Tax News & Views Overthinks the Tip Deduction Roundup

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IRS Floats Rules on Jobs Eligible for ‘No Tax On Tips’ Break - Erin Slowey, Bloomberg ($):

The IRS proposed rules Friday outlining who will qualify for a tax deduction on the tips they earn.

Workers in a large range of industries—from bellhops to influencers—will eligible for the new tax break, according to the proposed rules (RIN: 1545-BR63).

Those earning tipped income can deduct up to $25,000 per year under a massive Republican tax-and-spending cut package enacted in July. The law tasks the IRS and Treasury Department with deciding which jobs will qualify.

A quick look at the 71 pages of proposed rules finds this discussion of interest to the OnlyFans economy:

(6) Illegal activity. Any amount received for a service the performance of which is
a felony or misdemeanor under applicable law is not a qualified tip.

(7) Prostitution. Any amount received for prostitution services is not a qualified tip.

(8) Pornography. Any amount received for pornographic activity is not a qualified tip.

It's not clear that content-based restrictions of legal activity would survive a First Amendment challenge, but the regulations have a broader restriction that might cover online content creators anyway: The "specified service trade or business" bar for the tip deduction. The preamble explains (my emphasis):

Section 224(d)(2)(B) provides that qualified tips do not include those received in the course of a trade or business that is a specified service trade or business (SSTB) as defined in section 199A(d)(2). Under section 199A(d)(2), an SSTB is defined as any trade or business (A) involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or (B) that involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)). Treasury regulations in § 1.199A-5(b)(2) further define what it means to perform services in the fields listed in section 199A(d)(2)(A). For example, § 1.199A-5(b)(2)(vi) provides, in part, that the meaning of services performed in the performing arts means “the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such.”

This would seem to rule out the tip deduction for most online content creators, unless they can somehow say their work is not as "entertainers" or "similar professionals." Still, enforcement might be a big challenge.

Uneventful Times At The IRS

I.R.S. Official Sues the Agency, Saying It Leaked Private Data to News Sites - Jesse Drucker, New York Times:

A top official at the Internal Revenue Service sued the agency on Thursday, claiming that officials unlawfully leaked employment data to news outlets including Fox News, which then published an incorrect report that she had been fired.

Holly Paz, until recently the top I.R.S. official overseeing the country’s biggest companies, sued the agency in Federal District Court in Washington. She asked the court to establish that the I.R.S. and its parent agency, the Treasury Department, violated the law and asked them to pay damages.

...

Since the spring, right-wing websites and media outlets including Fox News have drawn attention to the work of Ms. Paz and other I.R.S. officials who were involved in a crackdown on an aggressive tax shelter used by companies including Occidental Petroleum and AT&T. The Trump administration has quietly rolled back those enforcement efforts after intense lobbying by industry and right-wing activists, The New York Times reported last week.

IRS Moves to Hire Attorneys After Mass Resignations - Benjamin Valdez, Tax Notes ($):

The IRS has begun hiring for more than 60 positions in the Office of Chief Counsel after rescinding offers to new attorneys and watching hundreds opt to resign this year.

The vacancies on USAJobs.gov, many of which are open through late September, are for an array of positions including general attorney (tax) in the office’s international tax arm, attorney-adviser (tax), and special counsel for the national taxpayer advocate.

The postings are the latest move by the IRS to resume hiring following the exodus of a quarter of its 100,000-employee workforce since the beginning of the year, largely because of the deferred resignation program. The agency also recently began hiring seasonal contact representatives ahead of the 2026 filing season and recently offered some staff who accepted the resignation offer a chance to come back to work.

Administration Suspends Taxpayer Advocacy Panel for More "Vetting."

White House to Vet Taxpayer Advocacy Panel Members - Benjamin Valdez, Tax Notes ($):

A volunteer advisory panel of the Taxpayer Advocate Service is pausing all public meetings indefinitely while the White House vets its members, according to a memo from panel leadership.

Treasury has directed an indefinite pause of all public meetings of the Taxpayer Advocacy Panel (TAP) — an advisory board within the Taxpayer Advocate Service — while the White House Presidential Personnel Office conducts a vetting process for all members, according to a September 17 email to members that was viewed by Tax Notes.

...

The TAP comprises about 75 volunteers from all 50 states and includes individuals from various backgrounds, not just tax professionals. The panel is responsible for screening feedback from the public and forwarding recommendations to the IRS regarding taxpayer correspondence, tax forms and publications, and taxpayer assistance centers, among other issues.

ICE Seeks Privacy For Agents Viewing Private Taxpayer Data

IRS Discloses Details On ICE Agreement In Data Sharing Row - Kat Lucero, Law360 Tax Authority ($):

The U.S. government disclosed additional details Thursday on the agreement between the IRS and immigration enforcement authorities to share confidential tax return information, including who had necessary permissions to access the disclosures, following a D.C. federal judge's order in a lawsuit seeking to end the interagency data sharing.

...

The four unnamed employees are the ICE Homeland Security Investigations acting special assistant to Williams, an ICE HSI criminal analyst and two ICE government contractor systems architects, according to the letter, which includes two internal correspondences between agencies. The DOJ refrained from naming the employees because of the high-profile nature of the proceeding and the government wants to protect them from potential harassment, it said.

Anonymity Sought for More ICE Employees With Access to Tax Data - Trevor Sikes, Tax Notes ($):

Following oral arguments in Center for Taxpayer Rights v. IRS, Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia ordered the IRS to provide the court with identifying information on individuals at the center of a tax data sharing request.

The IRS’s response, filed September 18, disclosed that former IRS Commissioner Billy Long received the request to share 1.28 million taxpayers’ data from Todd M. Lyons, acting director of ICE. The IRS also attached a copy of that request letter as an exhibit to its response.

The IRS identified Jesse J. Williams, assistant director of ICE, as the sole individual that ICE identified as being “personally and directly engaged” in the criminal investigations and the individual who received the shared data on taxpayers.

"Personally and directly engaged" in 1.28 million cases. Who says government employees don't work hard?

Taxpayer Advocate Slams Tax ID Number Process

When Taxpayers Struggle to Obtain an EIN, Everyone Loses - Erin Collins, NTA Blog:

Unfortunately, too many taxpayers encounter obstacles in obtaining an EIN. The process, which should be straightforward, can be marred by delays, technical glitches, and inconsistent procedures that frustrate both taxpayers and tax professionals.

Taxpayers applying online must complete the application in a single session that times out after 15 minutes of inactivity. Applicants may have to try several different web browsers to get the application to go through. Only one EIN may be issued per responsible party per day. Applicants outside the United States cannot use the online system at all, forcing them to mail or fax Form SS-4, Application for Employer Identification Number, which is a process that can take four weeks or more.

Even when taxpayers follow the rules, they frequently encounter error codes that require IRS intervention. For example, a mismatch between the responsible party’s name and Social Security number may stop an application cold, even if the taxpayer’s records are correct. Other codes reflect system overloads, instructing applicants to “try again later.”

Delays compound the problem. Backlogs in manually processing EIN applications leave businesses unable to open accounts or begin operations. In some cases, taxpayers report receiving EINs they never requested – raising concerns about errors or identity theft.

Political Threats To Tax Exemptions

Trump Readies Tax, Criminal Crackdowns on Liberal Groups After Kirk Killing - Simone Foxman, Caitlin Reilly and Gregory Korte, Bloomberg via MSN:

President Donald Trump, his vice president and other top officials have threatened to use a range of tools, from stripping groups of tax-exempt status and opening criminal racketeering probes to designating some as terrorists. Administration officials say they’re still deciding just how far they will go.

...

Vice President JD Vance pointed to “well-funded institutions of the left” that “lied about what he said so as to justify his murder.”

He hinted the administration may attempt to revoke the tax-exempt status of some groups. Senior administration officials, including the president and vice president, are barred by law from interfering with Internal Revenue Service investigations into specific taxpayers.

No Legal Basis Seen for Trump’s Threats to Strip Exemptions - Kelsey Brooks, Tax Notes ($):

The Trump administration has no legal basis for revoking the tax exemption of groups whose views it disagrees with, despite its threats to do so following the killing of Charlie Kirk, according to multiple law professionals.

“Nothing in the Internal Revenue Code authorizes the administration to distinguish between organizations whose messages with which they agree and those whose messages they dislike,” David A. Super of Georgetown University Law Center told Tax Notes. “As long as an organization meets the Code’s broad definition of a charitable or educational purpose, the administration has no basis for challenging them.”

Blogs and Bits

Got a business? Get an EIN - Kay Bell, Don't Mess With Taxes. "You’ll need an EIN to hire employees, apply for appropriate business licenses, open a company bank account, set up a retirement plan, and file your various business taxes."

The Fall Into Tax Season With New Forms And Numbers Edition - Kelly Phillips Erb, Forbes. "There will be changes to Form 1040 for 2025, including new Schedule 1-A, Additional Deductions. You’ll use that form to calculate new deductions for tips, overtime, car interest, and seniors. You can find out more, including some examples with numbers, here."

No Statute of Limitations Applies Where Preparer Fraudulently Prepared Client's Return - Parker Tax Pro Library. "The Third Circuit affirmed the Tax Court and held that the Code Sec. 6501(c) exception to the general three-year statute of limitations on the assessment of taxes does not apply when a third party fraudulently prepares a taxpayer's return. The court concluded that the structure of the statute focuses on the presence of 'a false or fraudulent return with the intent to evade tax' and does not include any express or implied textual indication that the 'intent to evade tax' is limited to the taxpayer.'"

Let the Work Opportunity Tax Credit Expire - Adam Michel, Liberty Taxed. "An Ernst & Young summary concludes that between 63 percent and 96 percent of the budgetary cost of WOTC accrues as windfall profits to firms for hires that likely would have occurred anyway."

State Tax News & Views: Defining Digital Goods and Related Exemptions - Melissa Menter and Colette Sutton, Eide Bailly. A roundup of developments in the state tax world.

Not Just A Tax Shelter, but a Special One

Nevada Man Pleads Guilty to Promoting Fraudulent Tax Avoidance Scheme - US Justice Department:

A Nevada man pleaded guilty today to advising clients to commit tax evasion.

The following is according to court documents and statements made in court: Defendant, of Las Vegas, operated a tax and accounting business known as X Tax Pros. From 2015 and through April 2025, Defendant promoted a fraudulent tax avoidance scheme called the “Special Tax Shelter Strategy.” Defendant promised clients that if they paid him certain “fees,” he could prepare a tax return that eliminated the clients’ taxes owed to the IRS and, in most cases, create a large tax refund. Defendant charged the clients tens of thousands of dollars in fees, which the clients paid from the refunds they received from the IRS.

To carry out the “Special Tax Shelter Strategy” Defendant falsified entries on the clients’ tax returns. In many cases, he did this by falsely reporting that the client had sustained a large loss from one or more business entities that Defendant controlled. In most cases Defendant’s entities carried on no business, did not file tax returns, did not sustain or report any losses to the IRS, and did not report the clients as partners. For some clients, Defendant falsified entries relating to cost of goods sold and royalty expenses.

"Special Tax Shelter Strategy," all right. Read your returns, and be real. The clients should have known better. After paying the back taxes, penalties, and interest, they will now.

What day is it?

It's National Overthinkers Day, dedicated to all of us who have sat up nights wondering if we really understand that code section.

Tax News & Views Overthinks the Tip Deduction Roundup

Make a habit of sustained success.

Joe B. Kristan, CPA