Tax Law (and Controversy) Under the Trump Administration

The TCJA: Will It Be Extended?

Negotiations regarding the extension of certain expiring and other tax provisions contained in the TCJA continue daily. The provisions that have received the most focus include the tax rates that apply to individuals (including provisions applicable when those individuals hold their businesses through pass-through entities), the individual state and local tax (or “SALT”) deduction, bonus depreciation, and the Section 163(j) limitation on the deduction for business interest expense. While the TCJA permanently lowered the corporate income tax rate to 21 percent, the lower tax rates applicable to individuals and pass-through businesses under the TCJA will expire at the end of 2025. The $10,000 cap on SALT deductions will also expire at the end of 2025 if it is not extended. The TCJA also temporarily allowed 100 percent bonus depreciation (i.e., full expensing) for trade or business property through 2022, with phase downs of the bonus depreciation percentage through the end of 2026. Congress also significantly restricted the ability to deduct business interest expense under Section 163(j) as part of the TCJA, with the Section 163(j) limitation becoming even more restrictive for tax years beginning after December 31, 2021, when the limitation began to be calculated using EBIT rather than EBITDA. Reverting to an EBITDA based calculation has been a focus of many companies and industry trade groups.

President Donald J. Trump has called for Congress to enact, through the budget reconciliation process, “one big beautiful bill” that covers the totality of the President’s legislative priorities, including extension of tax cuts under the TCJA. Aligning with President Trump’s approach, House Republicans recently passed a budget resolution that includes $4.5 trillion in tax cuts. In contrast, the original Senate version of the bill addressed many of President Trump’s legislative priorities — defense, energy, and border security matters — but avoided tax issues under the rationale that the Senate would pass a separate tax bill later in 2025. Given the momentum for the House approach, Senate Republicans appear to be switching gears toward a one-bill approach.

After House and Senate Republicans agree on a unified approach, any legislation must make it through the Senate’s budget reconciliation process. As part of the budget reconciliation process, Republican lawmakers must instruct the tax writing committees regarding the cost of the legislation included in the reconciliation bill and the amount by which the reconciliation bill may increase the deficit during the budget window. As noted above, the House-passed budget resolution included net tax cuts of $4.5 trillion over 10 years. Recent scoring estimates by the U.S. Department of the Treasury’s Office of Tax Policy place a $4.2 trillion price tag on the TCJA extensions in the applicable 10-year budget window.¹ As such, assuming a full extension of the TCJA, this budget resolution appears to leave little room for President Trump’s other tax policy proposals.

To the extent that any resulting legislation increases the deficit, lawmakers are expected to look for ways to close that gap, or at least provide rationalization for increasing the deficit. While President Trump has proposed increasing federal revenues through tariffs, only tariffs imposed through congressional (rather than executive) action can be taken into account for budget scoring purposes. Republicans may use the expectation of higher tariffs to justify higher deficit spending in the budget reconciliation instructions, but likely will seek other sources of tax revenues. To that end, President Trump has spoken publicly about repealing energy and environmental policies enacted in the IRA, targeting fraudulent spending and government waste, and eliminating the Department of Education. Some of these proposed revenue raisers are contentious even among Republicans, with some lawmakers already pushing back on repealing IRA policies that have created jobs in their districts. If revenue raisers cannot be agreed upon, it is also possible that lawmakers may adopt other approaches to reducing the scoring impact of the TCJA extenders such as changing the scoring impact calculation method to use the projected economic effects of current policy rather than revenue expected to be generated under current law.

The Inflation Reduction Act: Will It Be Changed?

As noted in our prior coverage (see coverage here), the IRA is a historic investment in climate policy that touches upon almost every facet of the energy transition in an attempt to drastically reduce greenhouse gas emissions. The IRA provides for the extension, expansion, and creation of a number of credits, which impact a broad swath of “green” technologies, provide substantial subsidies for standalone energy storage, clean fuel and hydrogen production, incentivize carbon capture, encourage domestic manufacturing and mining, and promote the installation of electric vehicle charging equipment. The IRA also provides for significant and unprecedented flexibility for monetizing these credits, making more projects financeable, permitting new market entrants, and allowing for new structures and products to be developed.

In the blizzard of executive orders issued during the first week of his presidency, President Trump halted the “disbursement” of certain funds provided for by Congress in the IRA; however, these executive orders seem to be more focused on IRA grants and loan programs and not on IRA tax credit extensions or expansions (see prior coverage here).

Importantly, executive orders do not have the power to rescind, amend, or terminate tax credits or benefits existing under the U.S. federal income tax law, and the relevant executive orders and subsequent Office of Management and Budget memos make no mention of tax credits, let alone attempt to expressly unwind or terminate any tax credits currently existing under the IRA or otherwise. Any changes to those provisions would require an act of both houses of Congress and significant time and effort. Thus, for there to be a “pause” on the availability of tax credits under the IRA in the short term, the U.S. Department of Treasury (“Treasury”) would have to refuse to honor credit claims or refunds when tax returns are filed and justify doing so without any statutory basis.

However, President Trump’s orders with respect to certain IRA provisions establish a starting point for negotiating with House Republicans, many of whom are trying to understand how the executive orders might impact the interests of their constituents. At least 18 House Republicans expressed support for the IRA tax credits prior to the election, many of whom have continued to support certain IRA tax credits in the months since the election. As such, assuming that Democrats will not support material changes to the IRA, significant changes to the IRA in 2025 may be an uphill battle.

One key provision of the IRA, the corporate alternative minimum tax (the “CAMT”), has been absent from IRA repeal discussions. At a high level, the CAMT was intended to offset expenditures for other provisions of the IRA by imposing a 15 percent minimum tax based on the book income of certain applicable corporations. After a two-year delay, the Treasury released a complex set of proposed CAMT regulations, which we have previously covered (see coverage here). While repeal of the CAMT would be viewed as a welcome development by many taxpayers and their advisors, repeal does not seem to be a high priority for lawmakers and would further complicate the Senate’s budget reconciliation process given the expected high cost of a repeal.

Tariffs: How Long Will the New Tariffs Last?

With recent calls for establishing a “Department of External Revenue,” President Trump has not shied away from his campaign promises to make tariffs a focus of his administration. While he implemented a variety of tariffs during his first administration, his imposition of 25 percent tariffs on imports from Canada and Mexico and an additional 10 percent tariff on imports from China this week far exceed his previous actions, and significantly increase the breadth and magnitude of the current U.S. tariff regime. It is unclear how long such tariffs will last and whether such tariffs will become a permanent feature of U.S. trade policy.

Senate and House Republicans generally are not as enthusiastically supportive of tariffs as President Trump. However, the President already has broad authority to implement tariffs through a variety of statutes, including the International Emergency Economic Powers Act of 1977 (for declared national emergencies), the Trade Expansion Act of 1962 (for imports that impair national security), and the Trade Act of 1974 (for when a foreign country places an unreasonable tariff on U.S. exports), provided that certain administrative requirements are satisfied. For these reasons, President Trump may already have the authority needed to implement many of his tariff policies without needing to win over the current Congress.

President Trump’s cabinet choices further support his intentions with respect to tariffs. For example, the Senate recently confirmed President Trump’s Secretary of Commerce pick, Howard Lutnick, who is a strong proponent of tariffs. This is an important choice as the Department of Commerce is responsible for determining whether the President has the authority to implement tariffs under tariff laws such as the Trade Expansion Act of 1962.

Undoubtedly, this new and expanded scope of tariffs will invite many challenges, including some in uncommon jurisdictions (such as the Court of International Trade), which will require specialized representation and strategies. Moreover, given the administration’s focus on tariff policies, we expect there to be enhanced enforcement in this arena, including a potential renewed emphasis on penalty determinations and litigation.

The IRS: Will Enforcement Priorities Change?

While the President has not yet formally announced his administration’s priorities for IRS enforcement, some changes from the prior administration’s practices already are underway.

After some recissions, the IRS received approximately $57.8 billion in funding under the IRA, with almost $5 billion for business systems modernization and $24 billion for enforcement; however, almost none of those funds have yet been utilized.² In fact, as of June 2024, the IRS had only spent about $6.9 billion of its IRA funding, including about $805 million on enforcement (or 3.4 percent of IRA funding designated for enforcement) and $1.6 billion on business systems modernization (or 33.2 percent of IRA funding designated for modernization initiatives).³

Even though it thus far has spent relatively little of the enforcement-designated IRA budget, the IRS announced in early 2024 that “the IRS has focused IRA resources on strengthening enforcement to pursue complex partnerships, large corporations and high-income, high-wealth individuals who do not pay overdue tax bills.”⁴ The IRS noted that, “[p]rior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.⁵

The IRS’s enforcement efforts with respect to large partnerships have been particularly noteworthy in the last 18 months. In response to criticism of the low partnership audit rate over the last decade, the IRS launched hundreds of partnership compliance audits and opened field examinations of 75 of the nation’s largest partnerships.⁶ It also established a new field unit dedicated to pass-through entities.⁷ However, whether large partnerships will be an enforcement priority for the new administration remains to be seen.

After the enactment of the IRA, the IRS also pursued significant hiring efforts to increase enforcement activity.⁸ In a recent publication, the National Taxpayer Advocate urged the IRS to move quickly and efficiently to mitigate the impact of employee attrition, as a large number of employees were either already retirement-eligible or estimated to become retirement-eligible within five years.⁹ However, in his first week in office, President Trump declared a federal civilian hiring freeze that is scheduled to remain in effect for the IRS until the Secretary of the Treasury, in consultation with the Director of the Office of Management and Budget and the Administrator of the United States Department of Government Efficiency Service (“DOGE”), determines that it is in the national interest to lift the freeze.¹⁰ Rather than lift the freeze, media outlets have reported that the administration intends to halve the number of IRS employees—which totaled approximately 100,000 people at the outset of the administration—and already has laid off over 6,500 probationary workers and received acceptances of thousands of DOGE-based voluntary resignation offers. At least half of these layoffs are attributable to employees in the Small Business/Self-Employed (SB/SE) Division, but the layoffs have also affected probationary employees at the IRS’s Large Business and International (LB&I) Division.

Recent reports indicate that Gavin Kliger, a software engineer and a representative of DOGE, “is set to work at the IRS for 120 days” and that “[h]is primary goal at the IRS is to provide engineering assistance and IT modernization consulting.” Kliger met with the IRS’s Chief Taxpayer Compliance Officer, Chief Information Officer, and Chief Technology Officer on February 13, signaling, perhaps, DOGE’s focus on greater IRS efficiency through improved technology.

Obsolete technology has long plagued the IRS. Every year the agency is tasked with processing more than 270 million tax returns, collecting about $5 trillion in taxes, and maintaining security over highly sensitive records. To do so, it uses hundreds of different software and hardware systems, many of which are more than 25 years old.¹¹ A critical part of the infrastructure depends on a system built in the 1960s written in a computer language that is no longer widely taught and therefore difficult to maintain.¹² As noted above, a substantial portion of IRA funding, now in jeopardy, was earmarked for business systems modernization at the IRS.¹³ Over the past two years, we have seen the telltale signs of increased use of machine learning, data analytics, and artificial intelligence technology as part of the audit selection and examination process. Efforts to pull back IRA funding and workforce reductions could significantly impact these modernization plans. During his Senate confirmation hearing, Secretary of the Treasury Scott Bessent recognized that “The IRS’s most significant challenges are modernizing its technology systems and improving its customer service for American taxpayers. Congress should ensure sufficient funding to bring IRS technology into the 21st century.”¹⁴

The combination of reduced headcount, demand for funding of tax cuts, and an emphasis on technology modernization, points to an administration that is focused on a move toward greater automation of IRS functions and a push toward more efficiency in audits. As we have noted in prior coverage, certain taxpayer segments (notably large partnerships) historically have had low audit rates, with 80 percent of those audits resulting in no changes.¹⁵ Absent increases in highly trained examiners, the IRS will need to continue its efforts to refine its audit selection criteria and more effectively use technology to target noncompliance. It may find an unexpected partner for those efforts in DOGE.

¹Office of Tax Analysis, The Cost and Distribution of Extending Expiring Provisions of the Tax Cuts and Jobs Act of 2017 (Jan. 10, 2025), https://home.treasury.gov/system/files/131/The-Cost-and-Distribution-of-Extending-Expiring-Provisions-of-TCJA-01102025.pdf.

²Treasury Inspector Gen. for Tax Admin., Quarterly Snapshot: The IRS’s Inflation Reduction Act Spending Through June 30, 2024 (Sept. 30, 2024), https://www.tigta.gov/sites/default/files/reports/2024-10/2024ier020fr.pdf.

³Id.

⁴I.R.S. News Release IR-2024-09 (Jan. 12, 2024), https://www.irs.gov/newsroom/irs-ramps-up-new-initiatives-using-inflation-reduction-act-funding-to-ensure-complex-partnerships-large-corporations-pay-taxes-owed-continues-to-close-millionaire-tax-debt-cases.

⁵Id.

⁶I.R.S. News Release IR-2023-166 (Sept. 8, 2023), https://www.irs.gov/newsroom/irs-announces-sweeping-effort-to-restore-fairness-to-tax-system-with-inflation-reduction-act-funding-new-compliance-efforts.

⁷I.R.S. News Release IR-2024-276 (Oct. 22, 2024), https://www.irs.gov/newsroom/irs-announces-launch-of-pass-through-compliance-unit-in-lbi-new-group-brings-together-teams-of-specialists-from-across-the-agency-to-tackle-large-or-complex-exams.

⁸I.R.S. News Release IR-2023-176 (Sept. 20, 2023), https://www.irs.gov/newsroom/irs-to-establish-special-pass-through-organization-to-help-with-high-income-compliance-efforts-new-workgroup-to-blend-current-employees-and-new-hires-to-focus-on-complex-partnerships-other-key-areas.

⁹Nat’l Taxpayer Advoc., Publication 4054, FY 2025 Objectives Report to Congress 25 (Rev. 6-2024), https://www.taxpayeradvocate.irs.gov/reports/2024-annual-report-to-congress/full-report/.

¹⁰Office of the President, Hiring Freeze (Jan. 20, 2025), https://www.whitehouse.gov/presidential-actions/2025/01/hiring-freeze/.

¹¹U.S. Gov’t Accountability Office, GAO-23-104719, IRS Needs to Complete Modernization Plans and Fully Address Cloud Computing Requirements 9 (Jan. 2023), https://www.gao.gov/assets/gao-23-104719.pdf.

¹²Id.

¹³Treasury Inspector General for Tax Administration, Quarterly Snapshot: The IRS’s Inflation Reduction Act Spending through June 30, 2024 (Sept. 30, 2024), https://www.tigta.gov/sites/default/files/reports/2024-10/2024ier020fr.pdf.

¹⁴Hearing to Consider the Anticipated Nomination of Scott Bessent, of South Carolina, to be Secretary of the Treasury, Before the S. Comm. on Fin., 119th Cong. 3 (Jan. 16, 2025) (Questions for the Record for Scott Bessent), https://www.finance.senate.gov/imo/media/doc/responses_to_questions_for_the_record_to_scott_bessent.pdf.

¹⁵U.S. Gov’t Accountability Office, GAO-23-106020, Tax Enforcement: IRS Audit Processes Can Be Strengthened to Address a Growing Number of Large, Complex Partnerships 37 (July 2023), https://www.gao.gov/assets/gao-23-106020.pdf.