| With IRS Staffing Cuts, Expert Predicts Tax Reform Implementation Challenges By Maureen Leddy, Checkpoint As the Senate gears up to consider a tax-heavy reconciliation bill and resolve differences with the House-passed version, one expert expects a bill will ultimately be enacted — but the real challenge will be putting the new law into place. The One Big Beautiful Bill Act (OBBBA, H.R. 1) “is the President’s number one priority,” Caroline Bruckner, an American University tax professor, told Checkpoint. “There’s a debt limit increase that’s driving the timing,” she noted. “So it will, I believe, come together at some point.” As the bill makes its way through the Senate, Bruckner, who previously worked for the Senate Energy and Natural Resources and Small Business and Entrepreneurship committees, doesn’t anticipate big changes. “What we’ve seen in big reconciliation bills in the past is that the Senate has really been able to make wholesale changes and force the House to accept them,” she explained. But OBBBA could be different, given the “slim vote majority” in the House — that chamber passed its bill last week 215 – 214. Bruckner is more focused on how the bill provisions will eventually be implemented after large-scale staffing cuts at the IRS. She said it’s unclear to her how the agency will “implement these wholesale changes and provide the necessary guidance, because, literally, there’s no one in the building to do the work.” The Trump administration leadership, including Treasury Secretary Scott Bessent, have touted AI as a way to streamline work and increase efficiency. But when it comes to implementing new laws and issuing guidance, Bruckner contends “you can’t relegate that to AI.” And AI, she added, may incorporate algorithms that “have a disparate impact on certain populations,” as a 2023 Stanford study revealed. Bruckner also noted her own research with colleague Collin Coil on where the IRS may benefit from AI use — and potential pitfalls. She concedes that “huge chunks of the bill” just make date changes. “That’s easy to accommodate,” she explained, “because the law isn’t substantively changing” and “people are prepared for that.” The challenges, Bruckner said, will be where “you’re trying to launch new programs through the tax system” or “substantially recalibrate existing provisions.” And those challenges will exist regardless of whether congressional Republicans meet their July 4th goal for passing OBBBA into law. Pushing up to the end of the fiscal year, or the debt ceiling “X date,” would give IRS staff less time to respond to statutory changes. However, for Bruckner, that “doesn’t make a difference because they just don’t have the workforce” — regardless of how much of a runway the IRS is given. Bruckner, who coordinates the AU’s Kogod School of Business Volunteer Income Tax Assistance program, reflected on recent conversations with VITA volunteers from IRS and Chief Counsel, as well as a May 2 Treasury Inspector General for Tax Administration report on IRS workforce reductions. “The brain drain and the skills exit is so profound,” she said. It’s unclear to her how “they’re going to be able to scale up the workforce or scale up the expertise needed to implement this bill.” Another concern, she said, is that OBBBA doesn’t provide the IRS with any funding to implement new provisions. In prior reconciliation bills “there was always money included for hiring for people at Treasury and IRS to issue guidance,” she noted. A new program, but a skeleton crew. One portion of OBBBA she’s particularly concerned about from an implementation perspective is the national school voucher program under proposed Section 25F. The bill would establish a nonrefundable income tax credit for a taxpayers’ qualified contributions to a scholarship granting organization. The credit would be capped at the greater of 10% of the taxpayer’s aggregate gross income or $5,000 — which could be contributed as cash or marketable securities. Up to $5 billion in credits would be available annually for the 2026 – 2029 calendar years. “Designing that program and executing it to withstand a litigation challenge is difficult under the best of circumstances,” said Bruckner. She’s concerned how the IRS will roll it out given “the exiting of experienced people” at the agency. And she predicts the program “is certainly going to run into pretty substantial litigation challenges.” Groups including the Institute on Taxation and Economic Policy and First Focus Campaign for Children have already called out the program as a potential capital gains tax shelter for the wealthy. First Focus, in a May 22 letter, contends it would allow “individuals to donate their appreciated corporate stocks and avoid paying capital gains tax on the appreciation, while also receiving a federal tax credit for the full market value of the donation.” And it lacks “accountability measures to prevent waste and fraud,” says First Focus. Bruckner predicts that getting guidance on any new provisions — let alone “being able to get someone of the phone” — will be a challenge. The issue, she explained, is “the amount of work that the passage of this bill is going to create and the lack of people that are sitting in desks available to do it.” Her advice to tax professionals for next year is to “file early, and be prepared to wait if you have to engage.” Tax Court Again Uses Functional Test to Deem Partners Limited ‘In Name Only’ By Tim Shaw, Checkpoint The Tax Court, following recent precedent, determined that three partnership members were not limited partners based on their day-to-day functions and thus subject to self-employment tax. (Soroban Capital Partners LP, (5/28/2025) TC Memo 2025-52) Background. Soroban Capital Partners LP is a limited partnership registered as a Delaware LLC, with a principal place of business in New York, New York. The IRS in April 2022 sent Soroban Notices of Final Partnership Administrative Adjustment (FPPA) for tax years 2016 and 2017. According to the IRS, Soroban mischaracterized income allocated to its limited partners: EWM1 LLC, GKK LLC, and Scott Friedman. The adjustments treated the limited partners’ ordinary income as self-employment net earnings, resulting in increases to Soroban’s self-employment income for 2016 ($77,663,963) and 2017 ($63,866,302). Generally, Code Section 1402(a) provides that net earnings from self-employment means the gross income derived by an individual from any trade or business carried on by such individual, less the business’ deductions and the individual’s distributive share of income or loss from a partnership. An exception under Code Sec. 1402(a)(13), however, excludes the distributive share of any item of income or loss of a limited partner — other than guaranteed payments — from net earnings from self-employment. But the IRS’ notices informed Soroban that the exception did not apply to the limited partners for both tax years. Prior proceedings. The Tax Court previously ruled in Soroban v. Commissioner (161 TC 310) that a “functional analysis test” is necessary to “determine whether a partner in a state law limited partnership is a ‘limited partner'” under Section 1402(a)(13). The court also determined it had jurisdiction to determine in a TEFRA proceeding how to apply the functional analysis test. Accordingly, the court granted the IRS’ motion for partial summary judgment upholding the FPPAs. Shortly after, the Tax Court ruled in Denham Capital, Management, LP (TC Memo 2024-114) that Congress intended the exception to apply to partners that are “passive investors” and not “actively participating” in daily business operations. Soroban and the IRS filed a joint motion to submit their case, and then filed simultaneous briefs. Among the new files was Soroban’s motion to reopen the record, so that it would reflect its Forms 1065 for 2016-2017 and earlier. Memorandum opinion. The Tax Court in a May 28 memorandum opinion again sided with the IRS in Soroban, finding the limited partners were limited partners “in name only” and did not qualify for the Section 1402(a)(13) exception for federal tax purposes. Soroban’s partners were “essential” to its business operations and were responsible for generating income, the Tax Court said. Because those earnings were not “of an investment nature,” the court upheld the IRS’ adjustments. Applying the functionality test, the court said they were also “held out to the public” as essential and participated in management and Soroban’s decision-making processes. Moreso, they worked full-time, and “their earnings constitute net earnings from self employment for the years in issue,” the opinion read. Soroban’s arguments relied on a “legal fiction” that the individual partners served the business in a limited capacity. “Instead, petitioner argues, they acted with authority delegated to them by the general partner, which they in turn had the authority to manage.” The court added that Soroban’s position “is precisely why application of federal tax law to the economic arrangement of the parties controls, and not mere state law classifications.” For more on the limited partnership exception for federal self-employment tax purposes, see Checkpoint’s Federal Tax Coordinator ¶A-6157. Q&A: Flat Rate or Aggregate? Taxing Severance Pay the Right Way By Christopher Wood, CPP, Checkpoint When employees receive severance pay, one of the most common questions payroll professionals face is: How should it be taxed? A recent inquiry asked whether severance should be taxed using the supplemental flat rate or based on what the employee claimed on their federal and state withholding forms — specifically in California. This Q&A article breaks down the federal and California state rules for taxing severance pay, helping both employers and employees understand their options and make informed decisions. Q: How does the IRS treat severance pay for tax withholding purposes? A: The IRS classifies severance pay as supplemental wages. Employers can choose between two methods for withholding federal income tax: Flat rate method. Under the flat rate method, severance pay is subject to a fixed federal withholding rate of 22%. To use this method, several conditions must be met: the severance payment must be clearly separated from regular wages on the employee’s pay statement; the employee must have had federal income tax withheld from their regular wages either earlier in the current year or in the previous year; and the total amount of supplemental wages paid to the employee must not exceed $1 million within the calendar year. Aggregate method. Under the aggregate method, severance pay is combined with the employee’s most recent regular wages, and the total amount is used to calculate withholding. This calculation is based on the employee’s current Form W-4 and their regular pay frequency. Because it reflects the employee’s actual withholding elections, this method can result in either higher or lower tax withholding, depending on the individual’s overall tax profile (IRS Publication 15-A). Q: What are California’s rules for taxing severance pay? A: In California, severance pay is classified as a type of supplemental wage, along with bonuses, commissions, overtime, vacation pay, and stock options. If paid at the same time as regular wages: If severance is paid at the same time as regular wages, employers are required to treat the total amount as a single wage payment and calculate Personal Income Tax (PIT) withholding using the regular payroll period’s withholding schedules. If paid separately from regular wages: However, if severance is paid separately from regular wages, employers may choose between two methods: (1) calculate PIT withholding based on the combined total of the severance and the most recent regular wages, then subtract the amount already withheld from the regular wages; or (2) apply a flat withholding rate of 6.6% for severance pay and other general supplemental wages. Other tax rate: For bonuses and stock options, a higher flat rate of 10.23% applies (California DE 44). TIGTA Finds IRS Remiss in Providing and Maintaining Emergency Defibrillators By Federal Tax Update Staff The Treasury Inspector General for Tax Administration (TIGTA) has released an evaluation report initiated to determine whether every IRS post of duty (POD) with more than 100 employees has immediate access to emergency defibrillator equipment and personnel trained to operate such equipment. (Report No. 2025-IE-R016) An automated external defibrillator (AED) is a small, lightweight portable device designed to help lay responders defibrillate individuals suffering a sudden cardiac arrest (SCA) until emergency services arrive. According to the report, a 2022 National Agreement requires that every agency POD with more than 100 employees will have immediate access to emergency defibrillator equipment, as well as personnel trained to operate such equipment. “Our evaluation found that AED equipment was not always operational or available at some IRS PODs,” the report stated. TIGTA conducted unannounced inspections of 62 PODs with 418 AEDs. As of May 2024, TIGTA found that: 114 AEDs did not include proper signage. 52 AED pad-paks were expired, 29 spare pad-paks were missing, and 2 pad-paks were damaged. Pad-paks are “essential” to the operation of an AED. 9 AEDs were not properly stored in a mounted, alarmed AED cabinet. 3 AEDs were not operational. 1 nonoperational AED trainer model was erroneously identified as an operational AED at an IRS POD. The report also revealed that monthly AED maintenance inspections “were not always completed.” In addition, an analysis of IRS records identified PODs that had more than 100 employees but did not have a required AED program. CPAs Concerned About SALT, Contingent Fee Provisions in Tax Reform Bill By Maureen Leddy, Checkpoint As congressional Republicans move forward with a reconciliation bill that would extend and revise tax provisions, the American Institute of CPAs is homing in on proposals they say could negatively impact accountants and their clients. Last week, the House passed the One Big Beautiful Bill Act (OBBBA, H.R. 1), which totaled over 1,000 pages and incorporated provisions from 11 House committees — including the taxwriting committee, Ways and Means. As the bill makes its way to the Senate, groups are highlighting proposals they’d like to see changed before the bill is signed into law. AICPA, in a May 20 letter to Senate and House taxwriting committee leadership, is pushing for revisions to “protect taxpayers and tax professionals” and “promote tax administrability.” SALT cap woes. Top of the list for AICPA is a provision in the House-passed bill the group says would prevent pass-through entities that are “specified service trades or businesses” — defined to include businesses performing accounting and legal services — from deducting state and local taxes (SALT). The 2017 Tax Cuts and Jobs Act limited the SALT deduction individuals could claim to $10,000. However, excluded from that limitation was SALT “paid or accrued in carrying on a trade or business.” These provisions are set to expire at the end of 2025. OBBBA would extend but increase the individual SALT deduction cap. It also would define “excepted tax” for purposes of the SALT deduction to include certain taxes “paid or accrued by a qualifying entity with respect to carrying on a qualified trade or business” under Code Sec. 199A(d)(2) or “in carrying on a trade or business.” A qualified trade or business does not, however, include the performance of services in several fields, including accounting and law. OBBBA’s individual SALT deduction provision, Section 112018, saw some last-minute changes in a manager’s amendment before reaching the House floor last week. Those changes include an increase in the SALT deduction cap to $40,000 for individuals, with a phase-down of the credit beginning at $500,000 modified adjusted gross income (and a $20,000 cap for marrieds filing separately with a $250,000 phase-down threshold). But AICPA’s concerns centered on the portion of the SALT cap proposal that it says “unfairly targets specified service trades or businesses (SSTBs) (as defined under section 199A(d)(3)) by preventing SSTBs from deducting state and local income taxes.” According to the group, the provision would result in “further needlessly widening the parity gap” between SSTBs and C corporations and non-SSTBs. AICPA told Checkpoint that these concerns remain after the manager’s amendment. In fact, “the divide between SSTBs and non-SSTBs/C corporations would be even greater” after the manager’s amendment, said an AICPA spokesperson. This is due to a correction — which AICPA had anticipated — regarding non-SSTB SALT deduction. The group also called out several other SALT-cap related provisions it contends would “introduce significant complexity and uncertainty” in its May 20 letter. Contingent fees. Another concern for AICPA is a provision in OBBBA that allows tax preparers to use contingent fee arrangements. The bill, specifically, would bar the Treasury secretary from regulating, prohibiting, or restricting such fee arrangements — whether in connection with tax return preparation, refund claims, or related document preparation. AICPA calls the change “an open invitation to unscrupulous tax preparers to engage in fraudulent preparation activities.” The group cites the role of contingent fee arrangements in Employee Retention Credit program abuses. While AICPA is pushing Congress to strike the provision entirely, it also suggests alternate language to limit abuse: requiring paid preparers to disclose that a return or claim is prepared under a contingent fee arrangement. A December 2024 proposed rule issued by the Biden administration’s Treasury took aim at tax prep contingent fees. Under that proposal, charging such fees in connection with tax return or claim preparation would constitute “disreputable conduct.” The rule further defines “contingent fee” to include a fee that is “based on a percentage of the refund reported on a tax return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific tax result attained.” Excess business losses. An additional provision noted by AICPA also saw changes before passing the House. The Ways and Means draft would have revised the treatment of excess business losses under Code Sec. 461(l)(2) to provide that these losses no longer carry over as net operating losses (NOLs) for non-corporate taxpayers. According to AICPA, this change would “effectively provide for a permanent disallowance of any business losses unless or until the taxpayer has other business income.” The provision was adjusted as it advanced toward full House consideration. A document posted by the House Rules Committee details the change (renumbered as Section 112026). Under the revised proposal, certain disallowed loses for a taxable year would be treated as “a loss attributable to a trade or business of the taxpayer … arising in the subsequent taxable year.” “While Rules Committee’s modifications to section 461(l)(2) provides a technical and administrative improvement, it does not address concerns around permanent disallowance of losses,” an AICPA spokesperson told Checkpoint. “From a partnership standpoint, this can be problematic when a partner disposes of their interest or when a pass-through entity winds down, where pass-through entities have no opportunities to exhaust business losses.” AICPA gave the example of a small business generating significant losses and then ceasing operations. “Those excess business losses would carryforward without business income to offset the losses. Then, the business owner’s only source of income thereafter is wage income from another employer (or nonbusiness income).” As a result, “the owner could be prevented from ever utilizing the excess business losses,” explained the AICPA spokesperson. “In lieu of the proposed modifications, one solution may be to treat carryovers as NOLs, which would be easier to utilize in carryover years instead of excess business losses.” Firms Ask IRS to Fix Book Minimum Tax, Premium Withholding Issues By Tim Shaw, Checkpoint The IRS should include in its next list of priority guidance projects clarifications to the corporate alternative minimum tax’s (CAMT) interaction with the foreign tax credit (FTC), as well as withholding on non-cash insurance premiums, stakeholders told the agency during an open comment period. In Notice 2025-19, the IRS solicited public input on which items should be included in the agency’s 2025-2026 Priority Guidance Plan (PGP). The annual list details regulatory and other guidance work the IRS aims to conduct from the beginning of July through the end of the June the following year. Unique to this cycle is an executive order signed by President Trump directing federal agencies to identify and remove regulations that, for example, are unconstitutional or place administrative burdens on taxpayers. Generally, the administration would like to scratch 10 regs for every new reg that is finalized. The comment period for members of the public to send the IRS suggestions relating to the next PGP is scheduled to close May 30. Since mid-April, several tax firms, legal associations, and trade organizations weighed in with what they would like the IRS — as it undergoes staffing and funding cuts — to work on. The following is a sample of tax issues on the minds of industry stakeholders. CAMT/FTC. KPMG LLP’s May 12 comment letter requested the IRS amend the definition of an “eligible tax” in Prop. Reg. § 1.59-4(b)(1) for the purposes of the CAMT FTC under Code Sec. 59(l). KPMG also sought the removal of Code Sec. 907 from applicable suspensions and disallowances. “The current definition of an ‘eligible tax’ is overbroad and not supported by the plain language or purpose of section 59(l) and, therefore, is not based on the best reading of the statute,” the firm’s letter stated. KPMG cautioned that the definition “would deny a CAMT FTC to the extent foreign income taxes” are disallowed or suspended under a list of Tax Code sections. “This list of regular tax disallowances and suspensions is overbroad and inconsistent with the plain language and purpose of section 59(l),” KPMG commented. At a high level, the CAMT is only imposed on a select few large corporate taxpayers and is calculated using financial statement income. When a taxpayer has CAMT liability, a credit is generated “that can be used to offset regular tax in future years,” KPMG explained. The CAMT FTC serves to curtail double taxation on income factored into the CAMT formula. The letter explained that in “explicit instances in which the CAMT FTC clearly refers to regular tax and regular FTCs, the final regulations should only include regular tax disallowances and suspensions that treat a tax as (1) not a foreign income tax within the meaning of [Code Sec. 901] or (2) not paid or accrued for” federal income tax purposes. FATCA. Miller & Chevalier Chartered recommended in a May 27 letter that the IRS finalize a 2018 proposed rules (Prop. Treas. Reg. Section 1.1473- 1(a)(4)(iii)), “which eliminates withholding on non-cash value insurance premiums” under the Foreign Account Tax Compliance Act. Miller & Chevalier noted how commenters at the time raised concerns over “the burden on insurance brokers of documenting insurance carriers, intermediaries and syndicates of insurers.” Overall, taxpayers supported the proposed regs’ treatment of “non-cash value insurance premiums as ‘excluded nonfinancial payments’ and, therefore, not withholdable payments under FATCA.” Despite the popularity of this exclusion, the regs have not been finalized, even though every PGP since the 2020-2021 plan included the IRS’ intention to do so. The regs should be adopted, the firm said, because finalization is in line with Trump’s order. Specifically, the regs resolve “significant issues relevant to a broad class of taxpayers as it will reduce the regulatory burden on insurance and reinsurance brokers, insurance carriers, intermediaries, insurers and insureds.” In Dispute Over Deceased Participant’s 401(k) Plan Benefits, Clear Plan Documents Fulfill Fiduciary Duty By Checkpoint’s EBIA StaffFollowing a 401(k) plan participant’s death, his adult children challenged the plan’s distribution of his $3 million benefit to his wife. LeBoeuf v. Entergy Corp., 2025 WL 1262414 (5th Cir. 2025) The participant had designated the children as beneficiaries after his first wife’s death, but several years later, he remarried. The beneficiary designation form stated that designations would be automatically revoked upon a subsequent marriage, making the new spouse the beneficiary absent submission of an updated form reflecting the spouse’s waiver of beneficiary rights (as required under ERISA and the Code). The rule that marriage voids a previous beneficiary designation was set forth in the formal plan document as well as multiple summary plan descriptions (SPDs) provided to the participant over the years. The quarterly account statements sent by the plan’s trustee, however, continued to list the children as beneficiaries and did not mention the spousal beneficiary provision. The children asserted that the employer/plan sponsor, the plan’s benefits committee, and the trustee breached their ERISA fiduciary duties by failing to adequately inform the participant of the spousal beneficiary and waiver requirements. After the trial court dismissed the claims against the employer and trustee and ruled that the committee had complied with its fiduciary duty, the children appealed. The appellate court upheld the trial court’s ruling. Because the plan document named the committee as the plan administrator, the fiduciary status of the employer and trustee depended on their authority and actions regarding the specific function at issue-participant communication. According to the court, the committee, not the employer, was responsible for participant communications, and the trustee’s duties in producing and sending quarterly statements were ministerial in nature. Establishing fiduciary breach by the committee would require showing that it made material misrepresentations or failed to provide adequate information. The court explained that participants have a duty to inform themselves of plan provisions, and while fiduciaries must respond to inquiries “promptly and adequately in a way that is not misleading,” they have no duty to determine whether confusion exists absent any inquiry. Because the plan document, SPDs, and beneficiary designation form all clearly described the spousal beneficiary policy and automatic revocation of pre-marriage beneficiary designations, the children could not “hang their hat” on the one set of informal documents (the statements) that did not reiterate the rule. EBIA comment. The committee was able to show that it satisfied its fiduciary responsibility through consistent communication of key plan terms in the plan document, SPDs, and beneficiary designation form. Nevertheless, there was room for improvement, as the quarterly statements indicating that the children remained beneficiaries apparently led to confusion. Updating recordkeeping systems so that quarterly statements reflect automatic beneficiary revocations or include a disclaimer about spousal rights could help reduce litigation risk in similar situations. For more information, see EBIA’s 401(k) Plans manual at Sections XIII.G (“Spousal Consent Requirements”), XXIV.B (“Who Is an ERISA Fiduciary?”), XXIV.E (“ERISA Fiduciary Duties”), and XXXVII.H (“Claims for Breach of Fiduciary Duty”). Ohio Couple Fails to Substantiate $127K of Business Deductions in Tax Court By Federal Tax Update Staff The U.S. Tax Court rejected an Ohio couple’s bid to claim $127,255 of business deductions after failing to substantiate expenses related to a gasoline filling station in Pakistan. (Khan, TC Summary Opinion 2025-5). Background. The petitioners, Safdar Khan and Maryam Tahir, filed a joint tax return for 2020. Khan listed his occupation as a physician and his wife as an employee. On their Schedule C, they reported healthcare activities for a business called “Shared Prosperity” in Miami, Florida. Khan also had a gasoline filling station in Pakistan, named Golden Star Filling Station. Construction for the gas station was completed by December 2019, but it faced operational challenges due to government-mandated lockdowns during the COVID-19 pandemic. The couple reported gross receipts of $4,455 and total business expenses of $193,878 for Shared Prosperity. $127,255 of these expenses were categorized as “Other Expenses,” and related to their gas station. The IRS audited the tax return and issued a Notice of Deficiency in 2023, disallowing the couple’s deduction for “Other Expenses” due to the lack of supporting information. Claiming business deductions. Generally, taxpayers may deduct ordinary and necessary expenses paid or incurred during the tax year in connection with operating a trade or business. Taxpayers may also deduct expenses of an income-producing activity. However, taxpayers may not deduct “start-up” expenses. In some cases, when the taxpayer lacks written records, the court can estimate certain expenses under the Cohan rule. Taxpayers bear the burden of proving that their claimed expenses were connected with an operational business and that they can substantiate the expenses. The petitioners asserted that the Golden Star Filling Station was an operational business in 2020, but the IRS contended that it was not operational and, at best, was in a start-up phase in that year. Court proceedings. During the trial, the couple provided several pieces of evidence to substantiate their claimed expenses for the filling station. This included a log of money transfers, exchange rate data, a check for oil purchases, and a list of purported salaries for employees. However, the court found this evidence insufficient due to discrepancies and the lack of clear documentation connecting the expenses to the business activities of the gas station. “The record before the Court provides a confusing, sometimes contradictory, and incomplete view of what expenses petitioners can substantiate with respect to the Golden Star Filling Station for 2020.” Moreover, the court did “not need to decide, as petitioners assert, whether the Golden Star Filling Station operated as a business in 2020,” the decision read, because the books and records presented to the court, along with Dr. Khan’s testimony, “are insufficient for the court to estimate the expenses petitioners paid with respect to the Golden Star Filling Station for 2020.” The court ultimately sided with the IRS finding that the petitioners didn’t meet their burden of substantiation for the expenses disallowed by the IRS. For more information about the Cohan rule, see Checkpoint’s Federal Tax Coordinator ¶ L-4510. House Budget: Updated Cost, Distributional Estimates By Tim Shaw, CheckpointBudget scorers and policy think tanks have weighed in on the budget reconciliation package’s expected impact on the federal deficit and which groups of taxpayers stand to benefit the most from Republicans’ proposals. The House budget bill, titled the One Big Beautiful Bill Act (OBBBA; H.R. 1), passed 215-214 last Thursday following a marathon Rules Committee hearing and last-minute changes to the state and local tax (SALT) deduction limit. Republicans had hoped to clear the bill out of the House before Memorial Day, putting pressure on last week’s negotiations with Freedom Caucus holdouts. Revenue projections and distribution analyses of the bill — both of the tax component and the complete budget — are continuing to be released or updated. Budget deficits. According to the Penn Wharton Budget Model’s (PWBM) most recent estimates released Friday, the OBBBA would “increase primary deficits by $2.8 trillion over 10 years.” Through fiscal year 2034, the tax provisions, the bulk of which extend or adjust Tax Cuts and Jobs Act policies, would cost about $4.3 trillion, the PWBM estimated. Its brief added that the Armed Services, Judiciary, and Homeland Security titles would also add $230 billion to the deficit. “These changes would be partly offset by spending cuts of $1,791 billion, for a total conventional cost of $2,787 billion.” Taken altogether, the spending cuts offset less than 40% of the expenditures. However, the PWBM said the “dynamic cost” that takes into account certain “microeconomic responses and compositional effects” exceeds the conventional cost, for a total of $3.2 trillion. While GDP would slightly increase over the next decade, the “actual savings from economic growth do not appear until 2033 and 2034 and are not enough to overcome higher costs in earlier years in the 10-year budget window,” the PWBM said. “After 2033, the dynamic costs fall relative to conventional, a difference which persists until 2054.” Meanwhile, the Joint Committee on Taxation on May 22 updated its score, saying the tax provisions would “reduce Federal revenues by about $3,819 billion over the budget window for fiscal years 2025-2034, relative to the present-law baseline.” Earlier in the week, the Congressional Budget Office (CBO) on May 20 projected the OBBBA to increase deficits by $2.3 trillion over 10 years. But the Committee for a Responsible Federal Budget (CRFB) disagreed, posting its estimates the next day. The CRFB’s math is closer to the PWBM’s dynamic cost, projecting a $3.1 trillion deficit hit. “Importantly, CBO has not yet fully evaluated the interactions among the titles within the bill,” the CRFB said in explaining the discrepancy. “It preliminarily estimates $120 billion of reduced savings due to interactions; however, there are likely significant interactions that have not yet been estimated between the Agriculture and Energy & Commerce titles and the health measures in the Ways & Means and Energy & Commerce titles.” These interactions would “reduce estimated savings” by $150 billion, per the CRFB. Distributional effects. On May 22, the Institute on Taxation and Economic Policy examined how the tax provisions would be split among income groups. “For working-class Americans, the tax cuts in the House bill are extremely modest and overall taxes would rise for these families when the impact of higher import taxes, or tariffs, are accounted for,” according to ITEP. Conversely, the “richest 1 percent” would see a total $121 billion in net tax cuts next year. This would “exceed the amount going to the entire bottom 60 percent of taxpayers (about $90 billion).” Adding additional context, ITEP said in 2026, the “poorest fifth of Americans” would benefit from just 1% of the tax savings “while the richest fifth” would receive 68%. About 43% of the cuts would go to the top 5% next year, and the top 1% would benefit from “an average net tax cut of nearly $69,000,” ITEP reported. The Center on Budget and Policy Priorities (CBPP) in its own estimates also published Thursday agreed the bill is “heavily skewed to the wealthy.” Under the CBPP’s model, the top 1% would “receive tax cuts three times the size of those for people with incomes in the bottom 60 percent.” The bill’s cuts to Medicaid and SNAP “roughly equal” the tax cuts for “very high-income” individuals, the CBPP continued. Millionaires would see 4.3% income increase, while the economic consequences of the Trump administration’s tariffs “would erase much of the tax benefit” to moderate- and low-income earners. Based on PWBM’s estimates, those making less than $17,000 “would lose about $820 under the House reconciliation bill,” a 14.6% loss on average. Taxpayers with incomes between $17,000 and $50,999 also would lose an average $430. “Lower income households tend to fare worse as spending cuts deepen over time,” the PWBM noted. Tax Court Will Review Passport Revocation Cases De Novo By Federal Tax Update Staff The Tax Court has determined that it will review passport revocation cases de novo and will not restrict its review to evidence in the administrative record. (Alberto Garcia, Jr., 164 TC No. 8 (Reviewed)) Certification of tax debt. When a taxpayer accumulates a “seriously delinquent tax debt,” the IRS can certify that taxpayer’s debt to the Secretary of State for denial, revocation, or limitation of the taxpayer’s passport. Generally, a “seriously delinquent tax debt,” as defined in Code Sec. 7345(b), is an individual’s unpaid, legally enforceable federal tax liability greater than $50,000, that has been assessed and for which the IRS has issued a levy or filed a lien with administrative rights exhausted or lapsed. When the IRS certifies that a taxpayer has a seriously delinquent tax debt, the taxpayer can petition the Tax Court to determine “whether the certification was erroneous or whether the Commissioner has failed to reverse the certification.” Garcia’s unpaid tax debt. The IRS assessed Garcia’s various tax liabilities between March 26, 2007, and August 23, 2010. These assessments totaled more than $100,000. After Garcia failed to pay the assessments, the IRS filed a suit in a federal district court to reduce those liabilities to judgment; the district court entered a default judgment against Garcia in 2014. In October 2022, the IRS certified to the Secretary of State that Garcia had a “seriously delinquent tax debt” under Code Sec. 7345(b). Challenge to debt certification. Garcia filed a petition challenging the certification with the Tax Court. Garcia’s petition alleged that the 10-year statute of limitations on collection had closed before the IRS certified his tax liabilities in October 2022 as “seriously delinquent.” Therefore, Garcia argued, the IRS’ certification was made in error. In response, the IRS claimed an exception to the 10-year rule applied to Garcia because his tax liabilities were reduced to judgment by a federal district court after he failed to appear and was defaulted. The IRS then moved for summary judgment claiming that the certification was proper. In his answer to the IRS’ motion, Garcia said that he was never served in the district court case. Scope of review in passport cases. The court said that to resolve the IRS’ motion, it had to determine whether the district court had jurisdiction to enter the judgment. The court also determined, for the first time, that “review of section 7345 certifications should occur on a new record made at the Tax Court, which may include, where appropriate, evidence introduced at trial.” The court denied the IRS’ summary judgment motion because the IRS failed to prove that Garcia’s debt was “legally enforceable.” Under Code Sec. 6502, the IRS generally must collect a tax debt within 10 years after assessment. Thus, the IRS can’t collect a 10-year-old tax debt unless some exception applies. The court noted that the IRS assessed all but one of Garcia’s liabilities between March 26, 2007, and August 23, 2010. Absent an exception, the limitations periods for collecting those liabilities would have expired between March 26, 2017, and August 23, 2020, more than two years before the IRS made its Section 7345 certification. Moreover, while the IRS claimed that the collections limitations period was still open when it certified the debt because it obtained a judgment for the tax liabilities, Garcia asserted that he was never served in the 2014 district court action. The Tax Court countered that a “judgment entered without personal jurisdiction over the defendant is void.” Thus, if Garcia wasn’t served in the 2014 lawsuit, “the default judgment would be void.” “And, because this issue could determine whether Mr. Garcia’s liabilities are ‘legally enforceable’ within the meaning of section 7345(b), we may not grant the Commissioner’s Motion,” the court held. For more information about passport revocation for seriously delinquent tax debt, see Checkpoint’s Federal Tax Coordinator ¶V-4023. TIGTA Reviews Racial Disparities in EITC Examination Selection By Federal Tax Update Staff The Treasury Inspector General for Tax Administration (TIGTA) has published an audit initiated to assess changes to the earned income tax credit (EITC) examination strategy relating to both a 2022 Treasury Directive and the fair and equitable selection of EITC returns for examination. (Audit Report No. 2025-308-020) “After acknowledging publicly that there were racial disparities in its EITC examination case selection methodologies, the IRS began working toward correcting the problem,” the audit stated at the outset. The agency took two major steps to address the problem, including: Developing and testing two new EITC case selection models. Rebalancing enforcement activities by examining fewer EITC cases and shifting resources to non-EITC workstreams. However, while noting these efforts by the IRS, TIGTA stated although “the IRS does not yet have results from its efforts, we found that the IRS has not yet established goals to measure success in addressing racial disparities in case selection.” According to the audit, the IRS plans to consider the racial disparities cited in external and internal studies as quantifiable measures against which they will compare future results. “Without established measurable goals, the IRS will be unable to evaluate how its efforts have made a difference reducing disparity issues with selected examinations of taxpayers claiming the EITC,” TIGTA said. Auditors did not assess the dictates of the 2022 Treasury Directive for Tax Year 2023 tax returns. However, they did find that the IRS “significantly decreased” EITC audits and this “increased the likelihood” of meeting the directive’s goal, the audit noted, adding that there are some concerns regarding related FY 2024 workstreams. “Given the importance of monitoring EITC disparity issues, it is especially important when measuring results by workstream that there is consistency between the planned examination starts and the FY 2024 Examination Plan to avoid reporting different outcomes,” TIGTA stressed. Treasury, DOGE to Continue IRS Overhaul as Judge Blocks More Agency Downsizing By Tim Shaw, CheckpointThe head of the Treasury Department and a Department of Government Efficiency (DOGE) associate indicated the collaboration between the two agencies will proceed with a focus on systems upgrades paid for by spending cuts, but a court order temporarily bars the Trump administration from carrying out any further workforce reductions. Treasury Secretary Scott Bessent posted on social media platform X May 22 that “IRS modernization is 30 years behind schedule, $15 billion over budget, and is relying on outdated technology.” Bessent’s post also included a Fox News interview segment in which he and Treasury Special Advisor Sam Corcos — a DOGE affiliate and tech CEO— discussed priorities at the IRS with host Laura Ingraham. Corcos, who described himself as a software developer, said he was brought in by the administration to review the IRS’ modernization efforts. “The IRS has some pretty legacy infrastructure” similar to “what banks have been using,” said Corcos, describing the challenges with “migrating to a modern system.” The banking industry has largely moved on from older programs based on COBOL and Assembly, he continued, yet the IRS has struggled to completely phase out its old tech. “Typically in industry this takes a few years, maybe a few hundred million dollars,” according to Corcos, but the IRS is “35 years into” the program. The IRS would say now that modernization completion is “five years away, but it’s been five years away since 1990. It was supposed to be delivered in 1996.” When asked why modernization has taken so long, Bessent responded in saying one of the “surprises” he’s had in his “eight weeks” in government is the “entrenched interests” that “constrict” available resources. “And nobody cares.” The Treasury secretary continued in saying “collections, privacy, and customer service” are not “being well-served” because of wasteful spending on consultation contracts, based on what DOGE has reported to him. “We cannot perform the basic functions of tax collection without paying a toll to all these contractors,” Corcos claimed. He did not directly respond to a CNN report in which an anonymous IRS employee accused Corcos of pulling the plug on the agency’s projects for 2025 using congressionally appropriated funds. Corcos directed attention to the $3.5 billion Operations and Maintenance budget and the $3.7 billion IT modernization budget. “That’s a lot of budget,” he said, “and we are way beyond any reasonable cost from what you would expect” from a similarly sized private company. Corcos said the IRS is most comparable to a “mid-size” bank. Touching on recent IRS layoffs, Bessent doubled down on deferring to DOGE on how to best streamline IRS functions and its project roadmap. “This is the department of efficiency, not the department of elimination,” Bessent stressed. (emphasis added.) He questioned why there are the same number of “customer support” staff on Christmas Eve as April 15, or Tax Day. Bessent said DOGE is prompting him to be skeptical of IRS staffing levels. Corcos stated his intention to remain in his capacity supporting the Trump administration for “six months” as Treasury continues to “look at” modernization and the workforce. The Treasury Inspector General for Tax Administration reported this month that by March, the IRS’ workforce shrank 11%. This reflects the number employees who accepted the administration’s voluntary resignation offer to step down from their posts in exchange for receiving normal pay and benefits through the remainder of the fiscal year ending September 30. It also incorporates probationary employees who received termination notices in February following the Office of Management and Budget’s guidance on reductions in force (RIF). Several lawsuits have been filed challenging the legality of the government workforce mass firings. One such complaint, filed April 28 by the American Federation of Government Employees and other labor unions in the U.S. District Court for the Northern District of California, cited an IRS memo dated April 15 detailing a Treasury RIF that would reduce the IRS by 40%. This includes “approximately 60,000 to 70,000 positions, through biweekly RIF notices,” the labor unions said, citing media coverage of the “leaked” internal communication. On May 22, Judge Susan Illston granted the unions’ motion for a preliminary injunction. Illston’s order halts any “large-scale” RIFs described by the groups affecting several government agencies, including Treasury. The temporary restraining order extends a two-week pause granted May 9. “Indeed, the Court holds the President likely must request Congressional cooperation to order the changes he seeks, and thus issues a preliminary injunction to pause large-scale reductions in force and reorganizations in the meantime,” wrote Illston. Nonprofits Relieved, But Vigilant, After Provision Struck from Reconciliation Bill By Maureen Leddy, Checkpoint Many in the nonprofit community are feeling relieved after a provision they say would have allowed the Treasury secretary to unilaterally revoke their tax-exempt status was stripped from the House-passed reconciliation bill. An earlier version of the One Bill Big Beautiful Bill Act (H.R. 1) would have given the Treasury secretary the authority to deem a nonprofit to be “terrorist supporting” — thereby ending their tax-exempt status. The legislative language defined a “terrorist supporting organization” as one that provided, during the 3-year period ending on the date of the designation, “material support or resources” to a terrorist organization “in excess of a de minimis amount.” Impacted nonprofits would have been provided with written notice of their designation as “terrorist supporting.” However, details on their alleged material support could be omitted in the notice if “inconsistent with national security or law enforcement interests.” Diane Yentel, CEO of the National Council of Nonprofits, said the provision would have given Treasury Secretary Scott Bessent “unchecked power” to “punish organizations that do not fall in line with the administration’s ideology, by labeling them as terrorist-supporting groups without due process, without a third-party investigation and without public evidence.” The provision appeared in the House Ways and Means Committee draft and survived that committee’s May 13 markup. It remained as the House Budget Committee compiled reconciliation bill text from multiple committees into the One Big Beautiful Bill Act. However, a comparative print posted by the House Rules Committee showed the text, which appeared under Sec. 112209, as having been stricken. And, in fact, the language did not resurface as the bill advanced out of the Rules Committee and to the House floor last Thursday. A returning concern. The provision’s appearance in the Ways and Means draft was not its debut. In fact, the House passed legislation twice last year that would have granted the Treasury secretary the ability to revoke the tax-exempt status of organizations he or she deemed to be “terrorist supporting.” A bill that included the provision, H.R. 6408, advanced out of Ways and Means with unanimous support and passed the House 382-11 in April 2024. It had three Democrat cosponsors, including lead cosponsor Representative Brad Schneider (D-IL). A second bill, H.R. 9495, that incorporated the provision — and also would have postponed tax deadlines for those held hostage abroad — passed the House 219-184 on November 21, 2024. But during its second trip to the House floor, Democrats and nonprofits raised new concerns about the provision — that it could be used by a future administration to target political enemies. Representative Lloyd Doggett (D-TX) said the bill “would be much better if it had some reasonable safeguards to ensure that an authoritarian decision was not one that prevailed.” And Representative Judy Chu (D-CA) noted that providing material support to a terrorist organization is “already illegal” — whereas the provision would allow a Treasury secretary to punish nonprofits “without evidence.” Nonprofits react. According to the Council on Foundations’ analysis, the Ways and Means reconciliation bill provision made a few improvements to H.R. 6408 and H.R. 9495. The group notes that latest version would have “exempted certain humanitarian aid provided with the approval of the Office of Foreign Assets Control” and “required additional disclosures from the Treasury Secretary.” But despite these changes, the CoF contends the now-stricken reconciliation bill provision “runs counter to due process and opens the tax code to weaponization and abuse.” With the provision now out of the House reconciliation bill, nonprofit groups breathed a sigh of relief — but they’re still on alert. Yentel called cutting the provision “a significant victory for nonprofit advocates.” She said, however, that tax-exempt groups “must remain vigilant to ensure the language doesn’t get added back into the bill on its way to enactment.” United Philanthropy Forum’s Deborah Aubert Thomas, too, is concerned that “[l]anguage that could threaten the independence and nonpartisanship of charitable nonprofits could potentially be reinserted during the ongoing reconciliation process.” As to why the provision was stricken, a National Council of Nonprofits spokesperson told Checkpoint that “members of Congress heard loudly from nonprofits across the ideological spectrum that this was a dangerous amount of power to be conferred upon the Treasury Secretary with no due process for the affected organizations.” Not Done Yet: US Senate Republicans Plan Changes to House’s Trump Tax-Cuts Bill By Bo Erickson, Reuters U.S. Senate Republicans said on Thursday they will seek substantial changes to President Donald Trump’s sweeping tax and spending bill after it narrowly won approval in the House of Representatives, in a sign that significant hurdles remain for the package. Just hours after House Republicans passed it with only one vote to spare, senators from Trump’s party outlined a range of objections to the package, which encompasses many of his top domestic priorities. That could make it more difficult for Congress to settle on a final version for Trump to sign into law. “I expect there will be considerable changes in the Senate,” said Republican Senator Ted Cruz of Texas. Republicans broadly agree on the main planks of the legislation, which would extend Trump’s 2017 tax cuts, tighten eligibility for health and food benefits, review many green-energy incentives and fund Trump’s immigration crackdown. But many of the same fractures that threatened the bill’s passage in the House are at play in the Senate. Some lawmakers raised concerns about cuts to the Medicaid health care program, noting that the coalition of voters who powered Trump’s November election victory and whose support they will need to hold control of Congress in the 2026 midterm elections rely on the bill. Others repeated the concerns of House counterparts that the measure does not sufficiently cut spending. The nonpartisan Congressional Budget Office estimates it will add $3.8 trillion to the federal government’s $36.2 trillion in debt. Republicans control the Senate by a 53-47 margin, and they have invoked special rules that will enable them to pass the package with a simple majority, rather than the usual 60-vote threshold required for most legislation. That will allow them to bypass Democrats, who blast the bill as a giveaway to the rich. That gives them a little more room for disagreement than their counterparts in the House, where a narrow 220-212 margin requires near unanimity. MEDICAID EYED Senators Josh Hawley of Missouri and Susan Collins of Maine said they were worried the House version could cut Medicaid health benefits for low-income Americans too deeply. Hawley also said he had spoken with Trump and discussed closing a tax loophole that allows wealthy private equity investors to lower their tax payments. “They ought to close the carried interest loophole,” Hawley said. The move could raise more tax revenue. Senator Thom Tillis of North Carolina, meanwhile, said he would push for deeper spending cuts to lower the deficit. “We’re definitely going to have to seek more savings,” he told reporters. Collins and Tillis both will be defending seats seen as competitive in next year’s election. Senator Ron Johnson of Wisconsin, a hard-right conservative and fiscal hawk, said he would not vote for the bill as written, saying it needed broader across-the-board spending cuts. Senator Rand Paul of Kentucky likewise said it did not cut spending enough, and objected to the inclusion of a $4 trillion debt-ceiling increase that would head off a possible default sometime this summer. “I’ll consider voting if they take the debt ceiling off of it,” he said. They will have to contend with others who aim to increase the bill’s total cost. Hawley called for expanding a $2,500-per-child tax credit, while Tillis cautioned against quick cancellation of green-energy tax incentives, which he said would disrupt companies that have grown to depend on them. Senator Mike Rounds of South Dakota questioned the accounting assumptions that underpin the bill, saying they did not take economic growth into account. While debating the tax cuts initially passed in 2017, during Trump’s first term, congressional Republicans also argued that they would pay for themselves by stimulating economic growth. The CBO estimates the changes increased the federal deficit by just under $1.9 trillion over a decade, even when including positive economic effects. In the end, Senate Republicans will face the same reality that their House counterparts did. Their party’s undisputed leader, Trump, wants the bill passed and can be expected to continue to apply pressure until it is. “It’s time for our friends in the United States Senate to get to work, and send this Bill to my desk AS SOON AS POSSIBLE!” Trump wrote on his Truth Social service early Thursday. So far the Republican-controlled Congress has not rejected any of his legislative requests. The Senate is not expected to take up the bill in earnest until early next month, after its week-long recess for the Memorial Day holiday. Any changes it makes to the bill will need to be negotiated with, and ultimately passed by, the House before Trump can sign the bill into law. Top Senate Republican John Thune of South Dakota spoke carefully as he addressed the bill’s prospects in his chamber. “They gave us a good product to work with,” Thune told reporters on Thursday. “But we want to have – and have – senators who want to write our own bill.” This article also appeared on Reuters.com. Writing by Andy Sullivan; Editing by Scott Malone and Alistair Bell. |
Business Owners Should Get Comfortable With Their Financial Statements
Financial statements can fascinate accountants, investors and lenders. However, for business owners, they may not be real page-turners. The truth
