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From the Hill: April 23, 2024

Legislators had differing reactions to an IRS update on agency funding and the status of the ERC.
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Here's a look at recent tax-related happenings on the Hill, including a Senate Finance Committee hearing involving the IRS commissioner, along with legislative disagreement over the agency's efforts.

Lately on the Hill

IRS Commissioner Danny Werfel found himself in his familiar seat in front of the Senate Finance Committee last week, fielding questions from both sides of the aisle during the committee hearing on the 2025 IRS budget and the 2024 filing season.

In a prepared statement, Chair Ron Wyden (D-OR) praised the IRS’ efforts to improve customer service, which reduced average call waiting times to three minutes, and for initiating enforcement efforts on “wealthy individuals,” including 125,000 cases in which they did not file tax returns despite making more than $1 million. He also lauded efforts to “root out the abuse of tax breaks for corporate jets” and suggested that corporate yachts also should be targeted, finding “it hard to believe that anybody is yachting to a board meeting.” Wyden credited the IRS’ success to the additional funding provided by the Inflation Reduction Act and warned against future cuts, asserting, “Wealthy tax cheats will have an easier time getting away with breaking the law. And it’ll be misery and higher costs for typical American taxpayers who are just trying to do their civic duty when tax filing season comes around every spring.”

Ranking Member Mike Crapo (R-ID) withheld praise for the agency, pointing out that President Joe Biden’s budget requests an additional $104 billion in IRS funding. “This underscores that the initial windfall was not a cure, the IRS has not transformed, and the President believes the only way to realize that vision is to just spend more,” he said. Crapo degraded the Direct File program as “redundant” and “inefficient,” citing a Government Accountability Office report claiming deficiencies in the free filing program and a current cost of $100 million while only serving 100,000 taxpayers for the 2024 filing season. Crapo concluded, “Commissioner Werfel, while I appreciate a handful of positive steps the IRS has taken during your tenure, so much remains undone at the IRS that any victory lap is unwarranted.”

In addition to emphasizing the merits of the current and requested future additional IRS funding, Werfel addressed the status of the Employee Retention Credit (ERC). In his prepared testimony, he provided that the IRS has processed 3.6 million claims to the tune of approximately $230 billion in value but lamented the flood of ineligible claims that continue to gum up the process. Werfel informed the committee that 1,800 entities have voluntarily withdrawn about $251 million in claims, approximately 1,300 entities participated in the ERC Voluntary Disclosure Program yielding about $225 million with 800 more submissions still to process, and that the IRS has assessed $572 million from entities making improper claims.

During the hearing, Wyden provided information from a “whistleblower” concerning the “avalanche of fraud” claiming approximately 95% of new ERC claims are fraudulent, “choking the IRS systems [and] delaying valid refunds.” Wyden brought up the January 31, 2024 ERC cut-off provision contained in the now dormant Tax Relief for American Families and Workers Act of 2024 (Act), which he introduced along with Chair Jason Smith (R-MO) of the House Ways & Means Committee. He asked for the commissioners’ thoughts on “if this Senate fails to take action on this bi-partisan tax agreement, seems to me that fraudulent [ERC] claims are going to continue to clog the system that’s going to cost taxpayers billions of dollars and is going to divert resources away from law abiding taxpayers.” Werfel agreed, reminding the committee of the September moratorium on processing new claims due to the rampant fraud they were beginning to see by “aggressive marketers and promoters.” Despite the moratorium, the IRS is still receiving 20,000 new claims per week “because the [current] law allows these claims to be submitted through 2025.” He continued, “In our big inventory of claims there are still eligible claims in the midst, but they are very hard to find. It’s like finding a needle in a haystack.”

Wyden assured the commissioner at least a couple of times that he is working to “pull out all the stops” to get the Act passed out of the Senate, noting the bipartisan nature with which it was passed in the House with 357 votes, “You can’t get 357 votes to order a piece of apple pie.”

Noteworthy Decisions

The U.S. Tax Court affirms that the IRS lacks authority in assessing Section 6038(b) penalties related to the failure to furnish information with respect to a foreign business entity. Mukhi v. Commissioner, T.C., No. 4329-22L, April 8, 2024.

As a result of examination, the IRS assessed Raju Mukhi penalties under §6677 and §6038(b) in excess of $11 million for failure to timely file foreign reporting forms, including Forms 3520, 3520-A, and 5471 related to his ownership in foreign corporations and foreign trusts.

Mukhi petitioned the court to decide whether the penalties violate the Excessive Fines Clause of the U.S. Constitution. The Eighth Amendment stipulates, “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”

The court upheld the penalties under §6677, which imposes penalties for failing to file an information return disclosing foreign trust ownership and transfers of money as required by §6048(b). The court determined that the penalties are not fines, as their purpose is to “encourage voluntary compliance, and therefore they are not punitive.” As they are not fines, they do not fall under the purview of the Excessive Fines Clause. The court added that even if they were, it would not have determined them to be excessive.

The court did, however, find that the IRS lacked authority to assess the §6038(b) penalty, citing Farhy v. Commissioner. In Farhy, the court determined that §6038(b) does not specify a means of assessing the penalties and, therefore, the IRS can only recover this penalty through civil lawsuit.

Other Important Developments

IRS Technical Guidance

  • Amber MacKenzie with the Treasury’s Office of Tax Policy spoke to concerns expressed in public comments on proposed regulations REG-142338-07 related to taxable distributions from donor-advised funds (DAFs) at a Georgetown Law Office of Executive and Continuing Legal Education program.

    TaxNotes reports “frustrations” commenters have with the definition of a DAF and the inclusion of a personal investment adviser as a donor-adviser. “But some of the comments seem to misunderstand that it’s necessary to fail only one prong of the proposed regs’ three-prong statutory definition of a DAF in order to not be considered a DAF. So things might not be as restrictive as they seem at first glance,” MacKenzie said.

    Speaking to the rules on taxable distributions and comments that the costs of managing a DAF should not considered distributions, TaxNotes reports that MacKenzie said, “I think it’s fair to say we intended the reasonable cost of administering and maintaining DAFs to be excluded from the definition of distribution. So we will be taking a closer look at the language we use to describe that in the final rules.”

    MacKenzie also said that considerations are being made to undo the retroactive application of the rules, noting, “I think the retroactive effect of the proposed regulations was inadvertent, and we are definitely considering your comments on that issue,” reports TaxNotes.

    Public hearings are scheduled on May 6 and 7 on the proposed regulations.

  • Revenue Procedure 2024-21 provides the nationwide residence average purchase price and the average area purchase price safe harbors for issuers of qualified mortgage bonds and mortgage credit certificates.
  • Revenue Procedure 2024-20, applicable to foreign life insurance companies and foreign property and liability insurance companies, provides the domestic asset/liability percentages and domestic investment yields to compute the minimum effectively connected net investment income for taxable years beginning after December 31, 2022.
  • Notice 2024-35 released by the IRS provides that a plan will not be disqualified and a taxpayer will not be subject to an excise tax for failing to make certain required minimum distributions (RMDs) in 2024, similar to relief provided in 2021, 2022, and 2023. In addition, the notice announces forthcoming final regulations related to RMDs will apply for calendar years beginning on or after January 1, 2025.
  • Fact Sheet 2024-13 addresses the tax treatment of employer-provided work-life referral services under a work-life referral program. The FAQs provide that this type of program can be treated as a de minimis fringe benefit excluded from income and employment taxes under certain circumstances.
  • Revenue Ruling 2024-09 has been issued providing the May 2024 various rates for federal income tax purposes, including the applicable federal rates (AFR), adjusted AFR, adjusted federal long-term rate, and the long-term tax-exempt rate.


  • The IRS has released a draft Form 1099-DA to report proceeds and other pertinent information resulting from the disposition of digital assets. Comments are requested on the form, due on or before June 21, 2024.

Continued Coverage of the Inflation Reduction Act (IRA)

  • Fact Sheet 2024-15 provides an update to previously issued FAQs to do with energy-efficient home improvements and residential energy property credits. Question 4 under general questions has been updated.
  • Fact Sheet 2024-14 updates FAQs related to new, previously owned, and qualified commercial clean vehicle credits. The revision includes updates to question 10 under Topic A (eligibility rules), question 11 under Topic B (income and price limitations), and questions 5 and 15 under Topic H (transfer of credits).

This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein. 

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