In this episode of Tax Notes Talk, Tax Analysts Chief Operating Officer Jeremy Scott reviews the 2024 developments in U.S. tax legislation and speculates what may lie ahead in 2025.
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: 2024 wrap-up.
We’re continuing our tradition at the start of the new year of reviewing what happened in U.S. tax policy and looking ahead to what we can expect in the next 12 months.
Here to recap the 2024 highlights and make some predictions for 2025 is Tax Analysts Chief Operating Officer Jeremy Scott. Jeremy, welcome back to the podcast.
Jeremy Scott: Thank you. Always glad to be here.
David D. Stewart: So let’s start off with what happened last year. Were there any significant changes to U.S. tax policy in 2024?
Jeremy Scott: Well, there weren’t too many significant changes in U.S. tax policy because again, it was a presidential year with divided government, and so there was some momentum for some tax legislation, but it never really came to pass.
Where we saw a lot of developments in 2024 was more on the tax administration side. We saw quite a lot of activity at the IRS, quite a lot of discussion about the IRS in terms of tax administration and some issues. And so where you saw some movement was more in continuing Republican criticism of how the IRS has been doing its job, continuing fights over the $80 billion in extra funding that the IRS received in the past. And then a look ahead at how the incoming administration is likely to treat the IRS and some of how particularly House Republicans were dealing with the agency at the end.
And so we did not see a lot of activity on Capitol Hill in terms of passing legislation; that was not a feature of 2024. We did see a lot of discussion of what to do with, as I said before, this IRS funding, and toward the end of the year, there was a certain dispute over $20 billion in frozen IRS funds and whether that would be codified in the final spending bill. And again, this is a preview of fights over IRS funding that you’re likely to see during the Trump administration, the incoming, I guess second, Trump administration and how House Republicans and Senate Republicans will treat them, and what kind of compromises might be out there.
But what we also saw was an interesting dispute over the Direct File program. The Direct File program for those who aren’t aware is an attempt by the IRS to make filing easier for certain taxpayers, primarily those that just file based off of W-2 type information. They can pre-populate some of the form, and then you can file it directly with the IRS, avoiding the use of the so-called Free File program, which is essentially run by paid tax preparers, or avoiding the use of third-party programs like TurboTax.
Direct File is not popular with Republicans. I have to admit, I’m not 100 percent clear on why Direct File is such a Republican priority. They claim it’s because they think that it allows the IRS more insight into people’s financial information. They claim it’s because pre-populating the form is a violation of privacy. It’s likely there are other motivating factors, such as limiting the IRS’s reach, in addition to supporting some of these third-party preparers. But Direct File became an object of dispute, Commissioner Daniel Werfel cited it as a success. Republicans have said it’s going to go away. So we saw some sparring over the success of Direct File in the filing season versus its future in 2025 when it’s scheduled to continue, but that’s obviously up in the air.
Another big IRS issue was on the employee retention credit. These credits got paused in 2023 because the IRS found a high incident of fraud. Something like 1.4 million of these claims have not been processed that should have been. Republicans again have been attempting to press the IRS on why these claims aren’t being paid, how to get them moving again, and why they were being fraudulently paid to begin with. Again, it’s a contradiction. The IRS pause was designed to lower the incidents of fraud. Republicans are accusing them both of going too slow and approving bad applications. But this became a major fight, particularly in the last quarter of the year, over what the future of these credits are. At one point, Werfel stated that he expected about 1.4 million of these to move in the near future, but again, there’s some confusion over what that number means. We know there are about 400,000 of them that might end up being denied. And in an interesting side note, the one case that the IRS brought to criminally prosecute people for fraudulent ERC claims, the IRS lost, the government lost. The so-called ERC mill was acquitted. The two people behind it were acquitted.
So this was how tax administration looked in the year, and we’re going to see more. A lot of this is setting the grounds for a Republican administration to essentially rein in the IRS in 2025. And so a lot of this is pre-fighting issues that are going to come up in 2025, but that’s most of the areas where we saw a lot of movement.
Outside of the IRS, there were legal developments in the previous year. We got to have two Supreme Court cases with massive tax implications, which is an extreme rarity, the big one being Moore. For those who don’t remember, in the Moore case, what was at stake was — well, what people wanted to be at stake was whether you could have wealth taxation or whether realization was a requirement for taxation. What was actually at stake was a much smaller issue.
The Court decided the case pretty narrowly in the government’s favor. It’s the dicta, it’s the other things that the Court said that hinted that in a different case, we might see realization be a requirement, and we had a number of justices express hostility to the potential for a wealth tax. Wealth tax was a major issue for some Democrats, and had the election gone differently, perhaps, we would hear a little bit more about it, but with the Supreme Court’s, what the Supreme Court said with the result of the presidential election, with the result of the Senate and House elections, wealth tax is dead on every level, but people were very fascinated by what the Court might say.
The other big Supreme Court case was Loper Bright. This is essentially the death knell to deference to government regulations, and we do not know quite how this will play out on the tax side, but it’s likely to make it harder for Congress to delegate a lot of authority to agencies to write regulations without some legislative guidance. And that could mean a lot for the IRS because traditionally, or at least in the recent past, what’s been happening is Congress will pass tax bills without a lot of legislative intent and then the IRS will be allowed to — the IRS and Treasury will be allowed to interpret these bills. That may not fly in court challenges anymore, and we’re going to have to see how that develops post-Loper Bright.
So I think that’s a pretty good summary of 2024. Any other issues?
David D. Stewart: No, that is a very thorough look at what we just lived through. Are you expecting to see a lot more litigation on regulations going forward now with this change in deference?
Jeremy Scott: Oh, I think we were going to see a lot more litigation regardless. I think Loper Bright has made it even more likely now that people will challenge regulations. And I think that we had seen because of some other developments in APA law, Administrative Procedure Act law, that the government was losing its ability to essentially impose regulations on taxpayers that were unpopular or did not have strong legislative support. And with the decline in legislative history, it’s hard to find that legislative support for regulations that allow them to essentially make law at the administrative level. And so I think we’re going to see more challenges of so-called fighting regulations that the IRS puts out. We’re going to see more challenge to Treasury’s authority to fill the gaps that Congress leaves. And essentially anytime Treasury attempts to fill a gap in an anti-taxpayer way or a pro-fisc way, I think you’re going to see challenges.
And I think you’re going to see courts very receptive to this because most courts, it doesn’t matter which way they lean, like to see those Administrative Procedure Act requirements followed. They don’t want to give deference to regulations that can be arbitrary or have not gone through all the processes for comment and review, and tax has traditionally tried to skate through that, and it has thought it is an exception to those type of rules. And I think there are a lot of taxpayers that are very eager to prove that that’s wrong, and I think you’re going to continue to see this. Unpopular regulations were ending up in court in increasing numbers anyway; now they’re going to even have a higher likelihood of being struck down, and you’re going to see more people willing to challenge them. They’ll essentially take positions on a tax return that will lead to court cases. I think you’re going to see a lot of that in the future.
David D. Stewart: And to the same vein, the Supreme Court taking up the Moore case was a little bit interesting because it seemed like there wasn’t much of an issue that was left unresolved when the case came to the court. Is the Supreme Court just going to start looking at things where we assume we know the answers all this time and taking a fresh look at them?
Jeremy Scott: I think that that’s a good way to put it. I think that the current Court is quite different in its makeup than, perhaps, we had in, say, the ’90s and early 2000s. The 6-3 conservative majority is a lot more solid than some of the 5-4 majorities were in the Reagan, Bush, and Bush years. And I think what you’re going to see is people are going to push cases to the Court, and this Court’s going to take them, and I think Moore was an example of this. There were at least four justices that wanted to say something about the realization requirement, and they were willing to take a case that quite frankly did not have great facts in order to make that statement. And I think this has shown a willingness for people to both bring these tailored cases to the Supreme Court and the Supreme Court to opine on them.
And we may see more of those. We may see a tax policy case or two every session in the near future. It just depends upon where the law goes and what people are comfortable challenging and what the court wants to say. I believe that if you had had, let’s say, a Democratic sweep and say a wealth tax had somehow been passed, not likely even with the Democratic — let’s say it happened, I think the Court would’ve taken that case and I think they would’ve struck it down. And I think they’re willing to send these signals in a way that previous Supreme Courts have not been able to. And I think as we all know in nontax issues, they’re willing to revisit issues that we think are settled law and tell us, perhaps, they’re not so settled after all, or reiterate the way they think the settled law is. And I think that creates a more interesting environment in some ways, but also a slightly less stable one.
David D. Stewart: You discussed the Direct File program and that was, as I understand, a pilot program in the last year. Is that expected to expand for 2025?
Jeremy Scott: It was expected to continue in 2025, and I think Commissioner Werfel has said he still expects it to continue into the filing season for 2025. I think it would be difficult for Republicans to stop it given that we’re on the verge of filing season for 2025. So I think you will see it there. Will it get a lot bigger? I don’t know. And will it continue beyond 2025? I think the chances are pretty slim.
To me, Direct File was an idea that was overdue in some respects, but it has proven to be less popular than I would’ve anticipated, like I said, particularly with Republicans on Capitol Hill. It started as a bipartisan idea as Commissioner Werfel has pointed out several times; it has not ended up that way. And so I think Direct File is probably going to see its last year in 2025 in this form, and we’ll see if anything succeeds it or if we go back to pushing people back into that so-called Free File program.
David D. Stewart: Now, coming up pretty soon after we’re recording this will be January 20. We will have a second Trump administration coming in. What tax policies are we expecting to see from the new administration?
Jeremy Scott: Yeah. So 2024 had no legislative activity of any real significance, just a lot of talk. 2025 is going to be the complete opposite. I think that we will have unified government again. You will have a Republican president, President Trump is back, a Republican Senate with a fairly solid 53-47 majority, and then a Republican House with a not-so-solid, very narrow majority — a majority that in fact won’t really be known until some special elections are run, assuming some of Trump’s Cabinet picks go through. But that doesn’t mean we aren’t going to see a lot of legislative activity, and that doesn’t mean we aren’t going to see some major bills coming through. And I think there is no doubt that you will see them take up the Tax Cuts and Jobs Act and attempt to extend most, if not all, of the provisions that are up for expiration.
I think this expiration of the TCJA is going to be the vehicle through which a lot of tax policy issues are tackled. I think you’re going to see Republicans attempt to get some of President Trump’s campaign promises in. Somewhat surprisingly Majority Leader Steve Scalise, R-La., in the House made it clear that he expects the no tax on tips to be a part of any provision. I think a lot of people thought something like that might’ve been a campaign promise that becomes difficult to implement, but they’re saying it’s going to be in there.
I think you’re going to see the state and local tax cap get taken up. Again, the Republican majority is very narrow in the House. There are some Northeast Republicans left primarily in New York that this is a major priority to see this cap either removed, allowing people to deduct more of their state and local property taxes and income taxes, or at least change so that it affects fewer people. I think that is going to be something that we see.
You could see some movement on the corporate rate. I doubt you get down to President Trump’s 15 percent. In fact, I doubt it goes down at all, but you might see some movement to, perhaps, create favorable credits to lower the effective rate rather than the statutory rate. There’s a lot of talk about expensing and research and development, and things like that. I think those will be in a provision. I just think that 2025 is going to be a major year in tax policy. I think you’re going to see the Republican majorities and President Trump attempt to put their stamp on tax policy for the next five to 10 years the way they did with TCJA, the way the Bush administration did in 2001 with the Bush tax cuts. I think you’re going to see them attempt to put their finger on the scale for as many tax issues as they can get in these bills so that they can control that narrative for as many years after their majorities may be gone or different in the future.
And so what I am anticipating is that essentially any wish list Republican item that’s been building up under the Biden administration is likely to get its day in the sun. They’re not all going to make it. There’s still some Republicans, there’s still some policymakers that are concerned about the deficit, concerned about spending, even spending through the tax code, but they are going to get discussed. And so it’s going to be a very lively year for tax policy from beginning to end.
It will be an even busier year if some of the ideas of having two reconciliation bills come to pass; that means essentially you would get two major pieces of legislation in the same year that can pass with a narrower majority in the Senate. If that happens, I mean, we’re going to be busy from beginning to end. They say they’ll do a smaller one first in that case and then the big tax bill later. I think a lot of people will pressure to get their favorite provisions in the first one, which is more likely to go quickly than the second one. So we’ll have to see how that plays out. I think a lot of things are a little bit unsettled as we’re recording this, and more of those details will be apparent after January 20.
David D. Stewart: Most of these priorities you’ve been discussing, actually I think possibly all of them, are ideas that will trim government revenue. In an era where we do have some large built-in deficits, is there anything out there that would raise revenue to maybe cut that deficit?
Jeremy Scott: Sure. There are tons of small things out there that could potentially cut into it. I think what you’ll see is there will be some attempt to cut some of the green credits within the Inflation Reduction Act, like I think there could be at least a symbolic repeal of the IRA’s environmentally friendly credits. Again, they’re not going to raise a lot of revenue, not going to target all of them, but Republicans have pledged to repeal some of those, and I think they will do at least enough of them to say that they did that.
You will see some pay-fors that you might not have expected get thrown in there. I’m not going to predict specific pay-fors that might show up, but I will advise people if something has a Joint Committee on Taxation score that raises revenue and doesn’t seem like it’s likely to be noticed by the general public, it could get thrown in. This is how things like the SALT cap ended up in the TCJA to begin with. You’re looking for revenue raisers that can make you seem fiscally responsible without affecting what you’re trying to do overall, which is lower taxes because that’s what Republicans tend to try to do. But you will see some pay-fors.
Will you see major pay-fors? I don’t think so. You could see some tightening on the international rules that have been in the TCJA that could raise more revenue. You could surprisingly see Republicans try to make the corporate alternative minimum tax work more effectively because, again, it’s not a tax that’s really that unpopular with their new populist base, the one that swept President Trump back into power, so they could find some revenue there. They didn’t pass CAMT, but they might not want to see it go away, and it might be to their advantage to see it be a little tighter, a little more effective because it can offset some of this revenue.
But I think what you’re primarily going to see is you’re going to see more on paper pay-fors. I would not be surprised, for example, if we switched from a current-law to a current-policy baseline, which dramatically reduces the supposed cost of some of the extensions of the TCJA. What that means is essentially you treat current policy, which is to extend the TCJA as the baseline rather than current law, which says it expires. That removes trillions upon trillions of dollars from the cost.
The other thing you might see, and this isn’t necessarily in our wheelhouse at Tax Analysts, though we do cover it as much as we can, tarrifs might be written in as a potential pay-for. They could essentially write a line item into the budget process that says, “We expect President Trump to raise X amount of dollars in tariffs,” and that will offset some of the costs.
That is not a true pay-for in the sense that it gets a score. Tariffs controversially don’t raise as much revenue as sometimes people think. But I would not be surprised to hear tariffs talked about as a pay-for for some of the $6 trillion over 10 years cost that you hear bandied about for some of Trump’s plans. But I don’t expect major pay-fors like the corporate rate or things like that to be on the table. That is, the Republicans are not going to do that.
David D. Stewart: So one of the stories of the last couple years has been increased IRS funding, which has obviously come under attack in just about every budget discussion since. What are we expecting to see with the IRS budget going forward, and what are we expecting to see generally with the IRS in the new administration?
Jeremy Scott: I think the IRS is in for a tough time under the new administration, and with a Republican Congress, I believe that the $80 billion is dead. We’ve already seen $20 billion more of it being frozen until March, at least under the proposal by Speaker Mike Johnson, R-La. I think that is just a placeholder for repealing it altogether. I expect most of that funding to go away. If it doesn’t go away entirely, you may see some Republicans stand up and say, “We could use this funding for service. We could use this for taxpayer-friendly provisions rather than enforcement.” So again, you’re retasking this revenue away from the revenue-raising aspect that it was originally intended to do and you’re putting it in beefing up IRS’s customer service, customer-facing focuses. That may happen, but I think the era of the IRS being popular on Capitol Hill as a means of raising revenue is over.
It was very brief. It lasted only for about two years of the Biden administration. That is not going to continue. Republicans are going to do everything they can to cut the IRS’s enforcement budget. They’re going to do everything they can to restrain the IRS’s enforcement power to what they feel is an acceptable level. And I think the incoming fight, if there is a fight over who will be the IRS commissioner, whether Trump will fire Werfel and replace him with former Congressman Billy Long, that is going to put some of these issues in the forefront and is going to allow Republicans to explain their distaste for increased IRS funding. And as we’ve seen over the course of the Biden and Obama administrations, when push comes to shove to get a spending bill through, Democrats are almost always willing to trade IRS funding for something else.
And so I think the IRS is in for a tough time in the next two years in particular. I think they will see their budgets cut. I think they will see that excess funding go away, and I think they will see some of their functions come under attack by a hostile House majority in particular.
David D. Stewart: You mentioned President Trump’s announcement of a new IRS commissioner. IRS commissioners have a fixed term. So how does it work with appointing a new one?
Jeremy Scott: Yeah. I think that raises some interesting questions. Mechanically, technically the IRS commissioner does serve a fixed term. Many commissioners do not serve their full term. In this case, Commissioner Werfel has not said that he intends to step aside to allow Trump to nominate a new commissioner, but the president can fire the IRS commissioner. And so I would expect if Commissioner Werfel does not come to some agreement with Trump to step aside, Trump will fire him and replace him with his pick. And I think you will not see a lot of resistance to that among Senate Republicans, so I think that is what is likely to occur. And if I had to guess, I would say Werfel will actually resign rather than cause Trump to actually terminate him for cause, which is what you’re supposed to do.
I think he will come to some agreement with Trump on how to end his tenure as IRS commissioner, and then Trump will nominate Congressman Long, and he will probably not face that much resistance from the Senate, given he’s not as controversial as some other picks. But it is a controversial thing to replace someone in the middle of their term. But as we just saw with the FBI director announcing that he would resign under a Trump administration, these terms are paper things. If a president wants someone new in the position, a president often gets their way.
David D. Stewart: All right. Well, Jeremy, it’s always great to have you here. Thank you so much for being here.
Jeremy Scott: Thank you so much. I always enjoy it.
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