CCH Weekly Report from Washington, D.C.

With the August 2 default date fast approaching, the White House and lawmakers continued trying to hammer out a debt-ceiling agreement that would win bipartisan support. Senate Minority Leader Mitch McConnell, R-Ky., offered a backup plan in the event that negotiations currently taking place between the president and congressional leaders fail to reach an agreement before the deadline. In addition, House Majority Leader Eric Cantor, R-Va., plans to bring a balanced budget amendment to a vote on the House floor during the week of July 18, although Democratic leaders are encouraging their members to vote against the proposal, saying it would harm the middle-class and seniors by cutting Medicare and Social Security. The Treasury Inspector General for Tax Administration (TIGTA) highlighted problems with protecting the confidentiality of taxpayer information and the success of electronic filing. The IRS reported that more than 100,000 paid return preparers did not comply with the new preparer tax identification number (PTIN) rules, issued foreign tax credit guidance, and warned taxpayers of some new tax scams.

White House

After nearly a week of intense discussions and with no deal in sight, President Obama on July 15 put Republican congressional leaders on notice to produce a “serious” deficit reduction plan (TAXDAY, 2011/07/18, W.1). The president held out hope for a big bipartisan-supported agreement, which would include significant cuts in discretionary, defense, and entitlement programs and the end of high-income tax breaks and loopholes.

The second alternative would be a “down payment” that included spending cuts and only modest changes in revenue or entitlement programs. Obama said the third and “least attractive” option would be to raise the debt limit alone.

Congress

Senate. The McConnell plan would give the president authority to raise the debt ceiling by $2.5 trillion, enough to see the government through 2012, or Obama’s first term, if negotiations remain at an impasse (TAXDAY, 2011/07/13, C.1). President Obama, however, must provide an equal amount of spending cuts to consider with each increase request. McConnell said Congress would initially authorize $100 billion to carry the government through the fall; after that, Obama could make another request for $900 billion, followed by one final request for another $900 billion in June 2012. Although not the president’s preferred option, Obama said it would “at least avert Armageddon,” referring to the disastrous effects of a government default on the U.S. economy and global markets.

The Senate on July 13 rejected, by a vote of 51-to-49, a nonbinding resolution (Sen 1323) expressing the sense of the Senate that any agreement to reduce the budget deficit should require that those earning $1,000,000 or more per year make a more meaningful contribution to the deficit-reduction effort (TAXDAY, 2011/07/14, C.2). The measure had a 60-vote threshold to prevent filibusters. Republicans had intended to file amendments to the nonbinding resolution as a means to debate the federal deficit, but the plan was derailed by Senate Majority Leader Harry Reid, D-Nev.

Senate Budget Committee Chairman Kent Conrad, D-N.D., on July 11 sketched a broad outline of his 2012 budget blueprint that calls for tax increases and spending cuts and would decrease the debt by $4 trillion (TAXDAY, 2011/07/13, C.2). Under Conrad’s plan, revenue would be derived from an overhaul of the tax code that includes a reduction in the corporate tax rate, dropping it from 35 percent to 29 percent, an increase in individual rates for high-income earners, plus elimination of a number of tax credits and other provisions directed at businesses and individuals.

Sen. Carl Levin, D-Mich., on July 12 reintroduced legislation to close offshore tax loopholes that cost the U.S. Treasury $100 billion annually and strengthen offshore tax enforcement (TAXDAY, 2011/07/14, C.3). Levin said the revised Stop Tax Haven Abuse Bill (Sen 1346) retains provisions from the original bill and includes new measures to prevent tax avoidance. The new provisions would change IRS regulations closing a tax loophole benefiting credit default swaps that send money offshore. In addition, the bill targets the treatment of offshore corporations as domestic corporations for tax purposes when controlled by U.S. citizens, and another tax loophole that allows corporate deposits of foreign funds in U.S. accounts to be treated as nontaxable, unrepatriated foreign income.

House. House Majority Leader Eric Cantor, R-Va., plans to bring a balanced budget amendment to a vote on the House floor during the week of July 18, that could be tied to legislation to increase the nation’s debt limit. Republican Study Committee Jim Jordan, R-Ohio., said the plan would make real spending cuts in fiscal year 2012, place firm caps on future spending, and –contingent upon House and Senate passage of a Balanced Budget Amendment –allow for a debt-limit increase.

Lawmakers on the House Ways and Means and Senate Finance Committees heard testimony on July 13 from academic and economic experts about the home mortgage interest deduction, taxation of dividends and revenue-neutral comprehensive tax reform (TAXDAY, 2011/07/14, C.1). The possibility of a default on the U.S. debt ceiling and the possibility of raising taxes and cutting spending served as a backdrop for many of the questions asked by lawmakers. Several experts warned of catastrophic consequences of not raising the debt limit by international credit markets. The hearing was called to discuss the role that debt and equity plays in business and individual investments.

Treasury

Taxpayer Information. The Treasury Inspector General for Tax Administration (TIGTA) discovered that the IRS has failed to promptly and properly notify taxpayers of inadvertent disclosures of their personal information (TAXDAY, 2011/07/15, T.1). TIGTA identified some steps the Service can take to prevent inadvertent disclosure of taxpayer information.

E-Filing. The Treasury Inspector General for Tax Administration (TIGTA) reported that the e-file mandate for large corporations file generated cost savings for taxpayers and the IRS (TAXDAY, 2011/07/13, T.1). Additionally, e-filing by large corporations promoted faster processing times and lower error rates.

IRS

Return Preparers. The IRS identified more than 100,000 paid return preparers who used outdated preparer tax identification numbers (PTINs) or failed to use a PTIN at all (IR-2011-74; TAXDAY, 2011/07/13, I.1). The Service intends to contact these preparers by letter. “The vast majority of federal tax return preparers complied with the rules. Obviously, some preparers did not get the word, so these letters provide additional information so they can register as soon as possible,” IRS Commissioner Douglas H. Shulman said in a statement.

Foreign Accounts. The IRS announced plans to gradually implement the Foreign Account Tax Compliance Act (FATCA) provisions of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 for foreign financial institutions (FFIs) (P.L. 111-147) (IR-2011-76, Notice 2011-53; TAXDAY, 2011/07/15, I.3). An FFI must enter into an agreement with the Service by June 30, 2013, to ensure it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.

Foreign Tax Credit. The IRS issued final regulations on foreign tax payments attributable to structured passive investment arrangements. The regulations provide that foreign tax payments attributable to these arrangements are not foreign tax payments for purposes of the foreign tax credit (T.D. 9535; TAXDAY, 2011/07/14, I.2). In related news, the IRS issued temporary and proposed regulations supplementing the final regulations (T.D. 9536, NPRM REG-126519-11; TAXDAY, 2011/07/15, I.1).

Tax Scams. Con artists are targeting churches and other groups with tax scams, the IRS warned (IR-2011-73; TAXDAY, 2011/07/12, I.1). The tax scams include false claims for credits or refunds.

Economic Substance. The IRS Large and International Business (LB&I) Division provided examiners with a new directive on applying the codified economic substance doctrine in examinations (LB&I-4-0711-015; TAXDAY, 2011/07/18, I.3). The directive includes various factors examiners should consider to determine if applying the doctrine is appropriate.

Withholding. IRS officials identified some of the types of payments exempt from 3 percent government withholding under Code Sec. 3402(t) during a webinar sponsored by the Service on July 14 (TAXDAY, 2011/07/15, I.6). Exceptions to Code Sec. 3402(t) come in two categories, exempt payees and exempt payments, the officials explained.

By Jeff Carlson, Stephen K. Cooper, Paula Cruickshank and George L. Yaksick, Jr., CCH News Staff

AUTHOR

Wolters Kluwer Tax and Accounting

Wolters Kluwer Tax and Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. Wolters Kluwer Tax and Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2016 annual revenues of €4.3 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

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