The Treasury Department and the Office of Management and Budget (OMB) released a Memorandum of Agreement (MOA) establishing a new process for the review of tax regulations. The MOA brings an end (at least for now) to the recent power struggle between the two agencies over who should get the final say in approving tax regulations. In the MOA, the OMB has gained new authority to give final approval to certain tax regulations issued by the Treasury.

Under the new framework, a tax regulatory action will be subject to review by the OMB’s Office of Information and Regulatory Affairs (OIRA) if it is likely to result in a rule that may:

  • create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;
  • raise novel legal or policy issues, such as by prescribing a rule of conduct backed by as assessable payment; or
  • have an annual non-revenue effect on the economy of $100 million or more, measured against a no-action baseline.

A tax rule that is subject to OMB’s additional review cannot be published in the Federal Register until OIRA notifies the Treasury that it has waived or concluded its review. OMB’s review will generally take 45 days after Treasury’s submission of a rule. The MOA also explains that any “policy disagreement that could not be resolved during the review process” will be resolved via a “principals meeting.” OIRA would facilitate such a meeting and, if needed, elevate any outstanding issues to the president.

This new MOA supersedes the 1983 Memorandum of Agreement between the Treasury and OMB with respect to tax regulatory actions.

A copy of the MOA is available here.

The agencies’ official press release can be viewed here.

Many of us in the executive compensation field have been busy these past few months preparing proxy statements and corresponding executive compensation disclosures.  Now that the crush of proxy season is largely behind us, and companies have either made it through their first pay ratio disclosures or are about to file proxies with pay ratio disclosures, you might be tempted to take a pause and catch your breath. But wait! An unnerving and growing trend has emerged in which state and local governments have either passed or are considering new taxes and other rules that are tied to a company’s pay ratio.

Most of these new or proposed bills would add surtaxes based on a company’s pay ratio.  For example, Portland, Oregon adopted a new tax in which it will levy:

  • A 10% surtax on companies with a pay ratio of at least 100:1 but less than 250:1; and
  • A 25% surtax on companies with a pay ratio of 250:1 or greater.

Other states either have followed or are considering following suit (in their own unique fashions), including:

  • California (which, inconveniently, is considering adopting its own pay ratio formula)
  • Connecticut
  • New Hampshire
  • Rhode Island
  • San Francisco

We flagged this issue prior to the pay ratio rules becoming effective (see our comment letter here) as one of the many problems associated with the pay ratio rules.  Unfortunately, the trend of states and localities seeking to levy punitive taxes based on pay ratio disclosures, that even the SEC admits, are simply estimates, is troubling and may ultimately grow in prevalence.  We are continuing to monitor all pay ratio taxes and will provide updates as warranted.

Talks of doing another round of tax cuts bubbled up again over the spring break recess. As the Tax Policy Update team previously reported, House Republicans are considering teeing up a second package of tax cuts for a vote this summer.

The GOP fully appreciates the fact that another tax bill has little to no chance of passing the Senate. But still, they want to put Democrats on the record for voting against tax cuts — it’s a good talking point for the campaign trail. The forthcoming package is expected to focus on making the temporary provisions in the new tax law permanent. As a refresher, provisions affecting the individual side of the tax code are set to expire at the end of 2025.

The House Ways and Means Committee will hold a markup for a series of bills related to IRS reform on April 11 at 10 a.m. Among the bills to be considered is The Taxpayer First Act – a bipartisan measure to improve IRS operations and tax administration procedures.

House Ways and Means Oversight Subcommittee Chairwoman Lynn Jenkins (R-KS) and Ranking Member John Lewis (D-GA) released a discussion draft of the bill over the spring break recess. The measure would overhaul the tax collection agency and modernize its information technology infrastructure. The overall goal is to improve taxpayer services and customer experience with the IRS.

The discussion draft is the product of 11 subcommittee hearings and roundtables over the past three years. The six-title bill includes provisions to reform the independent appeals process; improve customer service; promote sensible enforcement; enhance cybersecurity protection; modernize the IT infrastructure; and update the Tax Court. Most of the provisions in the bill have bipartisan and bicameral support.

Here are some noteworthy highlights:

  • Modify Select Official Titles. The current title of “Commissioner of Internal Revenue” would be changed to “Administrator of the Internal Revenue Service.” The current title of “Deputy Commissioner” would be changed to “Deputy Administrator.”
  • Establish an IRS Independent Office of Appeals. This provision would ensure that all taxpayers are able to access the administrative review process, so that their cases can be heard by an independent decision maker. This includes codifying the IRS Independent Office of Appeals and providing for additional Congressional oversight over decisions to stop taxpayers from engaging in the administrative review process.
  • Codify IRS Free File Program. This provision would codify the existing Free File Program and work with stakeholders to improve and promote the program. This is a bipartisan proposal spearheaded by Reps. Peter Roskam (R-IL) and Ron Kind (D-WI).
  • Limit Access to Information. This provision would prohibit a person, other than IRS personnel, from examining books, records, and witness testimony as part of an examination, unless they are serving as an expert.
  • Establish a Single Point of Contact for Identity Theft Victims. This provision would establish a single point of contact within the IRS for any taxpayer who is a victim of identity theft.

Interestingly, the bill does not include any provisions to regulate paid tax return preparers — an issue that has been hotly debated in recent years.

A full section-by-section summary of the discussion draft is available here.

The Senate convenes today at 3 p.m., and the House returns Tuesday at noon.

House

Financial Services Bills. The chamber will take up consideration of the following bills:

  • H.R. 4293 – the Stress Test Improvement Act would modify testing requirements applicable to bank holding companies and certain nonbank financial companies by (1) establishing limitations on CCAR and (2) reducing the frequency of stress testing from semiannual to annual.
  • H.R. 4061 – the Financial Stability Oversight Council Improvement Act would require the Financial Stability Oversight Council, in determining whether a nonbank financial company shall be designated as systematically important and consequently be supervised by the Federal Reserve Board and subject to prudential standards, to consider the appropriateness of imposing such standards as opposed to other forms of regulation to mitigate identified risks to U.S. financial stability. Every five years, the council must, upon request by a nonbank financial company, reevaluate such a determination and hold a vote on whether to rescind it.
  • H.R. 4790 – the Volcker Rule Regulatory Harmonization Act would give the Federal Reserve Board sole rulemaking authority for the Volcker rule and exclude community banks from the requirements of the rule.

Balanced Budget Amendment. The House will vote on H.J. Res 2, which would add a balanced budget amendment to the U.S. Constitution. This is a political messaging exercise for the GOP ahead of the midterm elections.

Tariffs Hearing. The House Ways and Means Committee will hold a Thursday hearing to discuss the effects of tariff increases on the U.S. economy.

Senate

Nomination. The chamber will consider the nomination of Claria Horn Boom to be U.S. District Judge for the eastern and western districts of Kentucky. A cloture vote has been scheduled for 5:30 p.m. today.

IRS Hearing. The Senate Finance Committee will hold a hearing Thursday to discuss the 2018 filing season and the future challenges of the IRS.

Mulvaney at Banking. CFPB Acting Director Mick Mulvaney will deliver his semiannual report to the Senate Banking Committee on Thursday.

Key Hearings

Wednesday, 4/11

  • Senate Finance Committee. Subcommittee hearing on “Market Access Challenges in China.”
  • House Financial Services Committee. Hearing on the CFPB’s semi-annual report to Congress with Acting Director Mick Mulvaney.
  • House Small Business Committee. Hearing on “The State of Trade for America’s Small Businesses.”

Thursday, 4/12

  • House Ways and Means Committee. Committee hearing on the effects of tariff increases on the U.S. economy.
  • House Ways and Means Committee. Subcommittee hearing on “Jobs and Opportunity: Local Perspectives on the Jobs Gap.”
  • House Financial Services Committee. Subcommittee hearing on “H.R. 4311, the Foreign Investment Risk Review Modernization Act.”
  • House Financial Services Committee. Subcommittee hearing on oversight of the FHFA.
  • Senate Finance Committee. Hearing on “The 2018 Tax Filing Season and Future IRS Challenges.”
  • Senate Banking Committee. Hearing on the CFPB’s semi-annual report to Congress with Acting Director Mick Mulvaney testifying.

With a shrinking pot of funding and workforce constraints, the IRS may have difficulties offering in-person appeals conferences at the taxpayer’s preferred location. As a result, the IRS appeals office is evaluating two pilot programs:

(1) Virtual appeals conferences: The virtual conference pilot program gives taxpayers and practitioners the option to remotely attend IRS appeals conferences through a web-based screen-sharing platform. So far, the program has received favorable feedback, though the IRS acknowledges that the conferences are not for everyone.

(2) Compliance-staff attendance at Appeals Team Case Leader (ATCL) conferences: This program allows IRS compliance officials who have historically not been present for appeals conferences to attend with technical employees.

The two programs were launched last year and the agency will be seeking external and internal feedback as it works on fine-tuning the pilots.

In a March 15 decision, the Federal Energy Regulatory Commission (FERC) disallowed certain tax benefits for master limited partnerships (MLPs), the predominant corporate structure for several energy companies.

Specifically, FERC voted to reverse a policy that allowed interstate natural gas and oil pipelines set up as pass-through companies to collect corporate income-tax expenses from customers. According to previous litigation, critics claimed that this resulted in the double recovery of costs for master limited partnerships.

It is unclear how these companies will adapt to the new ruling. Immediately after FERC’s decision, pipeline stocks plummeted. As master limited partnerships consider their options, the decision may push these entities to convert to corporations.

After missing a series of self-imposed deadlines, GOP leaders have finally unveiled the FY 2018 omnibus spending legislation. The package, coming in at $1.3 trillion, will fund the federal government through the remainder of fiscal year 2018. Congress must pass the omnibus by March 23 to avoid a government shutdown. At this writing, the House is looking to take its vote on either Thursday or Friday.

Below are some quick highlights.

Tax Provisions

  • So-called “grain glitch fix” – Sec. 199A
  • Extension of the Low-Income Housing Tax Credit – expires in 3 year
  • A set of technical corrections from all bills prior to the 2017 Tax Act – including corrections to the partnership audit rules passed in 2015

IRS Funding

  • Top Line: $11.4 billion for the agency – $320 million of that amount must be used for the implementation of the 2017 Tax Act
  • Taxpayer Services: $2.51 billion for IRS taxpayer services
  • Enforcement: $4.9 billion for enforcement
  • Operations Support: $3.6 billion for operations support
  • Business Systems Modernization: $110 million for business systems modernization
  • Administrative Provisions:
    • Mandatory employee training program on taxpayers’ rights
    • A requirement that the IRS send notices to employers with regards to address change requests and to give special consideration to offers in compromise for taxpayers who have been victims of payroll tax preparer fraud
    • A prohibition on using agency funds to target groups for regulatory scrutiny based on their ideological beliefs
    • A prohibition on using agency funds to give bonuses to employees or hiring former employees without considering conduct and compliance with Federal tax law
    • A prohibition on using agency funds for pre-populated returns
    • A prohibition on the Department from finalizing any regulation related to the standards used to determine the tax-exempt status of a 501(c)(4) organization

Others

  • Extension of the National Flood Insurance Program through July 31, 2018
  • Extension of the FAA through September 30, 2018
  • Approximately $4 billion to combat the opioid epidemic

Funding details for major departments and agencies are available here.

The House and Senate convene today at noon and 3 p.m., respectively.

The FY 2018 omnibus bill will be hogging the spotlight this week, as lawmakers scramble to avoid a government shutdown. The deadline is March 23, and the bill text is still baking. The House GOP caucus is meeting this afternoon to go over the bill with members. As always with these big spending measures, the House Freedom Caucus is expected to oppose the trillion-dollar-plus legislation. This means the GOP leadership will have to reach across the aisle for votes.

Here’s what else is in store for the week:

House

Floor Votes. The chamber will take up the following financial services bills:

Banking Bill Drama. Last week, the Senate passed its regulatory relief bill for community banks (S. 2155) in a bipartisan fashion. However, House Financial Services Committee Chairman Jeb Hensarling said that the House would not accept the bill as written. He wants to amend the bill by adding some more House-passed provisions. The Senate Democrats who supported the measure are opposed to changing the bill further, essentially telling Hensarling to take it or leave it. It remains to be seen which side will win this battle.

Trade Hearings. The House Ways and Means Committee will have hearings on Wednesday and Thursday to discuss trade issues (specifically tariffs) with U.S. Trade Representative Robert Lighthizer and Commerce Secretary Wilbur Ross.

Senate

Trafficking Bill. The chamber will vote to kick off debate on H.R. 1865 – an anti-sex trafficking measure that would allow states and victims to fight online trafficking by establishing new and enhanced penalties.

Nomination. At 5:30 p.m., members will vote on the nomination of Kevin McAleenan to be the commissioner of U.S. Protection at the Department of Homeland Security.

Trade Hearing. USTR Lighthizer will drop by the Senate Finance Committee on Thursday to talk about the president’s trade agenda and tariffs.

Key Hearings

Tuesday, 3/20

  • House Appropriations Committee. Subcommittee hearing on the FY 2019 Department Housing and Urban Development budget.
  • House Financial Services Committee. Subcommittee hearing on “Exploring the Financial Nexus of Terrorism, Drug Trafficking, and Organized Crime.”

Wednesday, 3/21

  • House Ways and Means Committee. Full committee hearing on the U.S. trade policy agenda with USTR Robert Lighthizer.
  • Joint Economic Committee. Full committee hearing on unleashing America’s economic potential.
  • Senate Budget Committee. Full committee hearing on the president’s economic report with CEA Chairman Kevin Hassett testifying.

Thursday, 3/22

  • Senate Finance Committee. Hearing on the 2018 trade agenda with USTR Robert Lighthizer.
  • Senate Banking Committee. Full committee hearing to discuss the oversight of HUD with Secretary Ben Carson testifying.
  • House Ways and Means Committee. Full committee hearing on the administration’s trade agenda with Commerce Secretary Wilbur Ross.