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Forbes
6 days ago
- Business
- Forbes
One Big Beautiful Bill: Breaking Down The House Tax Package
UNITED STATES - DECEMBER 15: HOUSE CHAMBER—The Speaker's well on the House floor. (Photo by Scott ... More J. Ferrell/) In this episode of Tax Notes Talk, Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco discuss the final version of the House's reconciliation bill and what's next as the legislation heads to the Senate. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: reconcilable differences. On May 22 the House passed the One Big Beautiful Bill Act, a giant reconciliation bill that has been hotly debated over the past few months. Factional disagreements over the state and local tax deduction cap and energy credits, as well as the need to balance tax cuts with revenue raisers, made the road to a finished bill a rocky one. So how did those issues get resolved, and what's next for the bill as it goes to the Senate? You can find a link to our deep dive into the clean energy tax credit changes in the show notes. But joining me now to walk us through the bill as a whole are Tax Notes Capitol Hill reporters Cady Stanton and Katie Lobosco. Cady, Katie, welcome back to the podcast. Cady Stanton: Thanks for having us. Katie Lobosco: Good to be here. David D. Stewart: So there was a bit of drama leading up to this bill. Could you walk us through what happened in the lead-up to the vote? Katie Lobosco: Sure. There was still a lot of moving parts a week out from this vote. House Speaker Mike Johnson would later look back and call it "a perilous time with a number of pivotal moments." So one of the first signs of some trouble came when it was time for the House Budget Committee, which combines different parts of the bill together. They failed to advance the legislation. Now, this was the Friday before the vote. So, initially, four members on that committee — members who are part of the staunchly conservative House Freedom Caucus — they voted against advancing this bill. So they took the weekend to negotiate a little bit more, and that committee came back on Sunday at 10 p.m. to revote, and they were able to advance the bill at that point. Now, Monday came, and Johnson tells reporters, "We're still building consensus; there's still some sticking points that have yet to be decided." These were things like the SALT cap and cuts to the Medicaid program. But Tuesday comes, and there's a little bit of a shift on the Hill. President Trump comes to speak to the Republican caucus, and several members come out of that meeting saying they think the president moved the needle and we're getting closer to where we need to be. House leaders start singing a different tune, and the leaders say the time for talk is over. That comes partly true. On Wednesday — early Wednesday, 1 a.m. — the Rules Committee convenes. Now, they're the last committee to have to vote on the bill before it heads to the floor, but we still don't have a final bill text yet. They're still hammering out some of these details, and some of the holdouts — again from the House Freedom Caucus — they're still concerned about the deficit impact of the bill. They go and meet with the White House, and they return, and House Speaker Mike Johnson says, "We're going to move forward." WASHINGTON, DC - MARCH 20: Speaker of the House Mike Johnson (R-LA) speaks during a news conference ... More following a closed-door caucus meeting at the U.S. Capitol Visitors Center on March 20, 2024 in Washington, DC. Congressional leaders announced Tuesday they had reached a deal on a FY2024 spending package that includes budgets for about three-quarters of all federal discretionary spending, including Defense, Homeland Security, Labor-Health and Human Services, and other bills. Without a deal, the federal government would be facing a partial shutdown at midnight on Friday. (Photo by) We're about 5 p.m. now; we still don't have a bill text. The Rules Committee is still meeting, and we finally get this final bill, what we call the manager's amendment, that makes changes to the bill around 9 p.m. Rules advances it out of committee by midnight, and eventually the final vote happens just before 7 a.m. David D. Stewart: So tell me about this manager's amendment. What sort of changes were being made by the Rules Committee? Cady Stanton: Yeah, it's really important to point out that manager's amendment because, as Katie was mentioning, there were quite a few changes in the 11th hour to this bill. So some context on timeline here, since it all came together quite quickly. The original full bill text was released May 12, ahead of the House Ways and Means Committee markup, then amended slightly through the Budget Committee May 19, and finally that manager's amendment with the biggest swath of changes was released late May 21, less than 12 hours before the final vote. Those changes included a further increase on the SALT cap — even higher than the $30,000 cap set in the original version of the bill. It also included accelerated phaseouts for clean energy credits from the Inflation Reduction Act, with carveouts for nuclear energy projects and changes to transferability rules. There were also adjustments to FDII, GILTI, and BEAT calculations. That manager's amendment also undid a repeal originally in the bill on the excise tax for indoor tanning services, which is very specific. And there were also changes to itemized deduction limitations for those with income in the highest tax bracket. The point of these, as Katie discussed, was largely to convince holdouts. There were also some changes to Medicaid work requirements to please the House Freedom Caucus, and SALT members in the end were pretty happy with the SALT cap in the bill, and they called it a victory for SALT on social media. David D. Stewart: So how did the votes shake out ultimately? Katie Lobosco: In the end, the bill passed the house 215 to 214. So there were two Republicans that voted no — Thomas Massey of Kentucky and Warren Davidson of Ohio — and they have concerns about how much this bill will add to the deficit. I'll note that House Freedom Caucus Chair Andy Harris, he voted present. He wanted to move the bill along in the process, but he said, "There is still a lot of work to be done in deficit reduction and ending waste, fraud, and abuse in the Medicaid program." And then there were two Republicans that actually missed the vote that raised some eyebrows, because they were David Schweikert of Arizona and Andrew Garbarino of New York, and they were both very involved in getting this legislation together. Schweikert had just missed the vote; he showed up at the last second and didn't get his vote in. And Garbarino apparently fell asleep, according to Mike Johnson. Again, this vote was just before 7 a.m. in the morning. They had been going all night, and he didn't get to the floor in time to vote. David D. Stewart: So let's turn to the actual content of the bill. What sort of tax cuts are we seeing in the legislation heading to the Senate? Katie Lobosco: So the bill would extend most of the individual and estate provisions of the Tax Cuts and Jobs Act, which are set to expire at the end of this year. So it makes permanent lower tax rates for individuals and makes the expiring standard deduction permanent and temporarily boosted by $1,000 for individuals and $2,000 for joint filers through 2028. It permanently extends the child tax credit at $2,000, with a $500 boost through 2028, and it increases the estate and gift tax exclusion from $14 to $15 million for individuals and from $28 to $30 million for couples in 2026 and indexes that amount to inflation thereafter. There's also some reforms to business taxes: The bill would permanently increase the passthrough deduction from 20 to 23 percent, and it also would slightly adjust and make permanent three international business provisions. One is the amount of foreign-derived intangible income, known as FDII, that a domestic corporation can deduct. There's the GILTI, which is the amount of a corporation's global intangible low-taxed income deduction, and BEAT, the base erosion and antiabuse tax. David D. Stewart: So you mentioned that there was an increase in the SALT cap. What happened with the SALT cap and these energy credits? Cady Stanton: Absolutely. SALT was definitely the producer of the most drama over the past few weeks, particularly in the tax realm. For context, the SALT cap is currently set at $10,000, and that was set by the TCJA, but that provision is set to expire at the end of 2025. So after a lot of late-night meetings and pretty loud pushes from Republican members of the SALT Caucus, the bill in the end included an increase on the SALT cap to $40,000. It also included a phaseout for that cap, starting at people who make income over $500,000, and there's also a slight increase both in that cap and that phaseout every year until 2033. And after 2033 it remains what it was for 2033, so it doesn't go back down. Now, this high number was considered a pretty big win for the SALT Caucus, but it's important to note that there really aren't that many SALT allies in the Senate, particularly among Republicans. So it would be pretty surprising if this stays as-is after the Senate is done with the bill. Now, turning to the IRA credits. When we talk about IRA, we're obviously referencing the Inflation Reduction Act, a bill that was passed by Democrats in 2022 and included a variety of clean energy tax credits. At the time the bill was passed, there was a certain cost estimate for these credits, but that estimate has gone up significantly, according to estimates from the Joint Committee on Taxation. As a result, the credits have been the target of Republican ire ever since, especially after they achieved the trifecta of the White House, Senate, and House control in November. Now, the reconciliation bill includes a mix of accelerated phaseouts and repeals of those credits, including the electric vehicle credits. The wording in the bill would restrict Chinese involvement in projects under this "foreign entities of concern" clause, and the reconciliation bill also specifically targets wind and solar power projects with restrictions. There are specific carveouts for nuclear projects that were included as a way to appease some moderates concerned about these cuts. And the last-minute changes to the bill specifically targeted restrictions on the clean electricity investment and production tax credits. BEIJING - OCTOBER 02: Chinas national flag is flown during a rock-and-roll festival to mark Chinese ... More National Day on October 2, 2005 in Beijing, China. Various activities are being held in China to mark the National Day. (Photo by) David D. Stewart: Now, what became of President Trump's campaign promises? Things like no tax on tips, no tax on social security? Katie Lobosco: So a lot of his priorities did get in the bill, but they got in as temporary measures, so they are only implemented for a certain amount of time. Why would lawmakers do this? That would reduce the overall cost over the 10-year budget window, which is how it's usually estimated. So, for Trump's priorities, the bill does make tip and overtime income deductible through 2028. Now, the bill doesn't touch Social Security specifically — that might run afoul of certain rules in the Senate — but it does increase the standard deduction for seniors by $4,000 through 2028. It also makes auto interest deductible for owners of cars made in the U.S. through 2028. The bill also creates what it calls Trump Accounts. These would be tax-advantaged savings accounts, and the government would contribute $1,000 for children born between 2025 and 2028, and it would also temporarily restore a trio of business tax cuts. This includes immediate expensing for domestic research and development through 2029, 100 percent bonus depreciation also through 2029, and 100 percent expensing for qualifying structures for which construction begins before the end of 2028 and the placed-in-service date occurs before the end of 2032. David D. Stewart: Now, you mentioned that some lawmakers were having trouble with the price of this bill. So what did it come out to in the end? What sort of costs are we expecting from this bill? Katie Lobosco: So the key takeaway here is that the bill overall will increase projected deficits by nearly $3 trillion over a 10-year period. Now, some Republicans are claiming it won't add to deficits because the changes will spur so much economic growth, but that's just not likely to be the case, according to a number of independent analysts. Since there were last-minute changes in the bill, we don't have a full official score from the Congressional Budget Office at this time, but the Penn-Wharton budget model has done its own estimates, and they find that the bill as written would increase deficits by $2.8 trillion over 10 years. The tax provisions alone would cost $4.3 trillion over 10 years. Most of that is due to the extensions of the TCJA's individual and estate tax provisions. The bill also boosts spending on defense and border security. The House did find more than $1.5 trillion in savings, mostly from changes to Medicaid, food assistance programs, and changes to federal student loans, but that only partially offsets the cost. David D. Stewart: So what are we expecting to happen next when this bill gets to the Senate? Cady Stanton: That's a really great question in terms of looking ahead. So passage through the House was a huge win for Republicans, and particularly for House Speaker Mike Johnson, who a lot of people honestly underestimated. He proved he can whip votes for passage within a very thin margin for his conference. But there's more tough work ahead for Republicans in the Senate, where members haven't been shy to share their laundry list of desired tweaks. Top of the list for many members, as they told Katie and I, is more permanency on provisions that the House bill makes temporary, including the three big promises from President Trump on the campaign trail: no tax on tips, no tax on overtime, and a bonus deduction for seniors, all of which currently end in 2029, as Katie mentioned. And that would be at the end of President Trump's presidency, as well. There's also a push to make permanent that trio of business tax cuts from the TCJA that Katie mentioned, and those had already started to expire or phase out, and this bill would restore them, and senators would really want to make that restoration permanent. As I said before, I also wouldn't be surprised to see changes to the SALT cap, as well as a fresh look at the IRA credit changes in the bill. A few senators have already mentioned that they're pretty worried about the impacts on their districts from repealing and phasing out these credits, where projects have been really bolstered by these tax credits. Finally, jumping back to what Katie was saying about the cost, the deficit impact of the bill will likely take a pretty large role in conversations over the next few weeks, as it did in the House with the deficit hawks. The Senate is going to use this current-policy baseline we've talked about before, which gives them some more flexibility to their scoring on the legislation, but some deficit hawks — specifically Senators Rand Paul and Ron Johnson — have already said that they want to see deficit reduction be top of mind in talks of changes in the coming weeks. So expect that to be a big part of the conversation. David D. Stewart: What are we expecting as far as the timeline? When should we expect movement to happen in the Senate? Cady Stanton: It's really tough to read exactly when the next step might be taken in the Senate, but there are a couple of important dates to pay attention to to see how things progress. The Senate won't get its chance to leave its mark on the bill until it returns from recess June 2, but once they return, senators will get to work on their changes to the bill ahead of this July 4 deadline. That's been suggested by Treasury Secretary Scott Bessent and reiterated by Republican leaders in recent weeks. There's also the chance that after changing the bill in the Senate, the House wants to change it again, which would send it back to the Senate a second time and obviously would extend the timeline, as well. WASHINGTON, DC - MARCH 13: Treasury Secretary Scott Bessent speaks to reporters outside the West ... More Wing after doing a television interview on the North Lawn of the White House on March 13, 2025 in Washington, DC. Bessent stopped to speak to reporters briefly and took a question on tariffs and voiced his concerns about a potential government shutdown. (Photo by) Like the Memorial Day deadline that the House set for itself, this July 4 deadline is largely self-imposed, but members do have a hard deadline for this version of the bill because it includes a debt limit extension. The "X date" for the debt limit could come in early August, so Treasury Secretary Bessent has encouraged Congress to get that addressed by mid-July, and it has to be done by the end of July since the House and the Senate take the entire month of August off. Now, it's important to note that they could always pull the debt limit out of the bill and work on it separately, but that would definitely disrupt the balance of the legislation and create some problems that would require Republicans to go back to the drawing board on the bill and on reconciliation in general. Another big factor on the timing of when this moves to the Senate is how Republicans in that chamber choose to make the changes they want. I wrote a pretty in-the-weeds story recently on the procedural options that senators have for these changes, but what it really comes down to is how much of an opportunity members will push for to be heard on the changes they want. Senate Majority Leader John Thune has said pretty openly that he wants to return to regular order in the Senate, which would draw out a process for amendments on the bill that would really stretch out work and create issues with the thin majorities that Senate Republicans have on their committees. But that process might also just be necessary, given how many people want changes, not just to the tax title of the bill, but also to areas like these SNAP and Medicaid program changes. Now, senators and their staff are likely working on filling out which of those choices they want to move forward with during recess, so it's worth keeping an eye out for which method they decide upon. David D. Stewart: Well, definitely sounds like they're going to be keeping you two busy for the next few months. Thank you for being here. Cady Stanton: Thanks, Dave. Katie Lobosco: Thank you.
Forbes
19-05-2025
- Business
- Forbes
Tariffs As Hidden Taxes: Was Amazon Right About Price Disclosures?
Several weeks ago, I used this column to suggest an unconventional idea: The taxpayers of the United States would benefit greatly from the creation of a national tariff-payer advocate. Such an officeholder would take on responsibilities that parallel those of the national taxpayer advocate — a position that has existed within the IRS since the mid-1990s — but in the tariff context. The officeholder would be supported by a professional staff and function as an independent actor, at liberty to raise whatever concerns she deems appropriate insofar as they affect taxpayers. While the national taxpayer advocate is known as 'your voice' inside the IRS, this new position would represent your voice within the External Revenue Service — an entity that does not exist yet, but one that President Trump has promised to establish. The idea has drawn some criticism, including the observation that the U.S. public has been getting along just fine all these years without such an advocate. Fair enough, although tariffs have recently acquired a gravity that's been absent for roughly the last 100 years. The public might not have needed this kind of advocate before, but it does now. The fiscal balance between internal and external taxes is experiencing a generational reset. A separate criticism is that a tariff-payer advocate would have little to do, given that cross-border trade is thought to be a dry subject matter. Nuts to that, I say. Look no further than Tax Notes' headlines since the start of the year. Four months into 2025 the business of tariffs is more dramatic than the comparatively sedate world of income taxation. Rest assured that a national tariff-payer advocate (if we had one) would be inundated with projects. Consider what transpired during the last week of April. Unconfirmed reports began appearing on the internet that Amazon — the Goliath of online retail shopping — was poised to unveil a new feature in how it displays prices. The following blurb, posted on Punchbowl News on April 29, tells the story: 'Amazon doesn't want to shoulder the blame for the cost of President Donald Trump's trade war. So the e-commerce giant will soon show how much Trump's tariffs are adding to the price of each product, according to a person familiar with the plan. The shopping site will display how much of an item's cost is derived from tariffs — right next to the product's total listed price.' A national tariff-payer advocate could have had a field day with this development. The impetus for Amazon's move was a policy change the Trump administration had announced a few weeks earlier. In a move that was overlooked amidst the 'Liberation Day' hoopla, Trump eliminated the long-standing de minimis rule for international parcels with a declared value not exceeding $800. Previously, these shipments were exempt from duties on the grounds of practicality. This subcategory of imports was regarded as being too insignificant (and too numerous) for customs officials to worry about. The conventional thinking had been that the meager revenue generated by imposing tariffs on these items wouldn't justify the associated inspection and processing costs. In other words, the juice was not worth the squeeze — or so we thought. It has been known for some time that the de minimis exemption had gradually developed into a prominent gap in tariff enforcement. It's estimated that the quantity of diminutive shipments has increased sixfold over the last decade, now numbering more than a billion parcels per year. Because each package cannot be separately inspected, there's no telling what they contain — perhaps contraband, perhaps fentanyl. Critics began referring to the de minimis exemption as the U.S. tariff loophole. Technically speaking, they were not wrong. On April 2 the White House changed all of that. It announced that, going forward (effective May 2), de minimis items sent through the international postal network would be subject to a duty equal to the lesser of a 30 percent tariff on the declared value or $25 per item. The move will especially affect small-scale vendors that conclude sales to U.S. consumers through popular online platforms like eBay and Etsy. It will also affect online vendors that reach U.S. consumers through foreign-based platforms such as Shein or Temu — the massive e-commerce marketplace operated by the Chinese company PPD Holdings. Amazon likewise found itself needing to adapt to the removal of the de minimis exemption — thus, the proposed change in how the company would display prices on one of its affiliated platforms. But for the retailer's display of the embedded tariff cost, users might be baffled by the unexpected spike in prices and falsely conclude that Amazon was simply gouging them. By way of example, consider a hypothetical listing of an imported espresso machine normally priced at $100. With Trump's rescission of the de minimis exemption, the listing might read as follows: 'Price: $125 — excluding local sales tax, including $25 tariff.' That kind of disclosure seems harmless enough. As long as the pricing data is honest and accurate, who could possibly have a nonfrivolous complaint? Amazon is no better off than if it had omitted the price disclosure. It's merely passing along a tax cost, which companies do all the time. More importantly, the retailer is taking the beneficial step of informing consumers what it's doing. In this manner, U.S. consumers would be better educated about the tax-induced costs they're facing. They would know the listed price is tax-inclusive as to tariff and tax-exclusive as to local sales tax — the precise amount of which would vary according to the purchaser's location, as determined by the provided mailing address. Given that our fictional purchaser would be asked to bear both tax burdens, I hardly see what's objectionable about spelling it out. The more detail, the better. I ask the readers of Tax Notes International, is transparency not optimal policy? Why would anyone prefer that U.S. consumers be kept in the dark? What strange virtue lies in keeping a federal tax burden concealed from public scrutiny? None that I can think of. Readers know what happened next. White House press secretary Karoline Leavitt, flanked by the Treasury Secretary Scott Bessent, lashed out against Amazon during a morning briefing with reporters. She labeled Amazon's move a 'hostile and political act.' She went further, accusing Amazon of inappropriate bias, noting that the company proposed no similar pricing disclosure to reflect the rise of inflation that occurred during the Biden administration. Her remarks were astonishing in how they framed Amazon as the bad actor, when all the company had done was to consider making tariff cost visible to the public. Moreover, Leavitt conveniently ignored that inflation (a dilution of household purchasing power) is not a distinct tax assessed and collected by the federal government, unlike a tariff. The bottom line is that recent inflation numbers (while highly embarrassing to Biden) cannot be compared apples-to-apples with Trump's tariffs. Leavitt's complaint would have made more sense if she had instead focused on Biden's own tariffs. That would have presented a like-for-like scenario. So, why didn't Amazon come up with the bright idea of displaying per-item tariff costs a few years ago, while Biden was in office? The answer, as discussed above, is that Biden isn't the one who eliminated the de minimis rule, which initiated the disclosure controversy. Of course, Amazon's senior management might have done us the favor of presenting per-item tariff costs irrespective of the status of the de minimis exemption. Ideally, that would have been done long ago, for the sake of transparency and enlightening retail consumers. Had that occurred, it would scarcely matter who happened to be in the White House. Both Trump and Biden imposed heavy tariffs that translated to higher consumer prices. Objectively, what Leavitt describes as a 'hostile' act by Amazon is nothing more than economic transparency. The alternative is that the federal tax burden be intentionally obscured from public sight. What are we to make of that? It's troubling that anyone in government — at any level of government — would actively seek to keep a tax concealed from U.S. consumers. Rather than scold Amazon, the White House should have praised the company's pricing scheme as a step forward in commercial stewardship. Leavitt and her boss should have hailed the move as an advancement in 'America First' economic policy. After all, but for such disclosures at the retail level, consumers might not realize they're poised to purchase a product made on foreign soil. One might liken the disclosures to a tool of economic patriotism. When you think about it, the proposed disclosures would likely encourage the consumption of domestically produced goods. The feared chilling effect on consumption, if any, would be limited to imports. Isn't that how protectionism is supposed to work? The right call here would have been an approach that embraces transparency: Allow Amazon to implement its price disclosures, then encourage all other retailers to follow suit. Give U.S. consumers as much price information as possible, and let them exercise discretion in the marketplace as they see fit. Instead, the administration revealed itself as overly fixated on dictating which tidbits of pricing data are visible and which are deemed so politically sensitive they must be concealed. Pardon my frankness, but that's weak. There's no way around it. Tariffs affect retail prices and everybody knows it. The White House needs to own it. Back to our timeline. Within a few hours of Leavitt's remarks, Trump phoned Amazon CEO Jeff Bezos. The purpose of the call was to urge Bezos to reverse course on the price disclosure. Bezos accommodated the request. Tim Doyle, a spokesperson for Amazon, later explained the situation as follows: The team that runs our ultra-low-cost Amazon Haul store considered the idea of listing import charges on certain products. This was never approved and is not going to happen. There you have it: a dust-up over nothing. Amazon's senior management never even approved the disclosure policy, supposedly. Trump later commented that 'Jeff Bezos was very nice . . . he solved the problem very quickly.' Again, the only 'problem' was that somebody wanted to keep people ignorant about tariff costs being passed to retail consumers. Trump and Bezos have a peculiar relationship. By way of reminder, Bezos is the second wealthiest man in the world (behind Elon Musk and ahead of Mark Zuckerberg), with an estimated net worth of $220 billion. Trump frequently criticized Bezos during his first term, accusing Amazon's business model of undercutting competitors on price and thereby harming traditional brick-and-mortar establishments. This friction did not last. Last year, with the presidential election fast approaching, Bezos seems to have made goodwill gestures toward Trump. Perhaps coincidentally (or not), The Washington Post, which Bezos owns, refrained from endorsing a presidential candidate. While superficially neutral, the policy shift was tantamount to a win for Trump. Unlike Musk, Bezos did not contribute to Trump's campaign ahead of the election, but he did donate a cool $1 million to Trump's inauguration fund. Bezos dined with Trump at Mar-a-Lago in December 2024 and was in the Capitol rotunda when Trump was inaugurated on January 20. Whatever their prior differences might have been, the two are now getting along quite well. I mention this because it relates to my earlier point about the role of an independent voice within the federal government — my proposal for a national tariff-payer advocate. The above episode confirms that retailers cannot be counted on to voluntarily display pricing data that fleshes out per-unit tariff costs. That means the job of educating the public on these matters must fall to someone else — why not a dedicated public servant? This is also why such an advocate must be formally recognized, by statute, as an independent actor. It's at this point that I turn to an unlikely source of inspiration: the late congressman Phil Crane, a Republican who spent 36 years in the House of Representatives. To paraphrase Crane, the 'worst tax imaginable' is a hidden tax. Hidden taxes are sinister things, Crane told me on more than one occasion. His concern was that because people don't realize they're paying a tax, they don't know enough to protest loudly against it. That conforms to Crane's ideological stance that all taxes must hurt a little bit, and to that end they must first be visible to the taxpayer. Crane offered these comments in the context of a conversation about VAT, to which he was vigorously opposed. I quibbled with his characterization of VAT as a hidden tax. Sure, VAT is price-inclusive (unlike the retail sales taxes used by most U.S. states), but I'd point out that VAT charges are typically listed on a consumer's receipt. Crane had a ready response for that, noting that few people these days bother to study their receipts. Besides, the appropriate time to inform consumers of the tax burden they're facing is not after the purchase has been completed, but before it takes place — when the acquired knowledge is able to influence their purchasing decision. Touché, congressman! Crane's criticism wasn't limited to VAT; he detested all forms of tax-inclusive pricing. He once told me that even the federal gasoline excise tax wasn't as transparent as it could be, and that upset him. Despite that, the excise tax is sensitive enough that neither Republican nor Democratic lawmakers have dared to increase it since 1992. Crane was a deeply conservative lawmaker, one whose positions I often disagreed with. But he had a valid point about transparency. I wonder what he would have thought about Amazon's augmented pricing policy, which would have spelled out the embedded tariff cost. More to the point, I wonder how U.S. consumers would have reacted to Amazon's pricing scheme, had it been allowed to play out without intervention from the executive branch. It's pure speculation on my part, but I'd guess that most consumers would greatly value the additional pricing details. Indeed, there's emerging evidence they do. Increasing numbers of U.S. consumers are logging on to their Temu accounts and taking screenshots of product listings, then circulating the images over social media. It's an impromptu response to such information not being made available by U.S.-based retailers like Amazon. Think of it as tax transparency via crowdsourcing. Temu, as it turns out, has chosen to be transparent about embedded U.S. tariff costs — a direct consequence of Trump's termination of the de minimis exemption. Temu has adopted the identical disclosure practice that Amazon considered before backing down under pressure from the White House. As a result, with a little digging, U.S. consumers should be able to easily discover embedded tax costs resulting from the imposition of U.S. tariffs. It's pathetic, however, that we need to resort to the sharing of screenshots from a Chinese website to be fully informed. Knowledge is power, as they say.
Forbes
13-05-2025
- Business
- Forbes
Still At The Table: Updates On The OECD Global Tax Project
CANADA - 2025/02/07: In this photo illustration, the Organisation for Economic Co-operation and ... More Development (OECD) logo is seen displayed on a smartphone screen. (Photo Illustration by Thomas Fuller/SOPA Images/LightRocket via Getty Images) In this episode of Tax Notes Talk, Tax Notes chief correspondent Stephanie Soong discusses how the Trump administration's tax priorities have been shaping negotiations on the OECD's two-pillar project. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: OECD update — pillars, tariffs, and the path forward. When President Trump first took office back in January, he announced that the U.S. would be pulling out of the OECD's international corporate tax reform deal. Since then, however, the U.S.'s position has changed a few times as the Trump administration defines its tax priorities. Meanwhile, the EU has been working to find a solution to the U.S.'s concerns that could allow the two pillars to be implemented. So what role will the U.S. play in ongoing negotiations, and how is the OECD continuing to develop its international tax framework? We'll link to previous coverage in the show notes, but here to bring us up to date is Tax Notes chief correspondent Stephanie Soong. Stephanie, welcome back to the podcast. Stephanie Soong: Thanks for having me again. Always a pleasure. David D. Stewart: So why don't you bring us up to speed on what's happened since we last checked in on pillar 2. And just a note before we get started: We recorded this on May 7, prior to the announcement of a possible trade deal with the United Kingdom. Stephanie Soong: Well, the OECD published another pillar 2 guidance package January 15, which included several items, including updated GLOBE information return and clarifications about how MNE [multinational enterprise] The package also contained a central register of legislation with transitional qualified status, meaning measures that have undergone a fast-track process to ensure they're consistent with the OECD's global minimum tax rules during a transition period. The OECD also published a multilateral competent authority agreement and commentary to facilitate the centralized filing and exchange of GLOBE information returns between tax administrations. But then came the president's January 20 memorandum ordering the Treasury secretary and the U.S. trade representative to come up with proposals for "protection from discriminatory and extraterritorial tax measures." And a report was submitted to the White House in March, although the report has not been made public. I've tried to get this report and have not been able to get it, but once I do — if I do — I will report on it for sure. So you mentioned that the U.S. pulled out of this deal. So the memorandum did say that "the secretary of the Treasury and the permanent representative of the United States to the OECD shall notify the OECD that any commitments made by the prior administration on behalf of the United States with respect to the global tax deal have no force or effect within the United States absent an act by Congress adopting the relevant provisions of the global tax deal." So many people interpreted this memorandum to mean that the Trump administration was withdrawing from the two pillar global tax reform plan. They may have thought that, but to me, it seemed that it was just reinforcing that there's a new sheriff in town. There's a new sheriff in town and what the previous sheriff did no longer applies, which is fair because it's a new administration. PARIS, FRANCE - DECEMBER 7: President-Elect Donald Trump reacts during his meeting with Prince ... More William, Prince of Wales at the Embassy of the United Kingdom's Residence on December 7, 2024 in Paris, France. Donald Trump was among the wave of foreign dignitaries descending on Paris this weekend to attend a reopening ceremony at Notre-Dame Cathedral, more than five years after it was damaged in a major fire. (Photo by) So anyway, shortly after that, on January 22, House Republicans reintroduced the Defending American Jobs and Investment Act, which is largely seen as an anti-pillar 2 bill. The bill would increase U.S. tax rates on foreign companies and investors if their companies impose extraterritorial measures on U.S. companies like the undertaxed profits rule. David D. Stewart: So what's happening with the other pillar going on right now? What's happening with pillar 1? Stephanie Soong: There hasn't been much movement at the OECD on pillar 1, which if you'll recall, consists of amount A, the taxing right, and the withdrawal and prevention of digital services taxes and other similar measures, and amount B, which is an optional simplified and streamlined transfer pricing approach to price baseline marketing and distribution transactions. And negotiations are continuing on a mandatory version of amount B. There was a lot more discussion of DSTs in the context of trade rather than pillar 1. Over the past few months, the threat of trade wars between the U.S. and the rest of the world started looming large, particularly with the Trump administration's plan to impose tariffs on countries with which the U.S. has trade deficits in goods. As these trade tensions grew, there was some discussion in the Trump administration about digital services taxes as a potential trade barrier. And if you remember, the U.S. really hates DSTs and other kinds of measures like that, because in its view, these kinds of taxes unfairly target U.S. companies. Pillar 1 of the reforms was supposed to roll back those DSTs and similar measures. During this time, there was some speculation that some countries were reconsidering their DSTs in response to potential tariff threats. There were rumors that the U.K. was considering amending or abolishing its DST as it tried to secure a carveout from the tariffs, but so far, the U.K. government has been vague on whether DST changes were even under consideration. And the Italian prime minister met with Trump in April, and they said in a joint statement that they "agreed that a non-discriminatory environment in terms of digital services taxation is necessary to enable investments from cutting-edge tech companies." It wasn't clear whether this meant Italy was planning on eliminating its DST. In January Italy did eliminate the €5.5 million domestic revenue threshold for its DST regime, and that expanded the scope of the tax to all large companies with Italian revenue from the provision of digital services. And meanwhile, in India, the government abolished their 6 percent equalization levy at the end of May. And at first, the Indian finance minister said abolishing the levy was meant to "address the uncertainty in international economic conditions," which prompted speculation that India was responding to the tariff threats. But the finance minister reportedly said that the levy's withdrawal was part of the process of rolling back the 2 percent equalization levy, which was abolished in 2024. While some countries appear to reconsider their DSTs, lawmakers in some jurisdictions seem to move in favor of introducing DSTs — like in Australia, the Green party proposed a 3 percent DST in March. And there was also talk in April from the European Commission about an EU-wide retaliatory tax on U.S. digital advertising revenue. And the South Centre in Geneva also urged developing countries to adopt DSTs and put up a united front against external threats against those measures, which I took to mean as trade threats. European flags fly at half-mast during a meeting of EU energy ministers to find solutions to rising ... More energy prices at the EU headquarters in Brussels on Septembre 9, 2022, one day after the death of Britain's Queen Elizabeth II. - Queen Elizabeth II, the longest-serving monarch in British history and an icon instantly recognisable to billions of people around the world, has died aged 96, Buckingham Palace said on September 8, 2022. (Photo by JOHN THYS / AFP) (Photo by JOHN THYS/AFP via Getty Images) And on amount B, we saw some more countries, like Norway and Turkey, saying they won't adopt the framework at the moment. And the co-chairs of the OECD inclusive framework published a statement in January that pretty much said that negotiations on pillar 1 centered mostly on trying to overcome differences between jurisdictions on the mandatory version of amount B. David D. Stewart: So turning back to what we're seeing out of the U.S. Since that memo in January, have we seen the U.S. actually leaving the OECD's negotiating table? Stephanie Soong: Interestingly enough, the OECD inclusive framework met in Cape Town, South Africa, in early April and produced a statement that pretty much confirmed that the talks were continuing on pillar 1 and pillar 2. Nothing changed from the January statement regarding pillar 1, but what was significant was that the United States was among the inclusive framework members that approved the statement, signifying the U.S. was still at the negotiating table. Manal Corwin, OECD's tax head, said at the Pacific Rim conference in mid-April that members were interested in finding a path forward with the United States that would address its concerns with pillar 2. And as I probably mentioned on this podcast, the U.S. GILTI [global intangible low-taxed income] regime partly inspired the pillar 2 income inclusion rule, but as far as key differences, one big one is that the GILTI rules apply on a blended worldwide basis, while the income inclusion rule applies on a jurisdictional basis. David D. Stewart: Do we have a sense of what the U.S. wants to achieve in these negotiations? Stephanie Soong: Well, a Treasury official said during a speech at the Pacific Rim conference that the U.S. priority is to find a politically acceptable and stable coexistence between the GILTI regime and the pillar 2 regime. And what coexistence means is yet to be determined. But there was an interesting moment after his speech when he clarified to us reporters that he did not say equivalence during his speech. So the U.S. apparently is not looking for equivalence between the GILTI regime and pillar 2. We really don't know yet what the U.S. wants or what it told the inclusive framework it wants, but my colleague Elodie Lamer was the first to report that the Polish EU Council presidency had set out options to help smooth things over with the United States. David D. Stewart: What sort of options are they proposing? Stephanie Soong: Well, they include revisiting the GLOBE rules on the treatment of tax credits because U.S. incentives like the R&D [research and development] credit aren't considered qualified refundable tax credits, which could lead to a lower effective tax rate and a possible pillar 2 tax abroad for U.S. companies. And another option is to limit the applicability of the UTPR — the undertaxed profits rule — possibly by extending the transitional undertaxed profits rule safe harbor or amending the pillar 2 directive to roll back the UTPR. Then there's the option of giving the U.S. GILTI regime equivalence to the IIR. But like I said before, the Treasury officials seemed to indicate that that was not what they were looking for. EU member states reportedly indicated their attachment to the UTPR's integrity and considered any changes to the pillar 2 directive to be premature. But meanwhile, business stakeholders have been increasingly calling for pausing the application of the EU's UTPR. David D. Stewart: So what should we be looking for next in these negotiations between the OECD and the U.S. and other nations? Stephanie Soong: So what I'm looking for myself is more information about the so-called path forward on pillar 2 with the United States and more updates on pillar 1, like the U.S. draft regs for amount B. Another thing I'm looking for is countries adopting pillar 2 rules and amending their existing pillar 2 rules. I'm looking out for whether countries are going to amend or abolish their existing DSTs or introduce new ones since they'll be targeted by tariffs anyway. And as always, pillar 2 guidance from the OECD. David D. Stewart: Well, it seems like there's going to be plenty to keep an eye on. And Stephanie, thank you for bringing us up to speed on all of it. Stephanie Soong: No problem. Thank you so much for having me on.
Forbes
06-05-2025
- Business
- Forbes
IRS Automated Guidance: Pros And Cons
WASHINGTON - AUGUST 30: The Internal Revenue Service building is shown August 30, 2006 in Washington ... More DC. (Photo by) Getty Images In this episode of Tax Notes Talk , Professors Joshua Blank and Leigh Osofsky, authors of Automated Agencies: The Transformation of Government Guidance , discuss the IRS and other federal agencies' use of artificial intelligence and chatbots in providing legal guidance to the public. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International . This week: I, taxbot. As automation and artificial intelligence become ubiquitous, U.S. government agencies like the IRS have been incorporating automated tools into their interactions with the public. While these tools do make it easier to share information, how accurate is the automated guidance? Does it always reflect agency positions, and what does that mean for taxpayers seeking the advice? Do the benefits of these tools outweigh the drawbacks? Two law professors recently explored these questions and more in their book, Automated Agencies: The Transformation of Government Guidance . Joining me now are the authors, Joshua Blank and Leigh Osofsky. Josh, Leigh, welcome to the podcast. Joshua Blank: Thank you. It's a pleasure to be here. Leigh Osofsky: Thank you so much for having us here. David D. Stewart: So why don't we start off with the basic question of what sort of automated tools were you looking into? What sort of automated tools are being used at the IRS and other agencies? Leigh Osofsky: For the purposes of our research, we conducted a review of automated tools across the federal government, and we specifically focused on chatbots and other automated tools that provide guidance to the public about the law. Some of the major tools that we examined included, at the IRS, the Interactive Tax Assistant. Also, at other agencies, tools like "Emma," which provides guidance about immigration and citizenship questions that you might have, and also at Federal Student Aid, "Aidan," which provides answers to questions you might have about your student aid and the law surrounding that. David D. Stewart: What led you down this path of research? What was the initial inspiration? Leigh Osofsky: Yeah, for over a decade we've been researching the ways that the IRS communicates complex law to the public. The issue is that tax law is incredibly complex and often ambiguous, and yet it has to be applied by hundreds of millions of individuals on an annual basis, many of whom simply don't have the time, or sometimes even the capacity, to understand how the complex tax law applies in their situations. At the same time, the IRS has obligations to help taxpayers comply with their tax obligations. Indeed, this is part of the IRS's mission statement. This puts the IRS in a difficult position: How can the IRS explain complex law that the public can't really understand? To solve this question, the IRS is increasingly turning to automated tools like chatbots to help the public understand the law. We got really interested in chatbots and started investigating them, and specifically one of the chatbots that we focused on was the Interactive Tax Assistant. If you go on the IRS's website, the Interactive Tax Assistant will be able to answer a whole number of questions you might have about your tax obligations, such as, "Do I have to file a tax return?" Or, "When is the tax return due?" Or even, "Can I take this particular deduction?" We started doing some of our own work around the Interactive Tax Assistant. We were then hired by the Administrative Conference of the United States, or ACUS, to examine chatbots across the federal government. Based on that research and other work we've done, we eventually published our book, Automated Agencies: The Transformation of Government Guidance . This book sets forth a comprehensive examination of the ways that federal governments are using automated technology like chatbots to advise the public about the law. David D. Stewart: Let's start off with the good of what you found. What are the positives that you found in the government's use of chatbots? Joshua Blank: Well, first, automated tools like the Interactive Tax Assistant do a great job of providing fast answers. They are much quicker and more efficient than a human customer service representative, especially if the issue is really simple, like "When is my tax return due?" Chatbot conversation Ai Artificial Intelligence technology online customer chatbot, ... More robot application, OpenAI generate. Futuristic assistant on internet. getty Second, agency officials view these types of tools as helping the public navigate complex legal rules and procedures and also aiding third-party advisers like accountants and lawyers. The last real benefit that we discovered in our research is that agency officials view these tools as a way to clearly and transparently state the agency's views of legal issues to the public, and also to advisers. David D. Stewart: It sounds like these can be helpful, but what are the downsides of them? Joshua Blank: Well, one of the features of tools like the IRS's Interactive Tax Assistant is that it illustrates what we describe as simplexity. Simplexity — in our research, we've described this as occurring when the law is complex and the government doesn't simplify the underlying law; instead, it presents the law as though it's simple. Our book shows how the government's simple presentation of complex law can result in systematic deviations from the underlying law. In other words, the government can present the formal law as something other than what it actually is. So just to take a couple of examples, sometimes the Interactive Tax Assistant will present the law in ways that are favorable to the taxpayer. Imagine that you are interested in getting an MBA — a Masters of Business Administration — and you want to know whether you can deduct the cost of that degree. So you go to the Interactive Tax Assistant, and in a few clicks you reach a question where the Interactive Tax Assistant says, "Well, is this necessary to meet the minimum educational requirements of your trade or business?" And you think about it and say, "No, actually, I'm already in the business, and the MBA isn't necessary to be in this business." The Interactive Tax Assistant quickly tells you that, "Well, in that case, the answer is that the MBA costs are deductible." Now, that's a clear, quick answer, but if we dig a little bit deeper, we'll quickly see that the issue is a lot more complex. In fact, this particular issue has been subject to lots of litigation. The Interactive Tax Assistant may tell you the expense is deductible, but that was only because of the information you provided. Very simple inputs lead to clear outputs, but they aren't necessarily consistent with the underlying law. Sometimes a tool like the Interactive Tax Assistant can deliver advice which is unfavorable to the taxpayer. For example, imagine a chronically ill taxpayer who can't take care of daily needs like bathing and cooking and hires a home health aide, and the taxpayer wants to know, "Well, are my expenses deductible?" The Interactive Tax Assistant very quickly will tell the taxpayer, "No, household health expenses are not deductible." But if we take a look at the governing law, we'll quickly find that the relevant section of the Internal Revenue Code, section 213, has a provision involving qualified long-term care services, and the legislative history makes it clear that maintenance or personal care services can include things like meal preparation, household cleaning, and other similar services. So this is an example that shows the Interactive Tax Assistant may tell the taxpayer you can't claim a deduction that the taxpayer may actually be entitled to. And we talk about many more examples of this in our book, Automated Agencies . David D. Stewart: I know in other areas of AI and these sort of automated systems there's a danger of hallucinations, where the AI just assumes a thing exists and then wills it into being in its text, but it's not really true. Are we seeing that with these government chatbots? Leigh Osofsky: Interestingly, at least at present, the federal government chatbots maintain careful control over the content that the chatbots provide to members of the public. So the chatbots are not currently making up their own content. Rather, what they're doing is trying to answer questions posed to them with content that's been preprovided to them by the agency. As a result, again, at least at present, there's not the same risk of hallucination with these chatbots that we see in some of the technology that might be available through private sources, but we definitely have to be careful about expanding the technology beyond its current form. If we did see such expansions, then we would have to worry about hallucination and other potential problems. David D. Stewart: What have you heard from people in the agencies about these automated systems? Are they in favor? Is it helping them do their work? Leigh Osofsky: Yeah, that was really one of the most interesting parts of our research, was being able to talk to the folks who create these for the federal government. The folks who create them are definitely very optimistic about them and feel that they're doing a good job. They're answering lots and lots of queries, so we're talking about millions of queries that these chatbots are answering per year per chatbot by the federal government agencies. The federal agencies think that this is a good way for them to provide more guidance to the public. Indeed, one of the ways that the federal agencies are currently evaluating these chatbots is principally through user surveys. So after you complete your interaction with a chatbot, some of these chatbots will ask you, "How did you like your experience? Did you feel like it was helpful?" And federal agencies are currently using these statistics to show that people are getting information that they think is valuable from these chatbots. One of the problems with that, though, is that, of course, the people who are using these chatbots don't understand the underlying law. That's why they're turning to the chatbots — to get a sense of what the legal answers are to their questions. And so when agencies are using user surveys to evaluate the quality of these chatbots, they're missing some of the things that the chatbots might not be getting right in their interactions with the public. David D. Stewart: Another question that raises is, you have an agency that is determining what the answers are going to be for individuals coming to them. So as they're simplifying, that would be sort of an interpretation on behalf of the agency. So in a world where the courts are getting more skeptical of agency interpretations, what does that mean for the answers these chatbots are spitting back? Leigh Osofsky: The sea change that you're referring to is Loper Bright , the Supreme Court case that overturned the Chevron doctrine. Interestingly, Loper Bright shouldn't really affect the chatbots' output, and the reason is because Loper Bright was a case about deference. The question was to what extent should courts defer to agency interpretations, and informal interpretations like those given by chatbots were never given a whole lot of deference by courts to begin with. And so Loper Bright doesn't formally change the regime around the types of answers that chatbots give. WASHINGTON, DC - JUNE 28: The U.S. Supreme Court is shown at dusk on June 28, 2023 in Washington, ... More DC. The high court is expected to release more opinions tomorrow ahead of its summer recess, with cases involving affirmative action and student loan debt relief still to be decided. (Photo by) Getty Images However, somewhat ironically, Loper Bright might actually cause agencies like the IRS to make interpretations to a greater extent through the use of chatbots. And the reason why is because if agencies are going to get less deference for the regulations that they've painstakingly issued, they might actually issue fewer regulations. In order to issue regulations, agencies have to go through a very laborious notice and comment process, which takes a lot of time and money. If those regulations aren't going to get the same level of deference, then agencies might decide, "You know what? We're just going to make what the rules are in the context of these more informal interpretations." And so we actually, after Loper Bright , might see greater use of informal guidance, including in the context of chatbots. So imagine, for instance, that Congress passes some new small business deduction and leaves a lot of questions unanswered in the code about the deduction. Treasury might make a decision that rather than using the laborious notice and comment process to issue regulations about that deduction, maybe it's just going to make a lot of more informal interpretations, including by having chatbots tell us some of the answers to the questions. David D. Stewart: What are the processes involved in keeping these chatbots up to date and adding new information into them? Joshua Blank: This was one of the big questions we had as we talked to the IRS and other agencies in our study. It varies from agency to agency, and sometimes even within a particular agency people who were involved in part of the process of creating a tool like a chatbot might not know all of the different participants in the process. And so one of the main recommendations that we have in terms of process is that agencies should adopt a clear chain of command regarding how they design, maintain, and review their automated tools. And we also feel that they should publish that information, because sometimes there will be questions involving ambiguous unsettled law, and it would be helpful for the public to know exactly how did the government's chatbot provide the advice that it did? Who was involved, and were there only people within the agency involved, or outside experts evaluating the issue as well? Those are the types of things that we can't see easily from the outside, but it certainly could be possible to adopt transparency measures to make the public have the ability to see those processes. David D. Stewart: And one of the issues that you've raised in your book was about the inequities question, the advice being given to people without the means to seek out independent advice. So could you explain that issue and how acute it is for taxpayers? Joshua Blank: Automated tools like the Interactive Tax Assistant can be very efficient and user friendly and often provide accurate information to the user, but there are certainly downsides. First, we found that automated tools can provide guidance to members of the public that can deviate from the formal law. Sometimes they portray the law as unambiguous, or they may add administrative gloss to the law, or they may omit discussion of statutory and regulatory exceptions. Another issue is that automated legal guidance tools often provide little, if any, notice to the user about some of these drawbacks, including the failure of the tool to capture the nuances of the formal law and the inability of the user to rely on the tool in order to bind the government or defend against tax penalties, for example. And finally, without reform, automated legal guidance tools like the Interactive Tax Assistant can have the counterintuitive effect of exacerbating inequities in terms of access to the law. If you think about who has access to the "law," well, if you can hire a tax lawyer who can research statutes and regulations and cases, you will have much greater insight into the formal elements of the law. That tax lawyer might even write you an opinion, and you can use that written opinion to potentially defend against tax penalties using the reasonable cause and good-faith defense, for instance, if you end up being audited. But that's not the case for taxpayers who can't afford legal counsel and who turn to tools like the Interactive Tax Assistant and other types of automated tools. In these cases, the tool is providing free advice. As a legal matter, the taxpayer can't use what the tool says to activate certain defenses to tax penalties. For instance, there is a defense called the reasonable basis defense. In order to use that defense, the taxpayer has to rely on an authority that's on a specific list provided in the Treasury regulations. The statements of chatbots like the ones we're describing and the Interactive Tax Assistant do not fall into that list. If the taxpayer wants to go back and say, "Hey, well, the tool told me these different things, and I relied on them," the taxpayer really needs a record to do that. And when we started our research, we found that many of these tools did not provide any way to download a record. The IRS has been making some strides to adjust its tool and to make some of these features that weren't existent available. Many agencies, however, do not do that. It's very difficult to capture the discussion; you have [to have] the foresight to take screenshots of your conversation with a chatbot. In general, a tool like the Interactive Tax Assistant is so effective and pervasive because it offers personalized advice. It uses words like "you" and "your" when it answers your question. The advice is often nonqualified. In fact, the IRS will say "answer" at the top of the screen as the Interactive Tax Assistant responds to your question. And of course it's effective because the advice is almost instantaneous and it's free. David D. Stewart: So what sort of steps should the government take to improve this? If we're going to be relying on these chatbots going forward as a means of providing customer service, what can be done so that you minimize those inequities and improve the service? Joshua Blank: We think there are many steps that the IRS, and actually all federal agencies, can take when employing chatbots and other automated tools. This is not an issue that we think is a question of whether the tools are going to be a very prevalent part of how the government communicates with the public. The private sector has been using tools like chatbots and other automated systems for years. The government has caught up, and we only think these are going to grow in the future. In terms of steps that the government can take — first, transparency: Agencies should notify users when the formal law is contrary to what the automated tool is saying, or at least when it's not settled, and sometimes there are major disagreements between circuits, for instance. It's possible to notify the user that there is at least something you should think more about because the law is unsettled. We also think that as a transparency matter, agencies should create publicly accessible archives that show and include an explanation of changes to statements made by chatbots and other tools. Reliance: Agencies should allow users to reasonably rely on statements provided by chatbots to defend against penalties for noncompliance like tax penalties. One important step that agencies should take to allow users to do that is to create ways for them to download records of their exchanges with the tools. Disclaimers: Agencies should include disclaimers regarding limits on the user's ability to bind the agency and on the limit of the user to rely on the advice for a defense against penalties. Certainly, these tools should also include a disclaimer that they're not human. Some of the agencies have very human-looking chatbots with names and faces, and agencies should certainly inform the user that they are not actually people responding to their questions. And finally, process: Agencies should adopt a clear chain of command regarding how they design and maintain and review their automated legal guidance and publish that information. The Administrative Conference of the United States in June of 2022 adopted 20 recommendations based on our report and included many of these recommendations. We differ in certain areas from ACUS, but those recommendations were printed in the federal register and distributed to all federal agencies. More broadly, I should also just add that chatbots and online tools like the Interactive Tax Assistant highlight what we would describe as a greater democracy deficit in administrative law. And to address this deficit, we think that first the public should have a role in participating in how these different automated tools are designed. The public should have a role in agency explanations of the law. Agencies like the FDA do this, and other agencies have. The IRS should include the public when creating informal guidance such as the guidance that the Interactive Tax Assistant offers. WHITE OAK, MD - JULY 20: A sign for the Food And Drug Administration is seen outside of the ... More headquarters on July 20, 2020 in White Oak, Maryland. (Photo by) Getty Images We also feel that there are limited opportunities under current law for the public to raise any formal challenge to inconsistent explanations of the law when the agency differs from the underlying law. There are approaches to this issue, too. Congress could request, for example, that the agency ombuds offices could be tasked with reviewing agency explanations and issuing regular reports. And finally, public reliance. Again, agencies should allow members of the public to reasonably rely on certain agency explanations. And we also feel that agencies should bind themselves to follow explanations where the agency uses language that is fixed and the same for all users. David D. Stewart: In the last several months we've seen some major changes in tax administration in the U.S. Does that raise the importance of these chatbots, or do you have any concerns that maybe they won't be maintained in the level that they're needed to, given the reduced staffing at the IRS? Leigh Osofsky: Yeah. We think that the chatbots are likely to only become more important as a result of recent changes at the federal government level. We see, certainly, a fair amount of downsizing in terms of federal government employees. At the same time, taxpayers and other users of various agency services across the federal government are going to continue to have questions about how they can comply with the law and how the law applies to them. And so the more limited availability of human resources and the continued questions that folks are going to have is going to just increase the need for chatbots to fill some of the gap that we're likely to see in available information for the public. So we're likely to see an increased use of chatbots — and indeed, we've seen various statements by the administration that there is likely to be an emphasis on the development of more automated technology going forward. So we think that the research that we've produced regarding chatbots is likely to become only more important going forward. We think that a lot of the lessons that we've learned in recent years will apply to this technology. So in the existing chatbots, we see some of the issues that we've talked about in terms of providing people answers that might seem simple and straightforward but aren't necessarily accurate given their situation. We've seen a lack of process and procedure around creation, we've seen a lack of interest in really doing a deep substantive evaluation of the information that the chatbots are giving, and we've seen sometimes a lack of clear line of authority within the agencies in terms of who's producing and maintaining the chatbots. And so these are definitely going to continue to be something that we need to keep our eye on, and this becomes only more important as the federal government turns to automation to a greater extent to automate the public's interaction with the law. Joshua Blank: The public also wants to access information differently than in the past. When I was a kid, I would go with my mom to the public library in April, and we would pick up tax forms and the IRS publications — these thick booklets where the government would explain the tax law to the public. Today, members of the public want to pick up their phone and take care of different tasks, whether it's banking or booking airline tickets. And if they have a question about a legal obligation or a government benefit they may be entitled to, they also expect to be able to just tap on their phone and receive an answer quickly. So the way that we absorb information has changed. Technology has had a major role to play in that, and the use of technology to communicate with the public is only going to increase in the future. Leigh Osofsky: And one other thing that we discuss in our book, Automated Agencies , is how there's likely at some point to be a turn from automated guidance to automated compliance. And indeed, we've already seen this turn begin to happen in various ways. So what we mean is that a lot of the chatbots that we examined provide guidance to the public in an automated fashion. If you want to know, "Can I take this deduction on my tax return?" the Interactive Tax Assistant will answer that question for you, but you still have a role to play there. You have to ask the Interactive Tax Assistant a question. You have to input information. And based on that information, the Interactive Tax Assistant will give you an answer. You then take that answer and make a decision when you fill out your tax return. Instead, we can imagine a system that takes this automation but employs it to a greater extent in the form of automated compliance. And what that would look like is you either input information, or maybe you don't have to input information at all because the IRS already has a lot of information through various data sources, and then the IRS just fills out your tax return for you. That's obviously a more dramatic use of automation, but some of the same issues that we examine in our book, Automated Agencies , we would actually see carried out in the form of this automated compliance. It would just be even less transparent to the public what's happening. And what I mean by that is, as we show in our book, when the government gives you an automated answer to your question, it's often simplifying the law and making decisions about how it thinks the law best applies to the facts in a way that's not always clear or unassailable. And so if the government turns to automated compliance to do more of the work for you with less of your own realization of what's happening, the government is still going to be making a lot of those same decisions, but it will be even less transparent to you how those decisions are being made. And so we think not only is there likely to be greater use of automated guidance in the coming years along the lines that we talk about in our book, but there's likely to be increasing pressure to turn in various ways to automated compliance. And we need to be very careful to think about some of the issues that we've identified as we make that turn. David D. Stewart: All right, well, it'll definitely be interesting to see how technology evolves in the area of tax. This has been a fascinating conversation. Leigh, Josh, thank you for being here. Joshua Blank: Thank you so much. Leigh Osofsky: Thank you so much for having us. It was great to speak with you.
Forbes
22-04-2025
- Business
- Forbes
Behind The Story: Investigating The Faults In The IRS's FOIA System
In this episode of Tax Notes Talk, Tax Notes chief correspondent Amanda Athanasiou discusses her recent investigation into the IRS's handling of Freedom of Information Act requests and trends from two decades of agency data. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: The waiting is the hardest part. The Freedom of Information Act grants individuals the right to request access to federal records, a transparency tool that has long been used by reporters and lawyers. But what happens when response times get longer and the appeals function works more like a rubber stamp on the initial responses? A recent Tax Notes investigation explored flaws practitioners have identified in the IRS's FOIA disclosure and appeals systems, which have led to taxpayer frustration and a growing backlog. Here to talk more about what was uncovered is Tax Notes chief correspondent Amanda Athanasiou. Amanda, welcome back to the podcast. Amanda Athanasiou: Thanks for having me, Dave. David D. Stewart: So why don't we start off with a background on what FOIA requests are and how they usually function, specifically at the IRS? Amanda Athanasiou: Sure. So as you said, the Freedom of Information Act is a federal law that enables individuals to obtain records from government agencies as long as those records don't fall into specific exemptions for things like individual privacy, national security, proprietary interest, things like that. In the tax context, taxpayers who are, say, engaged in disputes with the IRS will often use FOIA to gain access to what's in their file or records on their own investigations by the IRS or the DOJ. But it's also used often by journalists and members of the public to uncover agency records on a whole variety of things. In the IRS context, that can include requests that are targeting information on rulings or the agency's positions on certain matters. It could be training materials, historical data. The sky is really the limit, as long as the requester is asking for records that do actually exist and that are not exempt from disclosure. Reporters at Tax Notes have used FOIA to inform some of our investigations into litigation that we're following or to gather information for topics that we're looking into for stories. We generally do receive requests for extensions after we've filed those FOIAs, so we can relate to some of what our sources said and what the data shows about response times. David D. Stewart: So how did you uncover the information you've reported about in this series, and what did you find in your investigation? Amanda Athanasiou: So I got a tip from one of our sources for this story that initial FOIA disclosures from the IRS are upheld on appeal at a rate that is kind of surprisingly high historically. So to back up, when a taxpayer receives a response to their initial FOIA request that doesn't seem quite right — maybe they feel that the agency is claiming they don't have records that they should, or maybe they're improperly withholding them by citing various exemptions that don't seem to fit — taxpayers can generally appeal that response through what's called an administrative appeal. But this high sustension rate means that the appeals function is affirming the vast majority of responses at the disclosure level. So taxpayers are now really unlikely to get anywhere by filing that appeal, which basically leaves them with the options of litigating, filing more requests and trying to get at the information other ways, or basically giving up. Lauren Loricchio, our investigations editor, and I did some digging into 20 years of FOIA data that the IRS and other federal agencies are required to keep. And we found that, yes, this tip was accurate. An average of 93 percent of those initial FOIA responses that were appealed since 2008 were fully affirmed higher up. That's a much higher rate than other agencies. And basically what it means is that either the IRS disclosure office is giving perfect answers over 90 percent of the time — in some years, the rate was 98 percent or even 100 [percent] — or the administrative appeals process has turned into a rubber stamp, which is what several practitioners told us that they have experienced. We also found some other interesting trends while we were working through all of this data, namely that FOIA requests coming into the IRS have consistently fallen over the last 15 to 20 years. But the time it's taking the IRS to respond to those requests has gotten longer. David D. Stewart: So what did you find in the data, and did you see any reasons behind the trends? Amanda Athanasiou: Well, we found that on average FOIA response times for the IRS have doubled since 2008, from 24 days to about 48 days. Before 2024, they were actually on track to triple, but they came down quite a bit last year, giving us that 48-day average. So this trend is a little concerning on its own, but when it's considered in light of this two decade decline in the number of FOIA requests coming into the IRS, it's even more surprising. The data basically raises two questions: One, why are FOIA requests falling so consistently? And two, why hasn't that led to a quicker response time, or at least not a worse one? We did find some conclusions on the first question. The reasons offered by practitioners and the IRS itself for the drop in FOIA requests are generally that alternative ways of obtaining the needed records have been rolled out over the years. So the IRS pointed out that there are increased online and digital offerings. There's a FOIA library. There are upgraded routine access procedures. After passage of the Taxpayer First Act, there's a requirement to release administrative files for cases going to appeals that are under a certain dollar threshold. There's also a direct release mechanism, and all of this should theoretically help reduce the FOIA burden. It was also pointed out that with less enforcement activity, fewer audits over the years, there will be fewer taxpayers pursuing FOIAs within their own dealings with the IRS. Practitioners did counter that some of these fixes are not always successful or enforceable. So some feel that they're not necessarily a good substitute for FOIA. And it's also not clear that these mechanisms explain all of the declines in FOIAs, which has been quite dramatic if you include Privacy Act and FOIA requests dating back to the early 2000s. But generally, these theories seem to make sense. David D. Stewart: Is there any sense of why response times are going up and what sort of effect is that having? Amanda Athanasiou: Well, on the response time side of things, the explanation isn't totally clear. But there are certainly theories that constraints with staffing and funding, training, and an increase in complexity of cases, the involvement of more subject matter experts, that kind of thing — are probably all contributors to the increased response time. More than one practitioner commented that their experience with any given FOIA request really depends on who at the IRS is handling it. So some personnel are more responsive than others, better informed, that kind of thing. The issues that this presents is that attorneys are saying that they're not getting files they need to represent their clients in time to prepare for, say, hearings or other deadlines. So it is having real world consequences. David D. Stewart: Now, all this data sort of dates back. Everything is looking back. But we now have a new administration in town. What are we expecting to see happen with the FOIA backlog? Amanda Athanasiou: That's a great question. So as of 2024, staffing levels in the IRS FOIA office were about the same as they were in 2008. But as you'd expect, there are concerns going forward about funding cuts and staffing issues and freezes during the Trump administration having the effect of exacerbating an already somewhat worsening backlog. Another logical extension of reduced funding, though, is that enforcement could decrease, which as we talked about, that could itself lead to a decline in FOIA requests as fewer taxpayers are being audited, say. So that's a factor that could actually neutralize the effect on the backlog. It was pointed out in one of the stories in the series that was an increase in FOIA requests during Trump's first term. At the IRS, the requests still gradually declined a bit during that timeframe, but both of those points are probably worth considering if we're trying to read the tea leaves on FOIA. Between the already increasing wait times and reduced agency resources, one trend to watch out for is increased FOIA litigation. We already see a lot of examples of taxpayers going straight to court when they don't get a timely response to their FOIA requests. So these are cases in which there is no response from disclosure in the first place by the required statutory deadlines to administratively appeal. Reduced resources tend to increase wait times, so the current environment seems to be one in which we're likely to see that possibility of litigation increase. David D. Stewart: So what's likely to happen in an environment where there are fewer resources for handling these FOIA requests and these are going to litigation? How's that going to play out in court? Amanda Athanasiou: So the concern is, how sympathetic are the courts going to be to arguments that an agency doesn't have the personnel or the person power to get through the FOIA backlog? And there's some evidence that the answer is not very sympathetic. We actually saw a Florida district court handle that kind of argument from the Department of Justice's tax division recently. The tax division was accused of improperly holding documents that had been FOIA'd, and it argued it had only one attorney on FOIA requests. It was under court order to respond to unrelated requests. It had asked for various extensions throughout the process of this request, and it was going on three years to complete the requested issue. And the court said, "No dice." The agency isn't getting out of FOIA compliance based on what the court itself described as staffing challenges that amounted to a self-inflicted handicap. So the upshot is that agencies are statutorily required to comply with FOIA, and courts will likely uphold those requirements even in the face of staffing and funding objections. But as we've seen, the real world effects means that those FOIA response timelines and the lawsuits that result could creep upwards anyways, which could be costly to taxpayers. David D. Stewart: Well, Amanda, thank you so much for being here. This series has been fantastic, and we'll have a link in the show notes so that our listeners can take a look at it for themselves. And I think that there's probably going to be a lot of issues that we need to track and see the trends in the years ahead. Amanda Athanasiou: Certainly. I look forward to seeing what happens. And thank you again for having me.
