Tax News & Views Chips In on Taxpayer Advocate's Tax Season Worries Roundup

The National Taxpayer Advocate delivered her annual report to Congress yesterday. The report includes the top 10 problems taxpayers are facing, thoughts on the upcoming filing season, and legislative recommendations. A key bit:

For the significant majority of taxpayers who file their returns electronically, who include their direct deposit information, and whose returns are not stopped by IRS processing filters, the process will be seamless. Their returns will be processed quickly, and if they are due a refund, they will receive it without delay. But as always, the success of the filing season will be defined by how well the IRS is able to assist the millions of taxpayers who experience problems.

The National Taxpayer Advocate heads the Taxpayer Advocate Service, an independent office within the IRS. Erin Collins is the current National Taxpayer Advocate.

Links:

Press release.

Executive Summary.

Legislative recommendations.

Today's Roundup focuses on the Taxpayer Advocate report.

IRS faces stiff challenges in 2026 tax season due to workforce cuts and new laws, a watchdog says - Fatima Hussein, AP:

National Taxpayer Advocate Erin M. Collins released her annual report to Congress on Wednesday, two days after the start of the 2026 season. She finds that while the IRS was able to process returns in 2025 without major disruptions, “entering 2026, the landscape is markedly different.”

“The IRS is simultaneously confronting a reduction of 27% of its workforce, leadership turnover, and the implementation of extensive and complex tax law changes” mandated by Republicans’ tax and spending measure that President Donald Trump signed into law last summer, Collins said in her report.

Taxpayer Advocate Predicts Errors, Delays This Tax Season - Asha Glover, Law360 Tax Authority ($):

The IRS has demonstrably improved service over the last few tax filing seasons, but errors and delays could be a hallmark of the 2026 season as the agency enacts tax changes while facing a significant staff shortage, the national taxpayer advocate said Wednesday.

The advocate, Erin Collins, expects structural and operational challenges at the Internal Revenue Service during the current filing season, she said in her annual report to Congress. July's budget reconciliation bill made more than 100 changes to the tax code — including new deductions for tips and overtime and an increase to the state and local tax deduction — and many have required significant IRS programming, guidance, changes to tax forms and taxpayer education, according to the report.

Major law changes of such scope often increase return errors, false positive rates in processing filters and other issues, according to the report.

Outsourcing Issues Add to Depleted IRS’s Woes, Advocate Says - Benjamin Valdez, Tax Notes ($):

Setbacks experienced by private sector contractors tasked with scanning paper tax returns risk shifting the burden back to an understaffed IRS, according to National Taxpayer Advocate Erin Collins.

The article says three of the four contractors have been unable to meet processing goals so far. It also discusses taxpayer privacy concerns:

The taxpayer advocate also stressed that privacy risks come with the use of contractors in the handling of confidential tax return information.

...

The most notable contractor breach between 2018 and 2020 was when Charles Littlejohn, a former contractor with Booz Allen Hamilton Inc., leaked the tax return information of thousands of wealthy taxpayers, including President Trump. Littlejohn was sentenced to five years in prison in 2024.

Two days before the release of the national taxpayer advocate’s annual report, Treasury announced it will cancel all contracts with Booz Allen because of the company’s failure to “implement adequate safeguards to protect sensitive data, including the confidential taxpayer information it had access to through its contracts with the Internal Revenue Service” stemming from the Littlejohn incident.

Taxpayer Data at Risk as IRS Outsources Processing: Watchdog - Erin Slowey, Bloomberg ($):

Contractors may take shortcuts and endanger safeguards, Collins said, even though vendor employees who handle tax returns are required to take the same training as IRS workers.

“While this approach has the potential to reduce processing times for paper returns, it introduces operational and confidentiality risks, particularly because most of these contractors have not previously worked with the IRS,” Collins said.

Paper historically has been kryptonite for the IRS. At the agency’s worst, it was drowning in a backlog of millions of unprocessed tax returns even as the overwhelming majority of Americans file electronically.

Employee Retention Credit Still a Problem for IRS, Report Says - Trevor Sikes, Tax Notes ($):

“Amended return processing remains an area where the IRS has yet to fully recover from pandemic-related backlogs,” Collins said in her annual report released January 28. One significant driver behind the processing backlog was the ERC, she said.

The ERC, offered under section 3134 as part of the IRS’s COVID-19 pandemic relief program, allowed a refundable credit against employer taxes for certain tax year quarters to help struggling businesses pay their employees.

The processing backlog has only added to existing frustrations regarding the ERC from employers and tax professionals, according to the report.

The report notes that the slow ERC processing could result in taxpayers losing their rights to appeal or litigate (my emphasis):

...challenges remain for taxpayers with ERC amended returns. Taxpayers’ frustrations have shifted from waiting for initial processing of ERC claims to waiting for responses from Exam, waiting for responses from their administrative protest to a notice of disallowance, or assignment of their case to Appeals. In fact, taxpayers are reporting that their protests are moving very slowly or, in some instances, have stalled altogether.

As discussed below in the Form 907 discussion, these prolonged delays create additional and serious risks for these taxpayers. When amended returns or ERC protests remain unresolved for extended periods, taxpayers may unknowingly approach or permanently miss the two-year deadline under IRC § 6532 to file suit or protect their refund rights. As of August 30, 2024, the IRS had issued a total of 83,000 notices of claim disallowance for ERC claims. Of these, approximately 28,000 notices reflecting ERC disallowances were issued during the summer of 2024, leaving fewer than six months remaining on the two-year statute of limitations for those businesses. Without clear visibility into this deadline or timely guidance from the IRS, taxpayers face the risk of permanently losing their ability to pursue administrative appeals or judicial review through no fault of their own.

Taxpayer Advocate Seeks ‘Common-Sense Reforms’ From Congress - Katie Lobosco, Tax Notes ($):

Streamlining disaster relief and strengthening incentives to hold government contractors accountable are some of the top legislative changes the national taxpayer advocate would like Congress to address.

National Taxpayer Advocate Erin Collins presented several new legislative recommendations in what’s known as the purple book, an annual release aimed at strengthening taxpayer rights and improving taxpayer administration.

It may be unlikely to see any major tax legislation enacted in 2026 because the Republicans’ One Big Beautiful Bill Act (P.L. 119-21) included several of the party’s tax priorities. But House taxwriters have been working to advance some smaller bills that Collins previously advocated for.

Some key items from the report:

Provide consistent tax relief for victims of federally declared disasters (Recommendation #53). After a hurricane, flood, wildfire, or other natural disaster has destroyed homes or businesses, Congress often passes legislation to provide tax relief to those affected. But there is no consistency regarding whether or which forms of tax relief are granted. Taxpayers may receive extensive relief, some relief, or no relief at all. Relief, even when granted, generally is not authorized until months later. The current ad hoc approach creates uncertainty for disaster victims and their communities and often means that similarly situated taxpayers receive different results.

Extend reasonable cause defense for the failure-to-file penalty to taxpayers who rely on return preparers to e-file their returns (Recommendation #31). ...In 2023, a U.S. Court of Appeals held that reasonable cause is also not a defense when a taxpayer relies on a preparer to file a tax return electronically... Penalizing taxpayers who engage preparers and do their best to comply with their tax obligations is grossly unfair and undermines the congressional policy to encourage e-filing.

One item that I would put at the top of the list:

Reinstate the Theft Loss Deduction So Scam Victims Are Not Taxed on Amounts Stolen From Them (my emphasis)

Example: A taxpayer, scammed into withdrawing retirement funds, must pay taxes on the withdrawal, plus a 10% additional tax if they are not yet 59½ years old. This is the case even though the scammer absconded with the funds and the taxpayer never benefitted from the money withdrawn.

Whether a scam victim can deduct a loss like this often depends on proving a profit motive. This may be plausible for investment scams, but it is nearly impossible for romance or scare tactic scams. In addition, because current law requires the taxpayer to claim the deduction in the year the theft was discovered (not in the year the taxpayer lost the money), a taxpayer who is still within the statute of limitations period for a refund might not have enough income in the later year to deduct the loss fully.

One questionable recommendation is authorizing a "minimum standards" regime for the IRS to regulate preparers - in effect, a licensing scheme for tax preparers. I feel that this will only raise prices and drive more taxpayers into self-preparation - for which there will be even lower standards - or to drop out of the tax system altogether.

Maybe We Do Need Tax Enforcement?

Bisignano Eyeing Fraud Enforcement to Shrink the Tax Gap - Nathan Richman, Tax Notes ($):

IRS CEO Frank Bisignano wants to make the agency’s Office of Fraud Enforcement (OFE) successful as part of a push to reduce the tax gap, according to a criminal tax official.

“Going back to the CEO’s priorities of shrinking the tax gap, Frank’s got a very, very interested view on making OFE successful,” Tyler Hatcher, special agent in charge of the IRS Criminal Investigation division’s Los Angeles field office, said January 27 at the University of Southern California Gould School of Law Tax Institute in Los Angeles.

...

Hatcher noted that the IRS lost about 25 percent of its staff in 2025. “So there’s a lot of growing pains that I think will still have to happen before we see that program get back to where it needs to be,” he said.

Will Congress Avoid a Filing Season Shutdown?

Is a shutdown deal in sight? - Jack Blanchard and Dasha Burns, Politico:

News emerged last night that the White House is considering a short-term deal to avert a government shutdown while negotiations continue with Democrats over reforms to ICE — just the latest sign of Donald Trump’s stunning reverse-gear on immigration.

Welp: CNN and NYT both reported overnight that the White House is considering agreeing to the carving-off of DHS funding from a larger package of government funding measures that must be passed by tomorrow night.

Schumer, W.H. trying to avert shutdown - Punchbowl News. "On Wednesday, Senate Democrats coalesced around a list of proposed reforms to DHS and ICE’s operations and tactics. Democrats want to tighten the rules over the use of warrants, enforce a uniform code of conduct for federal officers, bar federal agents from wearing masks and require them to wear body cameras."

Mobile Employees and International Tax

Tax News & Views International Weekly: Remote Work Headaches - Alex Parker, Eide Bailly:

In the past, the term “dual resident taxpayer” may have brought to mind a glamorous, worldly jetsetter—a global tycoon, or maybe James Bond.

In the post-COVID era, however, it’s an increasingly common situation for workers. There have always been those whose job involves traveling to different jurisdictions, for short or long periods of time. And, especially since the formation of the European Union, many commute across national lines on a daily basis. But in the age of remote work, workers can easily split their time in different countries, or move frequently without disrupting their employment.

And, these remote workers could be important or high-ranking employees for the firm—maybe even the CEO.

Blogs and Bits

Tips From A Former IRS Insider: Five Potential Flags To Avoid This Tax Season - Kelly Phillips Erb, Forbes:

3. Don’t trust social media. Crazy tax ideas go viral on platforms like TikTok all the time, sharing inaccurate advice that can give people a false start on their tax return. Some social media influencers wildly suggest tapping into “secret ways” to avoid taxes, like converting all of your income into tips to take advantage of the “no tax on tips” provision. Another recent one urges people to file a Form W-4 and declare themselves exempt from federal tax withholding, a variation of a scam that’s been on the IRS radar for decades.

IRS FAQs Provide Guidance On Deduction for Qualified Overtime Compensation - Parker Tax Pro Library. "The FAQs contain additional information about the deduction, provide resources for employees (including federal employees) to assist them in determining whether they received qualified overtime compensation under the Fair Labor Standards Act, and contain information regarding the differences in reporting requirements for tax year 2025 and 2026-2028."

“Laffer Curves Are Flat” - Jack Salmon, The Unseen and the Unsaid. "That means big changes in the statutory top tax rate produce almost imperceptible changes in total government revenue."

The Return of the Wealth Tax, Evidence Against Them Is Stronger Than Ever - Adam Michel, Liberty Taxed. "Because of persistent administrative difficulties and taxpayers’ behavioral responses, wealth taxes raise comparatively little revenue."

Help Your Preparer Help You

Byron Center resident pleads guilty to tax evasion - IRS (Defendant name removed, emphasis added):

According to court documents, Defendant was charged with one count of tax evasion, a felony offense. Defendant admitted that, between 2011 and 2024, he regularly sold scrap metal that netted him approximately $3.4 million of additional income. Defendant used a Certified Public Accountant to prepare his federal tax returns. The tax returns that Defendant filed from 2011 to 2023 were false because Defendant never told his accountant that he annually sold scrap material that generated substantial additional income. Defendant admitted that he intentionally failed to provide his CPA with recycling payment records and the amounts of his recycling income to evade assessment of tax due and owing on that income. For example, in 2021, Defendant reported that he only owed $2,465 in federal income tax. In fact, Defendant obtained an additional $610,818 in taxable income from recycling payments resulting in an additional tax due and owing of $172,618.

Your tax preparer can't help you if you don't help your preparer. Tell your tax team about all of your income.

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Tax News & Views Chips In on Taxpayer Advocate's Tax Season Worries Roundup

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Joe B. Kristan, CPA