Tax News & Views Fresh Chocolate and Stale IRS Tech Roundup

IRS Staff Shortage to Hit Taxpayer Service, IT Work, Watchdog Says - Benjamin Valdez, Tax Notes ($):

The Treasury Inspector General for Tax Administration, in an annual report on management challenges facing the IRS released October 27, said the 25 percent reduction in the agency’s staffing between January and May will make it harder to provide quality service to taxpayers next filing season and could hamper IT modernization efforts, among other hurdles.

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The staff reductions, largely from the deferred resignation program and other separations, have now been expanded to include furloughs because of the ongoing government shutdown, as well as firings. The agency furloughed about 34,000 employees out of an employee population of 74,299.

TIGTA called attention to an 18 percent decrease in staff in return integrity and compliance services, which detects and prevents fraudulent refunds, and estimated the IRS could fail to detect nearly $360 million in fraudulent returns next filing season because of the loss. In the latest filing season, the agency was able to stop refunds for 99 percent of fraudulent returns identified, according to the report.

The report discusses IRS technology challenges (my emphasis):

The modernization of IRS IT and business systems is essential to fulfilling its mission of providing America's taxpayers with top quality service, helping them understand and meet their tax responsibilities, and enforcing the law with integrity and fairness. However, the IRS has a history of cost overruns and delays in its IT modernization efforts. As a result, the IRS continues to maintain some of the oldest IT systems in the federal government.

The IRS has more than 700 business systems, and half of them historically have been considered legacy systems that require replacement and decommissioning to reduce risks and improve functionality.¹ The IRS has upgraded several systems but has made little progress decommissioning what were previously considered legacy systems. For example, we recently identified 34 legacy case management systems that the IRS plans to incorporate and decommission as part of its larger effort to consolidate business unit case management systems. At this time, none of these legacy systems have been decommissioned. Instead, the IRS spent over $39 million in FY 2024 to maintain and operate 20 of these legacy case management systems. Currently, IRS business units are identifying which IT systems meet the new definition of a legacy system while Treasury leadership works to ensure the integrity of data across all IRS systems.

Technical experts can help manage the complexity of IT modernization efforts. However, the IRS has lost approximately 25 percent of its IT staff to deferred resignation programs, attrition, and voluntary separation. In March 2025, the IRS reported that it placed 48 senior IT employees on administrative leave, 27 of which were either in key management positions or were individuals recruited for their expertise related to the IRS's restructuring efforts.

Back in the DOGE heyday, the DOGE people held a 30-day hackathon to develop an API to allow IRS platforms to communicate with each other. The TIGTA report and a recent GAO report on IRS technology have no mention of this effort, which apparently has not produced such an API in time for the upcoming tax season. It has produced a new contract with outside vendor Palantir.

IRS CEO Role Incites Worry About Constitutionality, Agency Risk - Trevor Sikes and Benjamin Valdez, Tax Notes ($):

“The Constitution assumes that it will be followed,” but in the case of Social Security Administration Commissioner Frank Bisignano being named IRS CEO, “it’s pretty clear that it hasn’t been followed,” David A. Super of Georgetown Law told Tax Notes.

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A scary possibility is that “someone could sue and say that because [Bisignano] was not constitutionally appointed that any decisions he made at the IRS are illegal, which, depending on what he decides and when and what issues come to him, could destabilize a good chunk of the tax system,” Super said.

Because of the change in hierarchy, many people may question routine decisions that the IRS makes that were previously assumed to be legitimate, Super said. “It’s very bad for a system that’s already understaffed and doesn’t have a lot of resilience to deal with this sort of thing,” he added.

The New Tax Law and Investment

What to Expect from the New OBBBA Expensing for Manufacturing Structures - Alex Muresianu and Garrett Watson, Tax Policy Blog:

Typically, residential structures must be depreciated over 27.5 years and commercial structures (such as office buildings, warehouses, and factories) over 39 years. This means firms must spread deductions for costs out, rather than deducting costs when they are incurred. The OBBBA allows companies to fully and immediately deduct the cost of structures involved in “qualified production activity” through a new policy called expensing for manufacturing structures.

Qualified production activity is defined as “the manufacturing, production, or refining of a qualified product.” Other nonresidential properties, such as office spaces or other administrative facilities (that might adjoin a manufacturing facility), are not eligible for this immediate deduction.

The definition is not limited to explicitly manufacturing structures or factories. Taxpayers need further guidance from the Internal Revenue Service (IRS) to know exactly what types of investment will qualify.

Private Jets and Car Washes Are the Latest Tax Shields for the Ultrarich - Sophie Alexander, Bloomberg via MSN:

Across the industry, jet sales are up 11% from a year earlier and 30% from the year before that, according to data collected by Hurley’s company. Now, his team is gearing up for a particularly busy couple months as American buyers race to lock in deals before the end of December.

The key reason: a tax break solidified in the One Big Beautiful Bill Act that allows people with businesses to fully write off purchases of private jets in the year they buy them.

There may be a catch here. As this 2024 Tax News & Views post notes, the IRS has an ongoing examination campaign that identifies personal use of business aircraft as bearing "high-risk areas of non-compliance." From the post:

The IRS intends to aggressively audit businesses that own aircraft. Maintaining detailed aircraft records, including purchase documents, maintenance logs, and aircraft usage logs is imperative. It is critical to keep records of every aircraft expense, every flight, and every passenger to substantiate the allocation between business and personal use.

Tariffs Tuesday

Trump’s China Deal May Avert a Crisis of His Own Making - Ana Swanson, New York Times:

Trump administration officials have hailed the makings of a potential trade deal that could have China buy American soybeans and pause the introduction of its new licensing system on rare earth minerals, while the United States pauses or removes some of its tariffs.

It remains to be seen what might be agreed when President Trump meets the Chinese leader Xi Jinping this week. But those and the other measures that U.S. officials have mentioned appear to largely restore the relationship to a status quo from earlier this year, before Mr. Trump began his latest trade war with Beijing.

Striking down the tariffs won’t hurt anybody - Scott Lincicome, Washington Post:

In both legal filings and in public, President Donald Trump and his team have made fantastical claims about the calamities that would befall the nation should the Supreme Court curtail his authority to implement global tariffs under the International Emergency Economic Powers Act. They allege, in the government’s opening brief for a case that will be argued before the court in November, that an adverse decision would devastate the U.S. economy, the federal government’s fiscal position, and the president’s ability to effectuate trade and foreign policy. The goal, it appears, is to pressure the court into issuing a favorable opinion for prudential and institutional reasons, even if the law demands otherwise.

Given the legal deficiencies in the Trump administration’s case, this shock-and-awe approach is understandable. Yet it suffers from a serious flaw: The underlying policy claims are ridiculous.

Still Shutdown. Will Anything Change?

A Month Into Shutdown, Obamacare Fraud Claims Keep Sides Apart - Elin Durkin, Bloomberg ($):

As health care remains a key flashpoint in the government shutdown fight, Republicans have argued that enhanced Affordable Care Act premium tax credits lead to fraud and should be left to expire.

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These claims—at least in part—rely on reports from the right-wing think tank Paragon Health Institute, which has asserted the enhanced premium tax credit results in millions of improper Obamacare plan enrollments. Paragon’s findings have been cited by the editorial board of The Wall Street Journal, and echoed by the House Budget Committee, and Senate Republicans.

However, health policy analysts and researchers disagree on the validity of these findings. Six of eight experts who spoke with Bloomberg Government pushed back against the idea that there is a direct connection between the tax credits and fraud, with some saying letting the tax credits expire won’t solve the issue.

Dems’ Shutdown Demand Won’t Lower Health Care Costs - Veronique de Rugy, The Unseen And The Unsaid. "It’s about shifting onto taxpayers the cost of premiums for higher-income households."

Blogs and Bits

Social Security recipients could face taxes on the benefits - Kay Bell on Substack. "Recipients who have a larger nest egg to supplement the federal retirement payments could see up to 85 percent of their Social Security taxed."

IRS Provides Transitional Relief for 2025 Car Loan Interest Reporting Requirements - Parker Tax Pro Library. "Lenders will be relieved of the requirement to provide the origination date of the loan and vehicle-specific information such as year, make, model, and vehicle identification number."

New Budget Numbers Again Reveal Unsustainable Debt & Abandonment Of Working Families - Eugene Steuerle, The Government We Deserve. "For those willing to look beyond political rhetoric, the data clearly show the severity of our budget crisis. Non-wartime deficits relative to our national income at this level of low unemployment are at all-time highs, while debt as a share of national income will soon reach records, even surpassing what was needed to fight World War II."

Playing Budget Roulette Is A Bad Bet - Leonard Burman, TaxVox. "What we do know is that a delayed fiscal doomsday is still doomsday—but worse."

Solar-Powered Tax Disaster

Estate Agrees To Settlement In $50M Solar Co. Tax Row - Anna Scott Farrell, Law360 Tax Authority ($):

The estate of a former business associate of solar company owners caught in a $50 million tax fraud agreed to settle with a receiver appointed to collect company assets, according to a Utah federal court order, bringing the yearslong collection effort spanning dozens of settlements closer to an end.

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RaPower-3 owed $50 million to the U.S. Department of the Treasury after the court found that the company had engaged in a "massive fraud" that marketed useless solar equipment in order to capitalize on depreciation tax deductions and solar energy tax credits.

This case shows how tax cases can span decades and generations. The tax shelter behind the case appears to have originated in 2005. The promoters were ordered to disgorge $50 million in gains from marketing the shelter in 2018, an order affirmed on appeal in 2020.

The shelter was questionable from the start. Peter Reilly wrote in 2022 that at least 200 Tax Court cases grew out of investments in the shelter:

What the investors in the scheme did was purchase "Fresnel lenses" (the sort of lenses used in lighthouses) that were to be used to concentrate sunlight to boil liquids to produce electricity.

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The promoters marketed a plan that would allow investors to "zero out their taxes" by buying lenses and claiming depreciation deductions and energy credits. The systems to produce electricity never actually worked in any commercial sense and most of the lenses ended up just sitting in a warehouse. Of those that were installed on a tower, many were broken.

The moral? Beware of anybody who says you can "zero out" your taxes by investing in their deal. If you insist on considering such a deal, pay some money to an independent tax advisor; that expense is likely to save you a much larger loss on a flaky shelter, and maybe decades of litigation and uncertainty for you or your heirs.

What day is it?

It's National Chocolate Day! So if you'll excuse me...

Tax News & Views Fresh Chocolate and Stale IRS Tech Roundup

Make a habit of sustained success.

Joe B. Kristan, CPA