Lawmakers advance tax legislation for billionaires, IRS, Tax Court

Senate and House Democrats proposed a bill aimed at ensuring billionaires pay a “fair share” of taxes, without actually raising their tax rate under current law, while Republicans advanced tax legislation of their own pertaining to the Internal Revenue Service and the U.S. Tax Court.

The Democrats’ Billionaires Income Tax Act would expand on an accounting method already used in the Tax Code and would apply to fewer than 1,000 taxpayers and raise more than $500 billion. Only taxpayers with more than $100 million in annual income or more than $1 billion in assets for three consecutive years would be covered by the proposal. 

It would require high-income and high-net-worth taxpayers to pay tax on the income they earn on an annual basis through mark-to-market taxation. It would also end the ability of wealthy taxpayers to buy and hold appreciating assets and borrow against those assets to support their lifestyles tax-free. The bill would also stop tax breaks that allow high income and high net worth taxpayers to shield their income from taxation, including the ability to to transfer untaxed appreciated assets to their heirs at death and such heirs to sell such assets completely tax-free. 

The bill would tax gains and losses from assets like stocks that can be valued on an annual basis and they would be marked to market each year. Billionaires would have to pay tax on gains or take deductions for losses, whether or not they sell the asset. Taxpayers would be able to carry back their losses for up to three years under certain circumstances.

Senate Finance Committee Ranking Member Ron Wyden, D-Oregon, reintroduced the Billionaires Income Tax Act on Wednesday, while Reps. Steve Cohen, D-Tennessee, and Don Beyer, D-Virginia, introduced identical legislation in the House, making this the first Congress in which the Billionaires Income Tax was a bicameral proposal. The bill was also introduced in 2023.

“While people like nurses and firefighters pay taxes straight out of every paycheck, there’s a thicket of little-known tricks and accounting rules that allow billionaires to opt out of paying a fair share of tax on the income they enjoy,” Wyden said in a statement. “Billionaires and Republicans are going to offer up the same set of trickle-down arguments to pretend this proposal would bring about the end of western civilization. The only time you hear billionaires claim they can’t scrounge together any cash is when somebody brings up taxes, and odds are a lot of these mega-wealthy individuals are crying poverty from their yachts and private islands. This is a carefully designed proposal that draws on accounting methods already used in the tax code and raises revenue without increasing any tax rates.”

There would be a deferral charge on gains from assets like real estate. When a billionaire sells a nontradable asset, such as real estate or a business interest, they would have pay their usual tax, plus a “deferral recapture amount,” similar to interest on tax deferred while the individual held that asset. This approach would eliminate the need for annual valuations of these nontradable assets. The amount owed would be calculated by allocating an equal amount of gain to each year the billionaire held that specific asset, determining how much tax would have been owed on the gain in each year, and assessing interest on unpaid tax for the time the tax was deferred. The interest rate used would be the short-term federal rate plus one percentage point, and no interest accrues prior to the date of enactment of the proposal or the first tax year the individual is subject to the Billionaires Income Tax, whichever is later.

Under the legislation, there would be transition rules. The first time billionaires’ tradable assets are marked-to-market, they could elect to pay the resulting tax over five years. They could also elect to treat up to $1 billion of tradable stock in a single corporation as a nontradable asset, which will help to ensure that the proposal does not affect the ability of an individual who founds a successful company to maintain their controlling interest. The proposal also contains rules to prevent avoidance of the Billionaires Incomes Tax. 

The legislation is cosponsored by Sens. Sheldon Whitehouse. D-Rhode Island, Elizabeth Warren, D-Massachusetts, Bernie Sanders, I-Vermont, Tina Smith, D-Minnesota, Ben Ray Luján, D-New Mexico, Peter Welch, D-Vermont, Angela Alsobrooks, D-Maryland, Tammy Baldwin, D-Wisconsin, Richard Blumenthal, D-Connecticut, Tammy Duckworth, D-Illinois, John Fetterman, D-Pennsylvania, Martin Heinrich, D-New Mexico, Mazie Hirono, D-Hawai’i, Edward J. Markey, D-Massachusetts, Jeff Merkley, D-Oregon, Chris Murphy, D-Connecticut, Patty Murray, D-Washington, Jack Reed, D-Rhode Island, Brian Schatz, D-Hawai’i, and Chris Van Hollen, D-Maryland. The bill has been endorsed by over 100 supporting organizations. 

IRS and Tax Court bills

On the other side of the aisle, Rep. Glenn Grothman, R-Wisconsin, introduced the Fair and Accountable IRS Reviews Act to change the IRS penalty process by requiring that all proposed penalties be reviewed and approved by the issuing employee’s immediate supervisor before they can take effect. Currently, any employee the IRS deems a supervisor can approve proposed fines on taxpayers. Due to a 2024 change in agency policy, the definition of “immediate supervisor” was loosened to allow approval from almost anyone at the IRS. 

“Taxpayers deserve fair treatment and strong safeguards against unjust penalties,” Grothman said in a statement. “Right now, IRS agents can approve penalties brought forth by employees they have had little to no interaction with, which begs the question of whether taxpayers are receiving appropriate reviews of their cases. My bill restores accountability by requiring an agent’s direct supervisor review and approve any penalty before it is assessed. This simple safeguard will help prevent unnecessary or unfair fines and protect hardworking Americans from bureaucratic overreach.”

The bill passed by a unanimous vote of 44-0 in the House Ways and Means Committee.

Another bill passed by the committee, the Tax Court Improvement Act, is bipartisan and was introduced by Reps. Nathaniel Moran, R-Texas, and Terri Sewell, D-Alabama. It would authorize the Tax Court to sign subpoenas to produce books, papers, documents, electronically stored information, or tangible things for purposes of discovery or evidence, prior to a hearing. It would also hold judges to the standards for disqualification as other federal judges, as well as clarifies that the Tax Court has jurisdiction to extend a taxpayer’s deadline where timely filing was impossible or impractical. The House Ways and Means Committee voted 30-0 to pass the bill.