2023 U.S. federal tax policy outlook: 5 things to watch

Several significant federal tax policy developments occurred in 2022, and this trend is expected to continue in 2023, although the type of developments will differ. In 2022, much of the focus was on tax legislation and monitoring the IRS backlog. In 2023, the focus for tax policy is likely to shift. Following are five tax policy areas to watch in 2023:

1. Congress. The midterm elections resulted in a divided Congress, with Democrats retaining control of the Senate and Republicans regaining control the House. While bipartisan agreement is always a challenge in a divided Congress, the current level of partisan discord exacerbates those challenges. Unless something major changes, chances are low that this Congress will enact significant tax legislation. This environment is bad news for taxpayers hoping for fixes this year to IRC Section 174 and IRC Section 163(j) and an extension of bonus depreciation.
   
   Congress’ agenda should remain busy in 2023 even without enacted legislation. A significant number of tax bills are likely to be introduced, setting the stage for future tax legislation and each party’s tax policy goals. Also, Congress, including the tax writing committees, is expected to increase oversight activities. The IRS-related issues likely to be the subject of these oversight activities include its plans to spend the $80 billion in multiyear funding it received under the Inflation Reduction Act of 2022 (IRA), its progress in reducing the backlog, its customer service levels, its enforcement priorities, and the security of taxpayer information.
   
   
   Crowe observation
   
   Look for an increase in committee investigations and hearings and requests for the Government Accountability Office and the Treasury Inspector General for Tax Administration to audit the IRS, as well as intense questioning of U.S. Department of the Treasury and IRS officials during congressional budget committee hearings.


2. IRS implementation of IRA. Scrutinizing how the IRS plans to spends the $80 billion in funding will be high on Congress’ oversight agenda, and some in Congress have indicated a desire to reduce or eliminate that funding. IRS implementation of the IRA is a priority for the secretary of the Treasury. The secretary directed the IRS to provide a report by mid-February on its plan for spending the IRA funding and has instructed the IRS to work closely with the deputy secretary on setting operational initiatives and timelines. Treasury’s involvement in IRS’ implementation of the IRA likely will be a topic of congressional interest.
   
   Currently, the IRS is headed by an acting commissioner, although a permanent commissioner has been nominated. While the nomination is pending in the Senate, the acting commissioner will be leading the IRS’ implementation efforts, including drafting the report to Treasury. To date, there are few details about what will be in the report and no information about the public’s access to the report once it is submitted to the secretary. Given the high interest in the report, it likely will be made public at some point.
   
   Expectations are high that the $80 billion will be used wisely, even though there is little agreement about what precisely that means. Areas of likely agreement, however, are that the IRS should use some of the money to eliminate the backlog of returns, refund claims, and correspondence and to improve customer service. The IRS already has said that it plans to use IRA funding to increase hiring and training and improve technology, some of which has already started to happen.


3. Regulations and other guidance. While the tax legislative front looks to be relatively quiet, increased action on the tax regulatory front already has begun. Recently, Treasury and the IRS released guidance to implement IRA tax provisions for energy tax credits, the corporate alternative minimum tax, and the stock repurchase excise tax. Regulation watchers also are awaiting proposed regulations on reporting for digital assets. In addition, IRS officials recently highlighted upcoming regulations in the international tax and estate and gift tax areas. Treasury and the IRS have indicated that more guidance on these and other topics is forthcoming.


4. IRS enforcement. Even before enactment of the IRA, the IRS started to increase enforcement in response to concerns about historically low audit rates. The IRA funding is expected to lead to even more IRS enforcement activity, including an increase in audits of large corporations and partnerships, wealthy individuals, abusive transactions, pandemic-related fraud, and transactions involving digital assets and offshore activities.
   
   
   Crowe observation
   
   More than half of the $80 billion in the IRA funding was allocated to enforcement. Although the administration has said that audit rates will not increase for families and businesses making less than $400,000 per year, Congress will be keeping a close eye on how enforcement dollars are spent.


5. Tax litigation. Several tax policy issues are being hashed out in the courts, and that trend looks to continue. Some of the issues involve procedural and substantive challenges to the validity of tax regulations, the method for computing foreign bank account report penalties, and privilege in the context of tax services.
   
   
   Crowe observation
   
   Increased IRS enforcement likely will result in increased Tax Court litigation and efund suits.
   
   The mail backlog and difficulties reaching the IRS by phone have resulted in many taxpayers having to go to court to resolve matters that once could have been resolved at the administrative level. Improved IRS phone service levels (which some taxpayers and practitioners have experienced recently) as well as the IRS’ increased use of digital communication should allow more taxpayers to resolve their issues without having to go to court.