Key Takeaways
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Treasury Inspector General says time running out for IRS tax season staffing.
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Paper scanning initiative delay risks processing.
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Future of IRS digital services uncertain.
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The tax credits behind the shutdown battle.
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Court strikes down IRS political activity tests for tax exemption.
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World Smile Day.
Webinar alert! Mark your calendars for next Tuesday, October 7, for R&D Incentives: What Leaders Across Industries Need to Know, featuring leaders of the Eide Bailly research incentives team. Register here.
IRS Capacity For 2026 In Danger Due To Cuts, TIGTA Warns - Anna Scott Farrell, Law360 Tax Authority ($):
In a report, the IRS' federal watchdog said it was concerned about how workforce reductions that began under President Donald Trump would potentially impact the 2026 filing season, noting that key departments have lost 17% to 19% of their staff.
TIGTA projected that the loss of 2,000 employees from the agency's accounts management section, which processes tax returns and inventory, "may affect the IRS' ability to timely process tax returns during the 2026 filing season."
The report notes that the IRS initiative to scan paper returns has been delayed, with implications for the upcoming tax season. From the report (my emphasis)
IRS Modernization Plan Now in Treasury’s Hands, Ex-Director Says - Peyton Rhodes and Benjamin Valdez, Tax Notes ($):
April Harding, former IRS director of user experience services, submitted to Treasury leadership her strategic operating plan for overhauling the IRS’s digital products and customer service on May 9, her last day at the agency.
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“It takes about 10 minutes of Googling to find that voluntary compliance is stagnant over the last 20 years, despite billions of dollars and decades of modernization projects,” Harding said. The IRS should instead shift its focus to closing the tax gap, which is largely caused by underreporting, she suggested.
The strategic plan proposes that the IRS shrink the net tax gap to less than 5 percent by “improving methods of enforcement for sole proprietor taxpayers, with a particular focus on the less-regulated income streams known to be conducive to the underreporting.”
Filing Your Taxes for Free With IRS Is Changing Again, Explained - Erin Slowey, Bloomberg ($):
Giving some Americans the option to file for free generally has been a bipartisan goal, but it’s more complicated in practice.
The IRS created an agency-run free filing tool called Direct File during the Biden administration, which was widely cheered by Democrats. But Republican lawmakers in their new tax law are seeking to undo that tool, instead preferring a role for tax prep software companies that historically have been large donors.
IRS Appeals Division Adds a Layer
IRS Independent Office of Appeals starts Post Appeals Mediation pilot program - IRS:
“Appeals is committed to offering Alternative Dispute Resolution programs as a cost-effective option for resolving cases, improving the taxpayer’s experience, and making the best use of IRS resources,” said John Hinding, Acting Chief of Appeals.
Taxpayers can request PAM at the conclusion of an unsuccessful Appeals proceeding, and if the request is accepted, the parties meet in an accelerated mediation session where they make a final attempt to negotiate a mutually acceptable resolution. These sessions usually last one day. They are facilitated by an Appeals mediator with no connection to the underlying case, and taxpayers are invited to include a co-mediator at their own expense. The mediators promote settlement negotiations between the parties while helping them define the issues and identify common ground.
Ben Peeler, leader of the Eide Bailly IRS tax controversy team, says the the PAM program fails to address a deeper problem of poorly-trained and inexperienced Appeals Division personnel:
Related: Eide Bailly IRS Dispute Resolution and Collections Services.
Who Needs Paper Checks?
As the IRS Phases Out Paper Checks, Vulnerable Taxpayers Must Not Be Left Behind - Erin Collins, NTA Blog:
- Unbanked Households – According to the Federal Deposit Insurance Corporation’s 2023 report, 4.2 percent of U.S. households – about 5.6 million people – do not have a checking or savings account. Without a bank account or other accommodations, receiving a direct deposit is simply not possible. For these individuals, paper checks are not a preference; they’re a lifeline.
- Americans Living Abroad – U.S. citizens residing overseas frequently face challenges accessing U.S. financial institutions. Many foreign banks cannot accept or process IRS transactions, and the IRS does not routinely offer international electronic transfers.
- Taxpayers With Religious Constraints – Some religious communities, including some Amish and Mennonite sects, avoid using electronic financial systems altogether based on deeply held religious beliefs. Forcing them to comply with digital payment requirements would violate their rights and force them to make an untenable choice between religious freedom and tax compliance – an unacceptable position in a country that values both.
- Victims of Domestic Violence – Victims may be unwilling or unable to share their bank information with the IRS due to safety, control, or privacy concerns. This is because, in some cases, the abuser may monitor the victim’s financial transactions, including deposits, which may reveal the victim’s location or financial activity and thereby trigger further abuse or stalking.
Shutdown: The Tax Angle
Breaking down the ACA subsidy fight - Kelly Hooper and Sophie Gardner, Politico:
In 2022, Democrats and then-President Joe Biden extended the enhanced subsidies through 2025 in the Inflation Reduction Act. They’ll go away unless Congress acts by year’s end.
What's behind the health care fight that led to the government shutdown - Selena Simmons-Duffin, NPR.
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So in 2021, Congress stepped in with a lot more federal funding, which made premiums more affordable for people of all income levels.
Absent extension, the credits would only be available for family incomes up to approximately $120,000 annually.
IRS Data-Sharing Case Won't Be Paused For Gov't Shutdown - Kat Lucero, Law360 Tax Authority ($):
The timely submission of such information is necessary to resolve the Center for Taxpayer Rights and co-plaintiffs' motion to stop and reverse the IRS' sharing of tax return information for immigration enforcement, Senior U.S. District Judge Colleen Kollar-Kotelly said Wednesday. She denied the DOJ's bid to stay the deadline until Congress has restored federal funding to the department.
The DOJ sought the delay under an Oct. 1 order from the Washington, D.C., federal court's chief judge, which would allow the deadline extensions in civil cases during the federal funding lapse that prohibits several agency employees from working. But Judge Kollar-Kotelly noted that the chief judge's order does not apply to matters involving requests for preliminary injunctions — which is the current proceeding in the suit lodged by the Center for Taxpayer Rights, Main Street Alliance, National Federation of Federal Employees and Communications Workers of America.
The Shutdown - Russ Fox, Taxable Talk. "One thing that’s likely to continue during the shutdown are automated notices. Consider a taxpayer who gets an automated notice and timely responds. Will that response get noted so that a second notice doesn’t get generated? Who knows."
Tax Exempts and Political Activity
IRS’s Political and Primary Activity Tests Ruled Unconstitutional - Trevor Sikes, Tax Notes ($):
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The IRS denied Freedom Path’s tax-exempt status in 2013, stating that it wasn’t operated exclusively for the promotion of social welfare within the meaning of section 501(c)(4). The IRS used two tests: one from Rev. Rul. 2004-6, 2004-4 IRB 1, known as the political activity test, and one from reg. section 1.501(c)(4)-1, known as the primary activity test.
The Justice Department's Targeting of George Soros Is a Serious Scandal - Just as it was a scandal when the IRS under Obama allegedly targeted Tea Party groups. - Stephanie Slade, Reason:
The position of left-of-center commentators was, in short, that the supposed scandal had turned out to be a nothingburger. Conservatives weren't actually targeted at all. Because the initial report left out the fact that groups of a variety of ideological persuasions had received scrutiny, it created the mistaken impression that conservatives had been singled out—presumably for political reasons—when that wasn't true.
The argument was not that selectively targeting one's political opponents is fine, because elections have consequences.
Related: Eide Bailly Exempt Organization Tax Services.
Tariffs: The Scotch and Soybean Angle
US May Ease Tariffs on Scotch Whisky to Help Bourbon Industry - Lucy White, Charles Gorrivan, and Ellen Milligan, Bloomberg News:
The UK has argued the move would benefit the US bourbon industry because it exports used casks to Scotch producers, said the people, who asked to not be identified because the discussions are private.
Trump Bets the Soybean Farm on Tariffs - Wall Street Journal. "Whoever claimed trade wars are easy to win clearly wasn’t an American farmer."
No. You can’t compare tariff rates and income tax rates. - Brian Albrecht, Economic Forces. "For the tenth time, here’s what we absolutely, categorically cannot do: we cannot look at the nominal tariff rate of 2.5%, compare it to income tax rates of 40%, and conclude that, even on the margin, raising tariffs while cutting income taxes would reduce the total distortionary harms."
Transfer Pricing: The Other Trade Upheaval
3M’s Transfer Pricing Win Marks Tax Code Interpretation Upheaval - Tristan Navera and Caleb Harshberger, Bloomberg ($):
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The significance of the decision “is hard to overstate,” said Chad Martin, a principal of transfer pricing services at Eide Bailly LLP.
He said the Eighth Circuit is now forcing courts to wholly re-examine Section 482, which grants the IRS broad power to re-allocate corporate income.
Chad may have more to say on this Monday in his next Tax News & Views post.
Related: Eide Bailly Transfer Pricing Services
The New World of Government Financial Reporting Mandates
Tax News & Views International Weekly: Tax Reporting Transparency, at Home and Abroad - Alex Parker, Eide Bailly. "As Washington girds towards a fight over federal spending, Republicans have included a funding restriction which would nix a recent transparency initiative at the Financial Accounting Standards Board, the standards-setter for financial reporting rules in the U.S."
California’s SB 261: A Simple Guide for Compliance in 2026 - Kristin Gustafson, Eide Bailly. "California opens a new era in financial reporting with the passage of Senate Bill 261, a groundbreaking law that requires companies doing business in California to disclose their environmental impact and climate-related financial risks."
Blogs and Bits
3 tax moves to make October less scary - Kay Bell on Substack. "File your extended 2024 tax return: The possible (probable) coinciding of the Oct. 15 due date and fewer IRS staff to handle extended filings is why filing your postponed return is the first October Tax Move to make this year."
Wages Disallowed Under Section 280E Cannot be Used in Calculating QBI Deduction - Parker Tax Pro Library. "The Tax Court held that, in calculating an S shareholder's qualified business income deduction under Code Sec. 199A, the term "W-2 wages" excludes wages for which a deduction is disallowed under Code Sec. 280E (Expenditures in connection with the illegal sale of drugs)."
Former IRS Leaders Endorse Residency-Based Tax For Americans Abroad - Virginia La Torre Jeker, Forbes. "To appreciate the significance of LaHood's proposal and the Rettig-Cullinan endorsement, it's essential to revisit the many quirks of the U.S. tax regime that make it a global anomaly and place Americans abroad at s distinct disadvantage. Unlike virtually every other country (save Eritrea), the United States taxes its citizens on their worldwide income, regardless of where they reside or earn that income."
Related: Eide Bailly Expatriate Tax Services.
Tax Administration: The Rules, the Reviews, the Relief - Melissa Menter and Colette Sutton, Eide Bailly. "As the end of 2025 approaches, it’s critical to stay ahead of your Business Personal Property Tax (“BPPT”) compliance and minimization efforts."
What day is it?
It's World Smile Day! And it's Friday, so there's a reason, unless you are busy finishing up extended returns due October 15.
Make a habit of sustained success.
