STUCK IN NEUTRAL: Congressional Republicans and the IRS haven’t been on the same page all that much, for years now. But there is at least a little more agreement on the Employee Retention Credit, which House Ways and Means Chair Jason Smith (R-Mo.) noted when his committee hosted IRS chief Danny Werfel for a hearing last week. The two sides, Smith said, are “largely aligned on the importance of rooting out fraud in the employee retention tax credit program.” For Smith and Senate Finance Chair Ron Wyden (D-Ore.), the $78 billion crackdown on the ERC helped smooth an agreement for their bipartisan tax bill, which would expand the Child Tax Credit, restore three key tax breaks for businesses and passed the House late in January — though its path in the Senate remains uncertain. Congress enacted the ERC close to four years ago to help businesses keep making payroll during the pandemic, then subsequently expanded and extended the program — to the point that, as it stands, taxpayers still have until the middle of next year to claim the credit for 2021. Clamping down on the credit then became a rare bipartispan tax offset in this new bill, after the IRS was inundated with claims — a large number of which were spurred by aggressive third-party promoters — and struggled to keep the legitimate claims separate from the illegitimate ones. For his part, Werfel said last week that the new tax bill also would help his agency, which is still swimming in claims for the employee retention credit, even as (or perhaps because) of those efforts from lawmakers to close down the ERC. Werfel said during Thursday’s hearing that the IRS had just gotten up to 20,000 claims for the credit the previous week, even after the agency placed a moratorium on processing new claims months ago and even though the bipartisan tax agreement would shut off applications for the ERC as of Jan. 31. MORE ON THAT IN A BIT, but first thanks for joining a “man, those colleges really are exploring the studio space on scholarship athletes” version of Weekly Tax. A decision with geopolitical reverberations five centuries later: Today marks 552 years since Scotland took control of the Orkney and Shetland islands from Norway, essentially in lieu of a dowry from Princess Margaret, the daughter of the king of Norway and Denmark, who was marrying the king of Scotland. Help us keep track of confusing matters. Send your best tips and feedback. Email: bbecker@politico.com, bfaler@politico.com, bguggenheim@politico.com and teckert@politico.com. You can also reach us on X at @berniebecker3, @tobyeckert, @brian_faler, @ben_guggenheim, @POLITICOPro and @Morning_Tax WHEAT FROM THE CHAFF: In essence, Werfel told House tax writers last week that the Wyden-Smith plan would help the agency deliver rightful claims to taxpayers by stopping new wrongly filed claims from coming in the door. The number of ERC claims has dropped since the September moratorium, as Werfel acknowledged. But the backlog of claims is still getting larger, as the IRS takes a methodical approach to processing. “That inventory is growing, and it's growing with a lot of ineligibility,” Werfel said. “Helping us pause the incoming at this point so we can find those that have submitted that are eligible — we need that help.” At the same time, it’s fair to note that not every policymaker has lined up with Smith, Wyden and Werfel on the ERC. In particular, some of the Senate Republicans who say they oppose the bipartisan tax bill in its current form complain about using savings from the ERC to pay for the bill, arguing in essence that it’s not “real” money and expressing concern about taxpayers with legitimate claims being left behind. And in fact, even some of the Republicans on the Ways and Means Committee — all of whom supported the new tax bill — expressed some concern at last week’s hearing about what the IRS is doing to ensure that people who should be getting an ERC actually get it. The national taxpayer advocate, for instance, has said that she's worried that legitimate applicants for the ERC will have to "wait extended periods of time to receive their refunds." “These are very complicated issues, but there are people who filed believing that this was going to be taken care of and you're on hold, you're on hold, you're on hold and you don't know,” said Rep. Mike Kelly (R-Pa.). An addendum: The IRS noted in a legal memo released on Friday that firms that made improper ERC claims for clients would be liable for any underpayments, as Bloomberg Tax noted. Added reading: Here’s where The Washington Post editorial board stands — “The Employee Retention Tax Credit gives waste and fraud a bad name.” One more: The Post’s E.J. Dionne prodded the Senate to pass the Wyden-Smith plan in a new opinion piece, favorably citing some right-of-center advocates in the process. A MORE CONTENTIOUS TOPIC: GOP tax writers, it should be noted, are far more skeptical about the IRS’s entry into the tax filing business — with particular concerns about what authority the agency had to launch its current pilot program for a Direct File portal. For its part, the IRS says that it has a general authority to make life easier for taxpayers, which it argues a direct filing option would do. Either way, the agency keeps on plugging ahead with the current pilot. The IRS said in a statement on Friday that it now had around 1,200 taxpayers testing out the pilot, and that some of the taxpayers using the portal had started getting refunds. On top of that, the initiative has now started focusing on how the portal works with state returns. “Internal testing continues, with additional testing underway to ensure Direct File is successfully integrated with state systems,” said Bridget Roberts, the head of the program.
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