisting on a “clean” continuing resolution (CR) to temporarily fund the government. To that end, the September 19 House-passed CR would fund the government through November 21. However, the appropriations bill needs 60 votes in the Senate, which would require bipartisan support, which the bill does not currently have. Democrats in the House and Senate have put forward a proposal to fund the government through October 31 combined with the clawback of funding recissions enacted by President Trump and congressional Republicans, and policy changes made by the OBBBA with a focus on health care policy matters. The proposal also includes 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.
Last week, President Trump took to Truth Social to announce that he was cancelling a planned meeting with Senate Minority Leader Schumer (D-NY) and House Minority Leader Jeffries (D-NY) stating that there is nothing to negotiate. But the meeting, several days later and with the addition of Speaker Johnson (R-LA) and Senator Majority Leader Thune (R-SD), is now back on.
Last March, Senator Schumer led several Senate Democrats in voting for the CR that is currently funding the government. He said: “A shutdown would give Donald Trump and Elon Musk carte blanche to destroy vital government services at a significantly faster rate than they can right now,” and that a shutdown would be a “gift” that would let Republicans “weaponize their majorities to cherry-pick which parts of the government to reopen.”
This time, Senator Schumer and Rep. Jeffries have led a united front insisting that any funding bill contain significant policy changes, with Rep. Jeffries stating that congressional Democrats have been planning their strategy for the current showdown for months.
Office of Management and Budget (OMB) Director Russ Vought issued a memo to Executive Branch agencies with instructions to submit work plans should appropriations lapse. The memo states that the OBBBA “provided ample resources to ensure that many core Trump Administration priorities will continue uninterrupted” while “[p]rograms that did not benefit from an infusion of mandatory appropriations will bear the brunt of a shutdown.”
According to the memo, the Trump Administration is not legally required to continue programs whose annual funding lapses and are otherwise not funded. The memo instructs agencies to “consider Reduction in Force (RIF) notices for all employees in programs, projects, or activities (PPAs) that satisfy all three of the following conditions: (1) discretionary funding lapses on October 1, 2025; (2) another source of funding, such as H.R. 1 (Public Law 119-21) is not currently available; and (3) the PPA is not consistent with the President’s priorities.”
Notably, the RIF actions will be additional to furlough notices directly related to the lapse in appropriations.
Senator Schumer responded to the OMB memo by stating: “This is an attempt at intimidation. Donald Trump has been firing federal workers since day one—not to govern, but to scare. This is nothing new and has nothing to do with funding the government. These unnecessary firings will either be overturned in court or the administration will end up hiring the workers back, just like they did as recently as today.”
Impact of shutdown on IRS and Treasury tax personnel
The IRS shutdown plan, released late Monday afternoon, provides that no employees would be furloughed during the first five days of a shutdown through the use of IRA funding. What would happen if a shutdown lasts longer, which is very possible, is not clear.
National Security Presidential Memorandum-7 (NSPM-7) and Nonprofits
On September 25, President Trump issued NSPM-7 on the subject of “Countering Domestic Terrorism and Organized Political Violence.” The memorandum is addressed to the attorney general and the secretaries of state, treasury, and homeland security.
The memo instructs the IRS Commissioner to “take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism. In addition, where applicable, the Commissioner shall ensure that the Internal Revenue Service refers such organizations, and the employees and officers of such organizations, to the Department of Justice for investigation and possible prosecution.”
According to the New York Times, the Justice Department is pushing prosecutors to investigate George Soros’s Open Society Foundations. The organization responded:
“The Open Society Foundations unequivocally condemn terrorism and do not fund terrorism. Our activities are peaceful and lawful, and our grantees are expected to abide by human rights principles and comply with the law.
These accusations are politically motivated attacks on civil society, meant to silence speech the administration disagrees with and undermine the First Amendment right to free speech. When power is abused to take away the rights of some people, it puts the rights of all people at risk.”
Senate Finance Committee Hearing on Crypto
Senate Finance Committee Chairman Crapo (R-ID) announced that SFC will hold a hearing Wednesday, October 1, at 10 a.m. on “Examining the Taxation of Digital Assets.”
The witnesses will be:
- Jason Somensatto, Director of Policy, Coin Center, Washington, DC
- Andrea S. Kramer, Founding Member, ASKramer Law, LLC, Chicago, IL
- Lawrence Zlatkin, Vice President of Tax, Coinbase Global, Inc., New York, NY, and
- Annette Nellen, Chair, Digital Assets Tax Task Force, American Institute of CPAs, Durham, NC
On the House side, Rep. Max Miller is working on a bill addressing the taxation of digital assets, with highlights listed in this S&C memo. The Oversight Subcommittee of the Committee on Ways and Means held a hearing on “Making America the Crypto Capital of the World: Ensuring Digital Asset Policy Built for the 21st Century” on July 16.
Treasury Plans on OBBBA International Tax Guidance
In an email to Tax Notes, Deputy Assistant Secretary for Tax Policy Kevin Salinger said that Treasury and the IRS plan to issue guidance in the form of notices before the end of December on the four international tax provisions in the OBBBA that are effective this year. This would be followed by proposed regulations in the first six months of 2026.
One of those provisions is the elimination of the one-month deferral election for tax years of specified foreign corporations, which is effective for taxable years of specified foreign corporations beginning after November 30, 2025. Salinger said that the government expects to use the regulatory authority in the statute “to allocate taxes between the short year and the succeeding year. This allocation will be helpful for taxpayers who are concerned that the normal accrual of taxes in the short year would produce a loss, causing them to lose an entire year of foreign income tax credits.”
A second provision on which Salinger indicated a notice would be forthcoming this year is the definition of deduction-eligible income for purposes of determining foreign-derived deduction eligible income (FDDEI), from which the OBBBA excludes income or gain from the sale of intangible property and is effective for sales occurring after June 16, 2025.
The third provision is the revised foreign tax credit haircut, and in particular the new rule adding a 10% FTC haircut on distributions of previously taxed net controlled foreign corporation tested income, which applies to amounts distributed after June 28, 2025.
The fourth provision is the change to the subpart F and GILTI pro rata share rules, which is generally applicable after December 31, 2025, but with a transition rule for the treatment of dividends paid by a CFC on or before June 28.
Treasury Personnel
The IRS offered employees on administrative leave the option of deferred resignations under which they would continue on paid administrative leave through the end of the year and leave the agency at that time. The offer ended on September 22, and is the third time this year the IRS has offered deferred resignations. About 26,000 IRS workers accepted deferred resignations. In total, about 150,000 federal workers have accepted such offers. The IRS has attempted to hire back some of those employees, but the total is not publicly known.
Scott Kupor, director of the White House Office of Personnel Management, said that the number of such accepted resignation offers that has been reversed is “very small” compared to the total. But he acknowledged: “There may be some critical area or organizational area where they feel like, ‘ok, maybe, you know, we kind of cut this one too close to the bone.’”
The White House has decided not to do further background checks on the Taxpayer Advocacy Panel. The panel has around 75 members and provides recommendations to the IRS and the National Taxpayer Advocate. The panel’s public hearings had been suspended following a White House decision to consider further background checks, but the hearing scheduled for September 25 that seemed likely to be postponed was held as scheduled.