2024: A Year of Tax Administration and Legal Developments, Not Legislation
The year 2024 saw minimal legislative changes in U.S. tax policy due to the divided government and presidential election year. However, significant developments occurred in tax administration, primarily focused on the Internal Revenue Service (IRS). Republican criticism of the IRS continued, particularly regarding the $80 billion in additional funding allocated in prior years. Debates arose concerning the use of these funds, with $20 billion being frozen towards the end of the year, foreshadowing future conflicts over IRS funding under the incoming Trump administration. Another contentious issue was the IRS’s Direct File program, which allows taxpayers to file directly with the IRS, bypassing third-party preparers. Republicans opposed the program, citing privacy concerns and potential overreach by the IRS, despite its purported success. The future of Direct File in 2025 remained uncertain. Additionally, the IRS faced scrutiny over the employee retention credit (ERC) program, which was paused due to high fraud incidence. Republicans criticized the IRS for both the slow processing of legitimate claims and the prior approval of fraudulent applications. Legally, two pivotal Supreme Court cases shaped the tax landscape. In Moore, the Court narrowly ruled in favor of the government, though dicta hinted at potential future realization requirements for taxation and expressed hostility towards wealth taxes. The other significant case, Loper Bright, curtailed deference to government regulations, potentially impacting the IRS’s ability to interpret tax legislation without clear congressional guidance.
Loper Bright and the Future of Tax Regulation Litigation
The Loper Bright Supreme Court decision is anticipated to trigger a surge in litigation challenging tax regulations. The decision weakens the government’s authority to impose regulations lacking explicit legislative support, a practice the IRS has often employed. With diminished deference to administrative interpretations, taxpayers are more likely to challenge regulations perceived as unfavorable or exceeding the IRS’s authority. Courts, traditionally inclined to uphold Administrative Procedure Act requirements, are expected to be receptive to such challenges. This trend will further complicate the regulatory landscape and likely lead to more frequent court battles over tax law interpretation. The IRS, accustomed to operating with considerable latitude in implementing tax laws, will likely face increased scrutiny of its rulemaking processes and interpretations. This increased litigation could also slow down the implementation of new tax regulations, creating further uncertainty for taxpayers.
The Supreme Court’s Renewed Interest in Tax Cases
The Supreme Court’s decision to take up the Moore case, despite the seemingly settled nature of the issue, signals a potential shift in the Court’s approach to tax matters. The Court’s current 6-3 conservative majority appears more willing to revisit previously assumed settled tax principles. This willingness, combined with an increased tendency for tailored cases to reach the Court, could result in more frequent Supreme Court pronouncements on tax issues in the coming years. This trend introduces both greater clarity and greater potential for upheaval in the tax law landscape. The Court’s clear interest in addressing fundamental tax principles, such as the realization requirement, may lead to significant changes in how taxes are levied and collected.
The Fate of Direct File Under the Trump Administration
The IRS’s Direct File program, a pilot program designed to simplify tax filing for certain taxpayers, faces an uncertain future under the returning Trump administration. While the program is expected to continue through the 2025 filing season, its long-term prospects appear dim due to Republican opposition. Despite its initial bipartisan support, Direct File has become a target for Republican criticism, likely leading to its discontinuation after 2025. This outcome could leave taxpayers once again reliant on third-party tax preparers or the Free File program, potentially hindering efforts to simplify and streamline the tax filing process.
Tax Policy Under a Unified Republican Government
The return of a unified Republican government in 2025, with a Republican president, Senate, and House, is expected to usher in a period of significant tax policy changes. The impending expiration of provisions within the Tax Cuts and Jobs Act (TCJA) will provide the impetus for a comprehensive overhaul of the tax code. Republicans are anticipated to prioritize extending most, if not all, of the expiring TCJA provisions. Furthermore, expect attempts to enact some of President Trump’s campaign promises, including eliminating taxes on tips. Changes to the state and local tax (SALT) cap are also likely, reflecting the priorities of some Northeast Republicans in the closely divided House. While significant corporate rate reductions are unlikely, adjustments to credits or expensing rules might be pursued to lower the effective corporate tax rate. The potential for two reconciliation bills passing through the Senate increases the likelihood of substantial tax legislation, with Republicans aiming to cement their tax policy vision for years to come.
Revenue Raisers and Deficit Concerns
Despite the emphasis on tax cuts, some revenue-raising measures are expected to be included in upcoming tax legislation. While major tax increases are unlikely, targeted adjustments and pay-fors will be considered to address deficit concerns and offset revenue losses. Symbolic repeals of some green energy credits from the Inflation Reduction Act are anticipated, as are potentially other revenue-raising provisions that are unlikely to attract widespread public attention. Tightening of international tax rules or adjustments to the corporate alternative minimum tax (CAMT) could also provide revenue offsets, although significant revenue increases from these sources are not expected. Procedural maneuvers, such as switching to a current-policy baseline rather than a current-law baseline, could reduce the apparent cost of extending the TCJA provisions. Additionally, while not a traditional revenue measure, incorporating projected tariff revenue into budget calculations may be employed to offset some of the anticipated revenue loss from tax cuts.
The IRS Under Scrutiny: Funding Cuts and Enforcement Restraints
The IRS faces a challenging future under unified Republican control. The additional $80 billion in funding is highly likely to be repealed or repurposed away from enforcement activities. Congressional Republicans are expected to significantly curtail the IRS’s enforcement budget and powers. The likely replacement of Commissioner Werfel with a Trump appointee further reinforces the administration’s intent to rein in the agency. This shift in approach signals a move toward a less aggressive IRS, potentially impacting tax collection and enforcement efforts. The focus is likely to shift towards taxpayer service and compliance assistance, rather than rigorous audits and enforcement actions.
