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House Ways and Means Committee Chairman Kevin Brady (R-TX) today released a 253-page bill that in many ways mirrors similar legislation he released last month. Last month’s bill was not considered by the full House of Representatives, but we do expect this legislation to be considered by the House this week. H.R. 88, the Retirement, Savings, and Other Tax Relief Act, is a broad bill that includes tax-related disaster relief, tax technical corrections, Internal Revenue Service (IRS) reform, retirement savings, and delay of certain healthcare related taxes.
CUNA was hopeful that H.R. 88 would have contained needed corrections to the Tax Cuts and Jobs Act of 2017 (TCJA). CUNA’s proposed corrections regarding the TCJA’s executive compensation provision were not included in the bill. However, CUNA is pleased that the bill eliminates the new Unrelated Business Income Tax (UBIT) on not-for-profit transportation and athletic facilities fringe benefits.
On a related front, the Treasury Department today released interim guidance on how to comply with the parking portion of this provision when it is provided by tax-exempt organizations. As part of the guidance, Treasury states that the tax-exempt sector can use “any reasonable method” for 2018 to determine the increase in UBTI. The Treasury also provides a safe harbor method and provides estimated tax penalty relief in 2018. However, we are hopeful that H.R. 88 will eliminate this fringe benefit tax and thus make this Treasury guidance unnecessary.
The newly released version of H.R. 88 is notably missing what are commonly referred to as “tax extenders.” CUNA is interested in two of these extenders and we continue to press the Congress to extend or make them permanent. They are discussed below.
The Tax Cuts and Jobs Act of 2017 (TCJA), last year’s large tax reform act, imposes an excise tax on certain executive compensation provided by tax-exempt organizations. CUNA and other not-for-profit employers are concerned about the lack of parity between existing for-profit and not-for-profit employee contracts regarding the not-for-profit 21 percent excise tax and the deductibility of corporate executive compensation. The TCJA exempts from deductibility limits existing corporate executive compensation contracts by “grandfathering” in “for- profit” executive contracts in effect on or before November 2, 2017. No such provision was included for not-for-profit employee contracts. This amounts to a retroactive tax on the nonprofit sector as these contracts were agreed upon with certain tax considerations assumed. CUNA and the entire nonprofit sector are disappointed that this bill does not address this parity and fairness issue.
CUNA has also requested that, in the absence of a grandfather rule, Treasury should issue guidance permitting an allocation of benefit amounts over the life of a 457(f) nonqualified deferred compensation plan. For the purposes of applying the excise tax, the Section 457(f) plan benefit should be allocated on a ratable basis to each of the years included in the vesting period, which better reflects the way the plans are funded by the employer. In addition, CUNA supports has requested that Treasury issue guidance confirming that Section 457(f) plan benefits that vested on or before December 31, 2017 (in other words, before the effective date of the TCJA and the excise tax) are exempt from the excise tax, even if the benefits are paid on or after January 1, 2018. In the absence of this requested Treasury guidance, a retroactive tax will be imposed on employee retirement amounts that have been accumulated and vested over many years. CUNA is working with lawmakers and other not-for-profit employers to secure needed changes to the bill as it works its way through Congress.
This new bill also includes the “Taxpayer First Act of 2018.” This bill includes a number of measures designed to protect taxpayers from unfair practices as well as improve IRS operations. Of importance to financial institutions, the bill includes two provisions related to suspected or actual “structuring transactions” and their treatment under the Bank Secrecy Act. The first provision would only allow the IRS to pursue the seizure or forfeiture of assets if either the property to be seized was derived from an illegal source or the transactions were structured for the purpose of concealing a violation of a criminal law or regulation other than rules against structuring. It also includes post-seizure procedures. The second provision provides a taxpayer exemption for interest liability should a court return funds to a taxpayer whose assets were mistakenly seized based on invalidated structuring claims.
The newly released legislation also includes the “21st Century IRS Act,” legislation to provide improved transparency, accountability, and information security at the IRS. Of interest to financial institutions, the bill would:
-require the Treasury Department, the IRS, and the Bureau of Fiscal Service to consult with financial institutions and submit a report to Congress describing how the IRS can utilize new payment methods and platforms to increase the number of tax refunds that can be paid by electronic funds transfer. The report is required to consider the impact on taxpayers who do not have access to traditional credit union or bank accounts.
-require the IRS to create a website to allow taxpayers to electronically file IRS Form 1099s.
-require the IRS to automate the “Income Verification Express Service (IVES)” system. The current “Income Verification Express Service” (IVES) program requires that taxpayer transcript information requests be submitted to the IRS by fax and then the transcripts are furnished electronically. This provision would require the IRS to implement a disclosure program that is fully automated. This system is often used by mortgage lenders to verify the income of a taxpayer who is a borrower in the process of a loan application. Users of this new system would be charged fees to cover the cost of the program. Hopefully, the improvement and speed in the loan approval process will justify these new fees. This improved program will certainly be a welcome tool for credit union loan officers.
-allow the payment of federal taxes by debit and credit cards. Under current law, taxpayers can generally pay their taxes with payment cards through third party processors and only if the IRS does not incur any fees. This provision would allow the direct payment of taxes by taxpayers using payment cards but does require that these taxpayers are as responsible as possible for any such fees assessed through these payments and card processing contracts.
Finally, this new bill would require electronic filing of the annual returns of certain tax-exempt organizations and make these returns available to the public. This would be accomplished by extending the requirement to “e-file” to all tax-exempt organizations required to file statements or returns in the IRS Form 990 series. It would also require that the IRS make the information provided on the forms available to the public in a machine-readable format as soon as possible. Also, this bill would require the IRS to provide notice to an organization that fails to file a Form 990 for two consecutive years. Ordinarily, an organization’s tax-exempt status is automatically revoked if it fails to file a Form 990 for three consecutive years.
The Tax Cuts and Jobs Act of 2017 (TCJA) also extends the Unrelated Business Income Tax (UBIT) in several areas. The TCJA requires tax-exempt organizations currently subject to UBIT to pay UBIT (effectively 21 percent) on certain employee fringe benefits, namely transportation and parking benefits, as well as on-site gyms and athletic facilities. For profit businesses are no longer allowed to deduct these and other employee benefits. This provision is eliminated for not-for-profit employers in H.R. 88.
Unfortunately, the new version of H.R. 88 does not include the “extenders” that were included in last year’s version of the bill. There were two provisions beneficial to financial institutions, their members, and customers. First, the old bill would have extended a tax exclusion for cancelled mortgage debt income. This provision would have continued relief to taxpayers by not requiring them to pay personal income tax on forgiven mortgage debt. In addition, it would have continued the elimination of the requirement for most financial institutions (including credit unions) to file an IRS Form 1099-C ("Discharge of Indebtedness") on a mortgage default involving an individual's primary residence. Should the provision not be extended, financial institutions would be required to file IRS Form 1099-Cs on certain serviced mortgages, adding to the already high compliance burden on financial institutions. The provision in the old bill would have extended the original provision related to indebtedness for a qualified principal residence indebtedness which is discharged before January 1, 2019. The provision also modified the exclusion to apply to qualified principal residence indebtedness that is discharged before January 1, 2019, if the discharge is pursuant to a written agreement entered into after December 31, 2017. The second tax extender in the old bill would have continued to allow the taxpayer to treat certain mortgage insurance as interest if the premiums were paid or accrued before December 31, 2018.
CUNA continues to lobby these tax related items at the Congressional level, as well as at the Treasury Department and the IRS level.
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