Category: tax administration

Trump’s IRS lawsuit

President Trump, his sons Don Jr and Eric, and his business sued the IRS for $10 billion in damages to compensate for the illegal disclosure of his tax returns to ProPublica and the New York Times. To put the $10 billion in context, Forbes (9/18/25) estimated Trumps’ net worth as $6.3 billion.¹

Here’s a link to the CourtListener page that provides access to the complaint and other documents filed in the case.²

If he were a typical taxpayer, this would be a legit lawsuit that could result in the government paying damages.³ The law explicitly allows for these suits and provides for liquidated damages of $1,000/incident and reasonable attorney’s fees.⁴ The Trumps suit seeks punitive damages, of course.

For example, Ken Griffin, a hedge fund guy, sued over disclosure of his returns in the leak. The case was settled with an apology. As Tax Notes (no paywall) reports, unlike the Trumps, Griffin “did not allege that the IRS’s failure to appropriately safeguard his return information caused him pecuniary harm.”⁵ The Tax Notes story also notes that the IRS notified about 70,000 individuals that their information was involved.⁶

The following make the Trumps’ lawsuit especially unusual (among many others that make it merely unusual):

All presidents and major party nominees, except Trump, have voluntarily disclosed their tax returns to the public. Tax Notes archive. The one exception (Trump) is now claiming that involuntary disclosure caused him and his family massive reputational damage and entitlement to punitive damages.
The leak of his return information occurred while he was President and while his appointees were in charge of the Treasury Department and the IRS. One might say he was somehow responsible for the leak indirectly, the unitary executive and all that jazz. (I know, it’s just a highfalutin constitutional theory about authority and power, not accountability or legal liability.) And the conduct was so bad that punishment (i.e., punitive damages) should be meted out, the most important effect of which would be to line the pockets of the guy in charge. Translation: I or my appointed underlings made mistakes in supervising this rogue contractor who criminally released confidential tax return information. Please punish that conduct by giving me billions of dollars!⁷
Whatever one thinks of that theory, he and his appointees are now in charge. So, he will directly (unitary executive again) or indirectly be deciding whether to pay himself, his family and business and how much. That is a bit of a conflict, to the say the least. In the context of Trump’s administrative claims for damages related to the federal criminal cases, he allowed that it was “it’s awfully strange to make a decision where I’m paying myself.”⁸

A natural question is whether equitable defenses, like estoppel, laches, unjust enrichment and so on, will be available to the government. Probably not for liability based on a statute with exemplary damages. Of course, that assumes the more important question of whether DOJ will be allowed to contest the case at all and if doing so (e.g., some sort of damage formula in a “settlement”) will somehow be binding on the government for claims by others with clean hands and real harm to their reputations.

Of course, there is a plethora of commentary and pushback. A tiny sampling:

WaPo editorial (note that the new configuration of WaPo editorial board appears to be more of a WSJ editorial board wannabee than the old WaPo editorial board): “Public officials trying to dictate the amount of their own private payouts is a bad look.”
NYTimes editorial
Letter from Senators Wyden and Warren to Secretary Bessent and Attorney General Bondi
Motion to file an amicus brief filed by four former tax officials including John Koskinen and Nina Olson, Common Cause, and Project on Government Oversight – this is the most comprehensive lists of potential issues with the lawsuit that I have seen. It validated my instinct that there must be a statute of limitation issue with the suit. I think all of their overarching four requests for court actions make eminent sense to me.⁹
Jack Goldsmith and Bob Bauer discussed it on the Executive Functions podcast

Notes

When I checked Bloomberg’s list of billionaires (2/8/2026), Trump did not crack the top 500 (cutoff was $7.43 billion). Logically, one could argue that the tax return disclosures adversely affected his net worth (i.e., more than cut it in half or something like that), justifying the damage claim. That, of course, is ridiculous. He was reelected after the disclosure and his reelection vastly increased his net worth, if only based on outright or quasi-grifting. See, e.g., the NYTimes or the CAP accounts of a tally of how that has occurred. ↩︎
Note that the suit is filed in the southern district of Florida. I assume the Trumps were hoping to draw Aileen Cannon one more time. No such luck, the case was assigned to Judge Kathleen Williams, an Obama appointee. ↩︎
I.R.C. § 7431 authorizes suits for damages for violations of I.R.C. § 6103. The damages for “willful inspection or disclosure” are the greater of actual damages or liquidated damages of $1k per incident. Punitive damages, which the Trumps’ lawsuit requests, are allowed but appear to apply only if the grant is based on actual damages. (Punitive damages are the only way you can get to $10 million IMO, much less $10 billion.) The inspection and disclosure were made by a contractor who admitted it was done intentionally. So, the “willful” requirement for punitive damages under the statute is likely met. I don’t know if his contractor status affects the government’s liability. I.R.C. § 7431(a)(2) authorizes suits against an individual who discloses your return information but who is not an officer or employee of the government. That is what occurred here. Other suits have been filed against the contractor, Boaz Allen & Co. Whether the ability to sue contractors protects the government from liability or just adds another liability target is unclear. ↩︎
This is one instance where the statute cuts against Trump, his sons, and business. Entitlement to attorney’s fees is not allowed to individuals whose net worth exceeds $2 million or $7 million for a business. 28 U.S.C. § 2412(d)(1)(B). Notwithstanding that, the complaint (¶ 114) requests attorney’s fees. Getting to the limit in § 2412(d)(1)(B) requires following two cross references that start in § 7431(c)(3). ↩︎
An obvious question is whether the settlement would allow him to refile if DOJ and IRS agree to pay the Trumps a lot of money? ↩︎
The complaint (¶¶ 78 and 80) asserts that this IRS notice was what caused Eric and Don Jr. to discover the violations. Gee, were they on safari or under a rock since the news stories ran in 2023? There must be an issue of the SOL running. I didn’t bother to research the SOL, but the amicus brief referenced at note 8 makes a good case that the 2-year statute has run. ↩︎
The actual perpetrator (Mr. Littlejohn, the Boaz Allen & Co. contractor) is serving a 5-year term in prison. Criminal punishment is the strongest deterrent of conduct by his likes, the direct disclosers of return information. Thus, any deterrent effect of punitive damages (here they would be paid by the government, not Littlejohn or Boaz Allen) must be directed at the people who supervise and manage the direct perpetrators, i.e., higher level officials in the IRS, Treasury, and White House. ↩︎
At least, in that case he was only asking for $230 million. Of course, that claim was made before he won, and we all know elections have consequences. ↩︎
The requests: “First, the Court should consider issuing an order for the parties: to show cause why this Court has jurisdiction over this case, to explain how they will address the fundamental conflict-of-interest problems with this case, to show why this case should not be stayed until after President Trump leaves office, and to show why the unjustified $10 billion damage figure should not be stricken from the pleadings. Second, the Court should consider appointing amici who have expertise on issues of tax law and separation-of-powers issues to present fulsome legal arguments on all future issues that arise in this case. Third, the Court should consider allowing participation of those amici in hearings. To treat this case like business as usual would threaten the integrity of the justice system and the important taxpayer and privacy protections at the heart of this case.” ↩︎

Tags IRS, Trump

income tax tax administration

IRS January News

Trump Sues the IRS

I should have expected this after he filed an administrative claim for damages related to Jack Smith’s prosecutions. But his chutzpah never ceases to amaze me. According to the NYTimes, Trump Sues I.R.S. Over Tax Data Leak, Demanding $10 Billion(1/30/2026):

President Trump sued the Internal Revenue Service on Thursday for the unauthorized leak of his tax returns during his first term, demanding that the government agency pay him at least $10 billion.

Mr. Trump, as well as his two eldest sons and his family business, charged in the lawsuit that the I.R.S. and the Treasury Department had failed to prevent a former I.R.S. contractor, Charles Littlejohn, from gaining access to Mr. Trump’s tax documents, which were shared with The New York Times.

Mr. Littlejohn is serving a five-year prison sentence for taking tax documents about Mr. Trump and other wealthy Americans and giving them to news outlets. While federal law closely guards tax information, Mr. Trump, with the lawsuit filed in federal court in Florida, is now seeking billions in damages for the disclosures.

Mr. Trump appointed the leaders of the I.R.S. and Treasury Department, setting up the possibility of Mr. Trump’s aides deciding how to respond to a lawsuit brought by the president. Mr. Trump has previously demanded that the Justice Department pay him about $230 million in compensation for the federal investigations into him, a request that had no parallel in American history.

Leadership Shakeup

On January 20^th, WaPo reported (link) on yet another reorganization of IRS leadership and that the agency was leaning into relying on IT and is outsourcing some processing functions to the private sector (my emphasis added):

The Internal Revenue Service will reorganize its senior ranks days before this year’s tax filing season opens and try to use technology to become more efficient, the Trump administration’s IRS leader Frank Bisignano told The Washington Post on Tuesday.

…

Bisignano said the tax service was well-positioned ahead of the coming filing season but needed to more aggressively lean into technology, including initiatives pushed by the now-defunct U.S. DOGE Service to reduce staffing.

“We’re constantly investing in technology. We constantly must reap the rewards of it. And quite often we don’t, because someone isn’t willing to let go of those two people,” he said. “ … I’m not at all feeling that we don’t have enough staff. I just think it’s a way people think that is obsolete.”

,,,

Bisignano on Tuesday unveiled a new leadership team at the agency that will see 16 C-suite executives report to him, including a new chief of criminal investigations and the IRS’s acting chief counsel.

The agency will jettison its former standards that measured and tracked performance on taxpayer helplines. Bisignano said previous metrics that tracked access to customer assistance representatives were opaque and distracted from the agency’s mission of helping solve taxpayers’ problems. It will instead gauge average speed of answer at call centers, call abandonment rate and time spent on the line, he said.

The agency will also outsource some of its paper return processing operations, including using private contractors to scan and digitize tax returns. The IRS has long been burdened by paper processing. Hard copy returns make up a fraction of the agency’s correspondence, but they take exponentially longer to process than returns filed electronically.

DOGE officials had pitched fully privatizing those initiatives. Bisignano said the IRS would have a “hybrid” public-private digitalization process, saying he was wary of outsourcing too much of that work.

“I’m fundamentally DOGE,” Bisignano said, “and what I’ve meant by that is I’ve driven efficiency and quality my whole career.”

Last filing season, playing musical leadership chairs did not seem to matter. Let’s hope that holds. Governments heavily relying on technology solutions (hello, ACA) has not typically turned out well.

Privatizing digitizing paper returns seems like yet another opportunity for data breaches. (The ProPublica leak was from a contractor working for Booz Allen. Treasury has cancelled its contracts with Booz Allen in response.) I assume that this means the end of IRS staff keying in numbers off paper returns.

This AP story has some additional interesting details about the leadership changes:

In a letter addressed to the agency’s 74,000 employees and viewed by The Associated Press, Chief Executive Officer Frank Bisignano announced new priorities and a reorganization of IRS executive leadership.

Notably, Gary Shapley, the whistleblower who testified publicly about investigations into Hunter Biden’s taxes and served just two days as IRS Commissioner last year, was named deputy chief of the Criminal Investigation division. Guy Ficco, the head of Criminal Investigation, is set to retire and will be replaced by Jarod Koopman, who will also serve as chief tax compliance officer alongside Bisignano.

Joseph Ziegler, another Hunter Biden whistleblower, was named chief of internal consulting, the letter said.

For those of you who don’t pay as close attention to this stuff as I do, Shapley was kicked to the curb in a dispute between the current acting commissioner, SecTreas Scott Bessent, and then de facto DOGE head, Elon Musk. This is from a 4/18/2025 Politico story:

President Donald Trump is replacing the fourth IRS chief this year amid complaints by Treasury Secretary Scott Bessent that he was not consulted on the appointment after Elon Musk recommended the person, according to a White House ally and a Trump administration official familiar with the dispute who were granted anonymity to discuss private conversations.

Bessent also ousted a prominent member of Musk’s DOGE team assigned to the IRS, after a major staff reduction was set in motion at the agency.

Gary Shapley, an IRS criminal investigator and whistleblower in the Hunter Biden tax case, was tapped by Trump only days ago to temporarily lead the agency.

However, according to the people familiar with the situation, Shapley was installed largely at the request of billionaire Musk, and Bessent was left completely in the dark about the decision.

Bessent expressed his frustration outside the Oval Office on Thursday and made it clear he wanted someone he could trust to lead the IRS, according to the administration official.

Soap opera screen writers could be writing this script. Let’s hope agency leadership really isn’t important. Scott Bessent alone provides plenty of that sort of fodder (e.g., throwing down the proverbial glove in disputes with other administration officials). So, the volatility should be expected.

Relying on IT

Regarding the idea of leaning into technology as the solution, this story from the Federal News Network reports 1,000 IT staff were reassigned to other functions (in addition to the IT staffing reductions reported by National Taxpayer Advocate):

The IRS is moving about 1,000 IT employees out of its tech shop, as part of a reorganization plan that’s been underway for months.

Impacted employees say they have few details about what work they’ll be doing, and have been told by the agency to instead “focus on completing an orderly transition of your current work.” The notice they received last week states that they will no longer be working on IRS IT projects.

According to the notice, obtained by Federal News Network, the reassignments will go into effect on Dec. 28.

…

Last month, IRS IT directed hundreds of its employees to complete a “technical skills assessment.” According to two IRS IT employees, the test, conducted by HackerRank, consisted of several multiple-choice questions and a coding question that made up the majority of the overall grade. One employee said the questions “had zero to do with our jobs.”

“They did this to say, ‘Look, 98% of our people failed, so we are going to move you or RIF you,’” the employee said.

Sam Corcos, Treasury’s chief information officer and a Department of Government Efficiency representative, defended the IRS layoffs as “painful” in a recent podcast interview, but said they were a necessary tool to get the agency’s stalled IT modernization efforts back on track.

…

“We’re in the process of recomposing the engineering org in the IRS, which is we have too many people within the engineering function who are not engineers,” he said.

“The goal is, let’s find who our engineers are. Let’s move the people who are not into some other function, and then we’re going to bring in more engineers,” he added.

In March, the IRS removed 50 of its IT leaders from their jobs and put them on paid administrative leave. Corcos defended that decision, saying the IRS “has had poor technical leadership for roughly 40 years.”

During the interview, Corcos said the layoffs in the federal government are more restrictive than what’s allowed in the private sector. In practice, he said government RIFs often result in agencies losing younger employees with in-demand skills, but with less tenure — something he said should be corrected.

None of this instills confidence.

Dumb defunding

The temporary budget patch has expired, so Congress needs to come up with something if the government is to reopen. The House’s shot at this is HR 7148 – Consolidated Appropriations Act, 2026 (a different version passed the Senate). Of course, Congressional Republicans are still trying to unravel Biden’s appropriation increases for IRS operations and tax compliance. The last iteration of this in HR 7148 (the enforcement money will be effectively gone). The results are predictable – lower spending and much lower revenues. This note (c on p. 2) from the CBO estimate of the budget effects of HR 7148’s cuts to the IRS are eye-opening (my emphasis added):

Section 528 would rescind $11.7 billion of amounts provided to the Internal Revenue Service in the 2022 reconciliation act (P.L. 117-169). CBO anticipates that rescinding those funds would result in fewer enforcement actions over the next decade and thus in a reduction in revenue collections. CBO estimates that section 528 would reduce revenues by $2.7 billion in 2026, by $25.6 billion over the 2026-2030 period, and by $38.6 billion over the 2026-2035 period.

So, the government will lose over $3 of revenue for each dollar of the spending cut. Brilliant budgeting. This is some combination of weird ideology, stupidity, listening to the wrong people, and bad governance. The adverse effects will also filter through to state and local governments with income taxes. That’s on top of the systematic undermining of the Service’s operations that are otherwise occurring.

A dire view of the House-passed IRS budget comes from the NYU Tax Law Center blog (my emphasis):

“The appropriations agreement’s record cuts in the IRS base budget and nearly $12 billion rescission of funding for IT upgrades guarantee a worse taxpayer experience and more non-compliance. However, by expanding transfer authority, the agreement would give the Trump administration greater flexibility in using the appropriated funds and potentially allow it to paper over the severity of the cuts in the near term, even as the cuts set the IRS up to fail in future administrations.

The agreement cuts base IRS funding, including enforcement, by over one-third relative to its 2010 level, adjusted for inflation. It rescinds more than half of the Inflation Reduction Act funds remaining, and at current spending rates the remainder would almost certainly be exhausted during the current administration.”

Graph from Tax Law Center showing the effect of the changes in a longer-term context:

Status of IRA funding increase

The Bipartisan Policy Center put out a piece on the 2026 filing season, which is worth reading if (like me) you’re into that sort of thing. It contains a nice graph on the status of the IRA increase in funding:

This misleadingly assumes that the roughly $12 billion rescission in HR 7148 has been enacted. Versions of it have passed the House and Senate but needed to be resolved as part of the shutdown negotiations. But it almost surely will happen, which means the expanded funding of enforcement is all but toast. Sigh.

They write letters (on CI)

Congressional letters to the executive branch are a time-honored way of making political points. The pertinent topic now is immigration enforcement, of course. The Dems wrote a couple on that topic that relate to the IRS Criminal Investigations (CI).

The first (dated 1/22/2026) is to five inspectors general, including the IRS’s inspector general. The letter requests that they evaluate whether federal law enforcement resources have been diverted “toward advancing President Trump’s immigration enforcement agenda[.]”

With regard to IRS CI, the letter cites media sources, which I had not seen, as reporting:

More than 1,700 IRS Criminal Investigation employees have been reassigned to ICE as of September 2025, compared to just 250 employees as of June 2025.9 In April 2025, the IRS and DHS formalized a data-sharing Memorandum of Understanding granting ICE access to certain taxpayer return information — including names, addresses, and tax years — to support immigration enforcement, a potentially unlawful departure from the longstanding IRS confidentiality policy,10 and potentially further drawing from IRS resources.

None of the specific questions (see pp. 7-8) the letter poses specifically relate to IRS CI. We’ll have to stay tuned to see if a forthcoming report verifies the extent to which CI agents and resources have been reassigned to immigration enforcement.

I wonder how Secretary (acting IRS commissioner) Bessent’s dispatching CI to Somalia (or at least to investigate funds sent there) will be treated in responding to this. Ignored, I assume. Bessent made these comments in Minnesota FWIW.

Another letter (dated 1/28/2026) from some of the same members to Bessent requests responses to ten questions (p. 4) on the reduction in CI investigations, staff, resources, and the extent to which this is from reassignment to immigration matters. The letter (p. 1) says CI’s annual report (I haven’t seen it) documented:

[I]nvestigations into abusive tax shelters plummeted 63 percent last year to a level roughly 40 percent below every other year in the past decade. As one former head of the shuttered Justice Department Tax Division put it, “There is a usual ebb and flow, but you can’t ignore this number.” [footnotes omitted]

About your retirement package

Tax Notes has this story (no paywall) about IRS employees who took the early retirement (the “fork email”) offer:

Some IRS employees who participated in the deferred resignation program have yet to receive annual leave or annuity payments, with no clear answers for the delay.

Anthony Marasco, who spent nearly 30 years at the IRS, took the second deferred resignation offer and retired effective September 30, 2025. Along with several other recently retired IRS employees, he’s still waiting to receive his annual leave payout and his first annuity payment — months after leaving the workforce.

Marasco said a representative from the IRS Employee Resource Center told him in early December 2025 that the agency was sitting on a backlog of about 7,300 retirement applications and that he should expect to wait about six to nine months before receiving his first annuity payment.

…

From January through June 2025, 17,562 IRS employees participated in the second round of the deferred resignation program, according to the national taxpayer advocate’s midyear report.

More than 20,000 employees took part in both rounds of the program, which was launched as part of the Trump administration’s efforts to drastically reduce the size of the federal workforce.

Another recently retired IRS employee, who spoke to Tax Notes on the condition of anonymity, said the delays have likely been exacerbated by staffing cuts in the agency. The IRS Human Capital Office lost nearly 29 percent of its staff through June 2025, mostly through the deferred resignation program.

“I’ve been in contact with other retirees. We all took the September 30th date . . . we haven’t seen a dime,” the former employee said.

2025 was not a good time to be a federal employee or even to take a seemingly generous early retirement offer. I hope they lined up good private sector or state and local government jobs or have federal pensions that are being paid.

TAS annual report

On 1/28/2026, the Taxpayer Advocate Service released its annual report. As usual, the report is full of interesting information and useful suggestions on how the Service could improve. It gives the IRS good grades on the 2025 filing season but cautions about 2026 filing season, given the dramatic reduction in IRS staff (see table below) and the complex OBBBA provisions which apply retroactively to tax year 2025 (the press release, e.g., cites 8 qualifying rules for the new car loan interest deduction). Here’s the table documenting in IRS staffing cuts:

TPC/Brookings webpage

The Tax Policy Center and Brookings have a new IRS Spotlight webpage that they promise to regularly update with tax administration news. It has a lot of interesting graphics and data.

Tags IRS, IRS funding, Trump

income tax tax administration

Miscellany

Will AI save the IRS IT modernization?

Those of us who have been around forever remember multiple failed efforts to modernize the IRS or virtually any large government IT system, much of which are written in dead programming languages like Cobol and Fortran.¹ MN DOR was slightly better IMO and now has relatively up-to-date computer systems, at least for individual income tax administration (corporate, I’m less sure).²

A recent acting IRS commissioner (one of many) in an AICPA webcast suggested that AI may change that dynamic. AI has many failings (I have personally experienced its tendency to make up stuff multiple times), but writing computer code is supposed to be one of its strengths. In any case, here’s a description of what former acting commissioner Michael Faulkender said in that regard:

When asked how close the IRS was to modernization of its computer systems, Faulkender replied:

“I will give you the same line that I gave a number of times when I was acting commissioner. For 35 years, the IRS was five years away from its IT modernization. We will not say that in the 36th year. The plan was to get it done by the end of this term, so by 2028.”

Faulkender, who was deputy Treasury secretary and acting IRS commissioner for several months in 2025, said modernization of the IRS IT systems previously focused on taking millions of lines of computer code in languages like Fortran – developed in the 1950s – and translating them into more modern languages.

But now, artificial intelligence can reprogram the old code, said Faulkender, who also was an assistant Treasury secretary from 2019 to 2021. “So maybe humans don’t know how to program in those languages anymore, but AI does know how to program in those languages, so we actually don’t need to update code that actually works,” he said.

I hope he is right, but think he is overly optimistic, if not outright delusional. See e.g. this Harvard Business Review article. In any case, real people with experience still need to carefully review, test, and edit the AI-generated code. Software that determines people’s tax liability and other critical stuff is not something you can leave to AI. Moreover, the IRS IT staff has been decimated and undoubtedly has many other critical tasks to perform. Overconfidence in AI has been a mark of this administration (DOGE and all that stuff). So, consider me highly skeptical.

Trump accounts

The IRS has released guidance on Trump Accounts (44 pages; I only read the general overview), enacted as part of OBBBA.³ These accounts are yet another flavor of the IRA structure with, of course, its own set of special rules. The interesting element is that the federal government will contribute $1k for every child born in 2025 through 2028 (assuming the parent or guardian opt in – a big assumption for some). If the kid lives in the right zip code, Michael Dell or Ray Dalio might kick in more. Employers can contribute up to $2,500/year for children of their employees without it counting as income of the employee. Parents and others can contribute as well.⁴

A couple of curiosities I discovered in reading this. The IRS guidance delays the ability to make additional contributions to the plan until the country reaches the 250^th anniversary of the Declaration of Independence:

Contributions to Trump accounts cannot be made before July 4, 2026. (p. 5)

I guess that tracks with signing OBBBA on July 4, 2025. It also raises questions in my mind about the basis for making decisions and how much of it is PR-centric. Not the way I think government should work.

Second, the government website for Trump accounts has this graphic at its top:

What’s odd about it is that eligible investments for Trump Accounts do not include individual stocks, such as those displayed in the graphic. Per page 5 the IRS guidance (or I.R.C. § 530A(b)(3)):

During the growth period, funds in a Trump account may be invested only in eligible investments. An eligible investment, generally, is a mutual fund or exchange traded fund (ETF) that tracks an index of primarily U.S. companies, such as the Standard and Poor’s 500 stock market index, does not use leverage, does not have annual fees and expenses of more than 0.1 percent of the balance of the investment in the fund, and meets other criteria that the Secretary determines appropriate.

The PR flacks creating this stuff should talk to people who know about the substance of the programs they are promoting. But that is probably too much to expect from this administration which appears more concerned about image than substance or truth.

Who’s a socialist?

Cato has an article about the administration’s state corporatist policies. If (as I am) you’re concerned about this, it’s useful reading. It’s easy to forget or miss just how many instances of this have occurred in less than a year of this administration.⁵ This graphic collects instances (not comprehensive IMO) in which the administration took government stakes or is in negotiations to do so in private companies:

There were a lot. It’s easy to forget.

I find this ironic for a candidate and a party that regularly accuses the Dems of being radical left socialists and occasionally communists. These policies are more insidious than anything mainstream Democrats would dare to do IMO. They are categorically harder to justify (for a free market type like me) than most classic Western European democratic socialism policies. Most of those policies are Bismarckian social safety stuff that are useful, if not essential, to maintain modern market-driven developed societies; voters in democracies insist on them.

By contrast, the administration policies of extracting public stakes in private firms in return for regulatory approvals seem categorically different. The impacts of Mamdani’s policies (A few government grocery stores or free bus rides?) pale by comparison.

Hosts of limited government advocates (Club for Growth, Americans Prosperity Alliance, WSJ editorial board, and their ilk) made an explicit tradeoff of ignoring Trump’s total lack of support for democratic principles, presumably, because they judged the horrors of the potential Dems policies’ limits on economic freedom to be worse. State corporatism is what they opted for. That says something about their priorities and their ability to assess political reality (the nature of and probability of policies being implemented). More likely a case of their revealed preferences.

Notes

Disclosure: Fortran is one language that I was able to read and understand (well, most of the routines). I did a modest amount of basic Fortran programming back in the 20^th century. The basic calculations of the federal government’s individual income tax microsimulation model (p. 26) appear to still be written in Fortran. ↩︎
When DOR implemented a new IT system, we researchers expected it would be hugely disruptive and that we would lose access to some data that was irrelevant to tax administration. ↩︎
Yet one more example of appending Trump’s name to random stuff to buff his ego. ↩︎
I personally think that 529 Plans are a superior savings vehicle to pay for college and other education costs. That’s another post, though. ↩︎
The article really does not track the use of merger approvals as a way to effectively extract tribute from private businesses or more ominously to neuter critical media, like CBS or CNN potentially with the Netflix v. Paramount fight over Warner. ↩︎

Tags Trump accounts

income tax tax administration

IRS developments

Filing season

The Service has announced the 2026 filing season will start on January 26^th. The big question is whether reductions in IRS staffing, including the departure of over 20% of its IT and customer service staff (p. 5), and enactment of OBBBA provisions affecting tax year 2025 (no tax on tips and overtime, car loan deduction, etc.) will cause a breakdown.

The Service is on its seventh commissioner with Scott Bessent serving as acting commissioner for an apparently indefinite period of time. In addition to the challenges of being the Secretary of the Treasury, he appears to be easily distracted – e.g., into using the IRS to chase down rumors¹ that seem a bit removed from typical Service activities (whether admitted fraud proceeds went to a foreign terrorist group). The head of the Social Security Administration – a challenging job in its own right – is acting as chief executive and will be in charge of day-to-day operations. Not sure how much comfort that provides.

IRS apparently has reversed course and will be hiring seasonals rather than permanent customer service employees, according to Bloomberg. That should make recruitment more difficult, I assume.

Last year everything went remarkably well with similar but different issues at the top and impending chaos for those in the ranks. But the bar is a bit higher this year and staff who were kept on for the filing season are gone.² So, who knows. I wouldn’t hold my breath and would not file a paper return if I could avoid it.

Flagging audits

Meanwhile, NYTimes reports, not surprisingly, that the number of audits of large partnerships in 2025 was down significantly from 2024:

Since President Trump returned to office, nearly all the senior leaders of the [large partnership audit] operation have left the I.R.S. — taking the newly acquired partnership tax expertise with them. Audits have been abandoned, they have decreased in number and the initiative is foundering.

Progress on complex audits has slowed to a trickle, tax lawyers who specialize in these cases said. The number of large partnership exams has not gone “completely to zero, but it has certainly dropped 80 or 90 percent,” said Gary Huffman, a tax lawyer at Vinson & Elkins who represents partnerships that are being audited. A lawyer who handled roughly 15 such audits in 2024 reported only three in 2025. Another who advised clients on four such audits in 2024 saw zero new audits in 2025.

…

“We were having good success bringing into the I.R.S. seasoned tax and legal expertise to help with complex audits, including for large partnerships,” said Danny Werfel, who served as I.R.S. commissioner for the final two years of the Biden administration. “Because these folks were relatively recent hires, they were probationary employees. When all probationary employees were let go, lots of talent walked out the door.”

…

Profits reported by partnerships exploded to $2.6 trillion by 2022, from $267 billion in 2000, the most recent I.R.S. data shows. Profits reported by traditional corporations grew at about half that pace.

…

With no one left to look for the dodges, tax experts warn that abusive shelters are likely to proliferate.

A recent study by a team of business and law school professors at schools including Stanford, the University of Georgia, New York University and the University of Chicago found that audits of complex partnerships had a “high return on investment,” generating $20 in collected taxes for each $1 spent by the I.R.S. That return is over eight times what the I.R.S. generates from auditing corporations, the researchers found.

Doing large partnership audits seems to me to have a higher cost-benefit payoff than seeing if the Feeding Our Future fraud moneys made their way to al-Shabab. Discovering that the latter occurred would obviously be bad, but the payoff would largely be partisan political scalps, rather than internal revenues.³ That’s world we live in.

Notes

Per Fox News: “Bessent said Friday [1/8/2026] that the Internal Revenue Service (IRS) Civil Enforcement is auditing financial institutions that allegedly supported the laundering of Minnesota funds, and that the IRS is planning to unveil the ‘formation of a task force to investigate any fraud and abuse involving pandemic-era tax incentives and misuse of 501(c)(3) tax-exempt status by entities implicated in the Minnesota based social services fraud schemes.’” ↩︎
IRS employees with filing season responsibilities were prohibited from taking the Fork Email early retirement. ↩︎
I’ll be surprised if Bessent’s inquiry results in criminal charges or sanctions on financial institutions for money laundering. ↩︎

Tags IRS, IRS compliance income tax

tax administration

Criminal tax prosecutions

Post author By saltspeak
Post date December 11, 2025
No Comments on Criminal tax prosecutions

Yesterday’s Reuters story, Tax prosecutions plunge as Trump shifts crime-fighting efforts (12/11/205), was no surprise when it reported that DOJ tax prosecutions declined by 27% this year (through 11/1/2025) compared to 2024.

Reuters used data extracted from Westlaw from 1990 on. This year is an all time low as shown in this graph from the story:

The story reports some interesting and troubling details about what is going on (in addition to the dramatic reduction in IRS staffing and shuttering of the DOJ Tax Division). Some excerpts:

The administration made deep cuts to the Internal Revenue Service’s criminal investigative unit, and some of those who remained were ordered to start working on immigration cases or anti-crime patrols in Washington, according to government records and officials, speaking on the condition of anonymity because they were not allowed to discuss their work publicly. At the same time, the Justice Department closed its Tax Division, and officials said a third or more of the criminal lawyers who worked there quit.

…

Reuters used federal court dockets to count the number of Justice Department attorneys who appeared on behalf of the government in tax prosecutions between January and the beginning of November. Last year, about 420 did. This year, about 160 have.

Top Trump administration officials told prosecutors early this year that tax investigations were not a priority, three people familiar with the discussions said, speaking on the condition of anonymity to discuss the department’s internal deliberations. Participants concluded that the department’s new management was “very skeptical about white-collar crime and whether we should be doing those cases,” one person familiar with the discussions recalled.

…

At least a third of the roughly 80 criminal prosecutors who worked in the office [DOJ Tax Division] at the beginning of the year quit rather than be reassigned, two officials familiar with its staffing said.

…

U.S. attorneys’ offices that could pick up some of that slack have also lost prosecutors with experience in white collar cases, current and former Justice Department officials said. Department records show more than 1,000 lawyers have left U.S. attorneys’ offices this year, roughly double the number who quit or were pushed out in previous years.

…

The IRS investigators who remain “are being pulled in a lot of directions,” some of which are unrelated to taxes, a former Justice Department official who witnessed the changes said. “The damage being done is significant.”

In Washington, the new responsibilities for IRS investigators have included conducting patrols alongside city police officers as part of a show of force Trump ordered this year to combat what he called a crisis of crime in the capital city.

The IRS’ office in Washington initially sent only a few of its roughly 60 agents to assist with those patrols. But after Trump aide Stephen Miller complained, the office upped that amount to more than 20 agents to patrol the streets, two people familiar with the deployment said.

Good grief is all I can say to 20 IRS agents assigned to patrol the streets of Washington DC. These people are not serious about running a government. The pattern squares with multiple inexplicable pardons of white collar and tax criminals, as well as a president who views aggressive tax avoidance (to the edge of evasion) as smart.

Need to assure donors? Just ask.

Another data point on how the IRS is truly a different agency than the one I was familiar with during my working career: this CBS story, Treasury Dept. tells Erika Kirk Turning Point USA not under investigation, following social media rumors (12/9/2025):

The Treasury Department sent a letter last week to conservative influencer Erika Kirk with findings that contradict fraud allegations about the finances at Turning Point USA and could help her refute those claims, sources told CBS News.

Questions were being raised on social media about the finances at Kirk’s organization, Turning Point USA, and podcaster Candace Owens and others were urging donors to demand refunds. That led a few of its small-dollar donors to ask for their money back, one of the sources said. Erika Kirk runs the nationwide conservative college student organization co-founded by her late husband, Charlie Kirk.

…

The letter said none of the four tax-exempt entities Kirk now runs — Turning Point USA Inc., Turning Point Action Inc., Turning Point Endowment Inc., or America’s Turning Point Inc. — are being examined by or are under investigation by the IRS, and all of the entities “submitted on time” all their 990 forms to the IRS this year. Contents of the letter were shared with CBS News.

Asked about the swift response to aid the conservative organization’s efforts to combat the social media rumors, a senior Treasury official said: “The IRS is able to provide this type of information upon request by the taxpayer. And in this case, it’s hideous that malicious lies and smears obligated her to make the request.”

That’s a service I had never heard of the Service offering.

Tags compliance, income tax, IRS

tax administration

November IRS News

This post consists of excerpts from and my comments on five media stories related to the IRS that appeared in November. They’re in chronological order, not how I assess their importance.

Direct file ends

What I had assumed would occur now is official, the IRS is ending (“suspending”) the direct file program under which the government itself provides software to calculate and file your income taxes. (The Free File program by private software firms and fill-in PDF forms – no tax calculations – will continue, though.) The IRS did not announce it but sent an email to the state tax agencies according to the Federal News Network (11/5/2025). The New York Times story has more detail.

This seemed certain to happen given the views of GOP members of congress and the conclusion of the Treasury Department’s mandated report on it:

Direct File had low overall participation and relatively high costs and burdens on the federal government, compared to other free filing options. . . . Direct File’s complexity and technical demands also diverted IRS resources from other core priorities. Meanwhile, successful, longstanding programs, such as Free File (which already covers a broader eligibility population than Direct File and operates at little cost to the government), were not fully promoted or optimized during this period.

The report estimated a cost of $138 per return without taking into account indirect costs.¹ Scale economics and long-term fixed costs suggest the per return cost would drop over time and as its usage increased (marginal per return cost had to be very low). Free File’s asserted broader eligibility is questionable. It likely reflects the more limited geographical reach of Direct File until more states could come on board. Direct File had much higher income eligibility than Free File ($200K v. $84k for Free File).

I have mixed feelings about this, but my take is that the software firms who provide Free File services are inherently conflicted (their business model is to sell the software, not to give it away) and I lean toward the government bearing the cost of basic preparation and filing. Software is virtually essential now, given the complexity of the code. (Thank you, Congress.) Providing free software to do the calculations is similar to providing paper forms in days of a simpler code without income phase-outs, an AMT, and similar. (People would not have been pleased if the IRS charged for tax forms, while allowing low-income people to get them free from the IRS’s printer.) It’s analogous to a sales tax credit for retailers to offset some of their costs of collecting the sales tax for state and local governments.

Giving away tax base

I have discussed before how the IRS for various reasons undercuts the revenue intended to be provided by legislation (usually offsets to fund GOP tax cuts or Dem tax cuts or spending increases). Sometimes, that is a matter of practical necessity (e.g., delay of expanded information reporting for gig workers, now repealed), fear of popular/political blowback, and in other cases is simply inexplicable (allowing pass-through entity level taxes to avoid the SALT deduction limits). Even if the concessions are contrary to the letter of the law and intent of Congress, rarely does anyone have standing to and the wherewithal to challenge them.

The NY Times published a story (How the Trump Administration Is Giving Even More Tax Breaks to the Wealthy, 11/8/2025) that mainly focuses on undercutting the new corporate alternative minimum tax or CAMT, enacted to offset the cost of Inflation Reduction Act (a/k/a Biden’s infrastructure bill).

It’s hard to tell from the article what the agency’s rationale was for the various dilutions of the CAMT and other provisions. CAMT, of course, undercuts the investment incentives in TCJA and OBBBA (see this Brookings piece, e.g.). So, undercutting it will further the administration’s and GOP Congress’s agenda. But that certainly is no justification. Moreover, as the article points out, it is done without accounting for the cost, as enacting actual legislative changes would and is sure to increase the deficit materially. The changes are permanent features, in most cases. The article quotes speculation that hundreds of billions may be involved. Hard to judge the quality of such speculation, but it seems credible.

Most troubling is that the article asserts the crypto industry is a big beneficiary of the concessions. That’s an industry that adds little social value (as far as I can tell) and is the subject of some of the most lucrative grifting by Trump and his family, along with other administration insiders (like David Sacks) in other contexts.

Here are some excerpts from the Times article:

The Treasury Department and Internal Revenue Service, through a series of new notices and proposed regulations, are giving breaks to giant private equity firms, crypto companies, foreign real estate investors, insurance providers and a variety of multinational corporations.

The primary target: The administration is rapidly gutting a 2022 law intended to ensure that a sliver of the country’s most profitable corporations pay at least some federal income tax. The provision, the corporate alternative minimum tax, was passed by Democrats and signed into law by President Joseph R. Biden Jr. It sought to stop corporations like Microsoft, Amazon and Johnson & Johnson from being able to report big profits to shareholders yet low tax liabilities to the federal government. It was projected to raise $222 billion over a decade.

…

“Treasury has clearly been enacting unlegislated tax cuts,” said Kyle Pomerleau, a tax economist at the American Enterprise Institute, a right-leaning think tank. “Congress determines tax law. Treasury undermines this constitutional principle when it asserts more authority over the structure of the tax code than Congress provides it.”

The alternative minimum tax isn’t the administration’s only effort to roll back taxes on large businesses and wealthy individuals. Last month, the Treasury and I.R.S. granted new tax relief to foreign investors in U.S. real estate. In August, they withdrew regulations to prevent multinationals from avoiding taxes by claiming duplicate losses in multiple countries at once. And, as The New York Times previously reported, the Treasury and I.R.S. have rolled back a crackdown on an aggressive tax shelter used by big companies, including Occidental Petroleum and AT&T. That amounts to another $100 billion in cuts — and likely far more, according to tax advisers.

…

The Treasury’s actions are probably contributing hundreds of billions of dollars to the federal deficit, tax experts said. That is on top of the trillions that the legislation signed by Mr. Trump in July is already adding to the deficit. Yet unlike laws passed by Congress, Treasury is under no obligation to publicly account for revenue lost by its actions — such as cutting spending to offset the money no longer being collected.

Opting crypto out of the CAMT:

The [CAMT] could have swept in two of the biggest crypto firms, Coinbase and Strategy. In response, they sought rule changes for calculating the minimum tax. Three high-powered legal advisers — Michael Desmond, who served as the I.R.S. chief counsel in the first Trump administration; Andrew Strelka, formerly senior tax counsel in the Biden administration; and Eugene Scalia, the labor secretary in the first Trump administration — pushed to exempt “mark to market” gains reported to investors. Those gains reflect the increase in value of the investments held by companies that haven’t been sold yet.

On Sept. 30, the I.R.S. granted their request, explicitly citing “digital assets.” Big crypto companies “have been granted a reprieve,” lawyers at Vedder Price wrote.

Monte Jackal as characterizing the changes as an effective repeal of the CAMT. (Seems a bit over the top to me.)

Conflicts at the top

The IRS commissioner position has been a revolving door under the Trump administration. We’re on the seventh commissioner or acting commissioner, when you include Danny Werfel, Biden’s commissioner who left shortly after Trump was inaugurated. Scott Bessent, the Treasury Secretary, is now acting commissioner.

Before becoming Treasury Secretary, Bessent was a hedge fund guy. He was a principal at Key Square Group. The NY Times published a story that revealed his old hedge fund has taken the position that limited partners who are actively involved in working for or managing the partnership (as Bessent was) do not need to pay Social Security and Medicare (SECA) taxes on their non-guaranteed partnership distributions. The I.R.S. Tried to Stop This Tax Dodge. Scott Bessent Used It Anyway (11/12/2025).

The IRS (the agency Bessent now directly heads) takes the position that these limited partners are not limited partners (i.e., passive investors) who are exempt from the SECA taxes on their nonguaranteed payments.² In its view, these limited partners are garden-variety partners who must pay SECA taxes on their non-guaranteed payments. (The statute explicitly exempts the guaranteed payments.) The IRS won a Tax Court case on this issue in 2023, which is on appeal.

This tax minimization strategy is analogous to the more publicized use of S corporations to shield pass through entity income from full SECA taxation. Multiple high-profile politicians have used this gambit – John Edwards, Newt Gingrich, Joe Biden, and many more. Broadly closing off these strategies would raise a lot of revenue and is one option (indirectly through subjecting them to the NIIT) I suggested to fund the Dems’ proposal to continue the more generous ACA credits.

The story reveals that Bessent did not appear troubled by the fact that he has and is taking a tax position contrary to the agency he now manages. According to the Times story:

Mr. Bessent has stood by the tax maneuver. During his confirmation process to lead the Treasury Department, which oversees the I.R.S., Mr. Bessent said he would not follow the I.R.S. position that limited partners like him owed those self-employment taxes.

Instead, he said he wanted to see how ongoing legal challenges would pan out. He pledged to create “a reserve fund to address any contingency related to this issue” and said the amount in question was smaller than the $910,000 described by Democrats. He also committed to winding down his hedge fund.

Tax experts quoted by Times do not agree. (I can attest to Professor Burke’s bona fides. She was formerly a U of M law professor, and I took a week-long partnership course from her. She is a national expert in partnership taxation.)

“There’s zero question that this is abusive,” Walter D. Schwidetzky, a law professor at the University of Baltimore who focuses on partnership taxes, said of the ability for business owners to avoid self-employment taxes through limited partnerships. “No one of good faith would argue otherwise.”

…

“What surprises me is that there’s a precedential Tax Court opinion that Scott Bessent seems to say, ‘That’s not good enough for me,’” said Karen Burke, a tax law professor at the University of Florida who has written about the limited partnership exemption.

The Biden Administration had a regulation project to explicitly foreclose claiming the exemption, but the Trump Administration appears to have dropped it. The article notes that the staff turmoil at the agency and DOJ (in addition to Bessent’s public statement, I suppose) may undercut the government’s litigating position on appeal:

The U.S. government continues to defend the I.R.S. position in court, but it is now doing so with a weaker hand, tax experts said. The Trump administration has moved to disband the Tax Division at the Justice Department, which represents the I.R.S. in appellate court, and many tax lawyers in the department left amid the turmoil there, former officials said. One of the lawyers who represented the I.R.S. in the Fifth Circuit case involving the limited partner question, for example, withdrew from the case and left the government this year.

“The proposed restructuring of the Tax Division will not impact the ability of its civil litigators and criminal prosecutors from advancing its mission to fairly and consistently enforce the nation’s tax laws,” a spokeswoman for the Justice Department said.

The I.R.S. has lost not only much of its overall staff, but much of its leadership, too. Several of the agency’s top officials focused on tax enforcement have been pushed out, put on leave or quit.

This is just another (comparative mild) example of questionable ethical behavior by administration officials and a seeming lack of concern about defending the tax base.

MAGA mugging

Trump nominated Donald Korb to be IRS chief counsel. I thought this to be a modestly bright spot in an otherwise dark picture for the agency. Korb served in George W. Bush’s IRS as chief counsel, as well as a few other IRS roles before that. He is a respected tax lawyer with a long career, a typical conservative normie Republican. The Senate Finance Committee had recommended his confirmation.

Well, it was not to be. He’s out. Per Politico (11/14/2025):

President Donald Trump abruptly withdrew Donald Korb’s nomination for IRS chief counsel on Friday.

While Trump didn’t explain his decision, right-wing political activist Laura Loomer reposted Trump’s announcement on her X account, along with the hashtag “#LOOMERED.” Loomer, who’s sidelined several administration officials, chastised Korb on Wednesday for praising Democrats and donating to them.

I regard that as unfortunate depending upon who his replacement is. The leak by Senator Wyden regarding Korb’s questionable comments in a private meeting with Finance Committee staff and his public comments on the data sharing agreement, as reported by Tax Notes (no paywall), suggested to me that Korb might be in trouble with the MAGA types and was trying to pander to them. Loomer is a whacko, whose targets are impossible to predict (much less whether Trump acts on them). Who knows why a typically below the radar appointment like IRS chief counsel would attract her attention? This is not good, anyway you view it.

The federal district court for DC has decided the IRS data sharing case that I previously blogged about here, granting a stay and a preliminary injunction of the data sharing policy. Links: to court’s memorandum and WaPo story (11/21/2025).³

The court accepted the plaintiffs’ arguments on the address issue and the rejected the government’s position that one or a few ICE employees could be “personally and directly engaged” in criminal investigations of thousands of individuals for which data was requested. The court likely thought that was simply not possible for one or two people to do that, because being personally engaged requires more than a cursory paper check as the government asserted.

The court’s memorandum, in deciding the agency had taken final, reviewable action describes how extensive IRS’s actions were:

Plaintiffs’ factually uncontested allegations show that the IRS spent an unknown amount of money developing the capability to conduct mass transfers of taxpayer information; entered into an agreement with ICE to conduct mass transfers of confidential taxpayer address information; and then completed a mass transfer of confidential taxpayer address information to ICE pursuant to this agreement, all while removing high-level individuals who disagreed about the disclosure process. This marks the consummation of the IRS’s decision-making process. page 40.

The IRS, according to the court’s memorandum, committed multiple violations of the statute in one instance in which it provided ICE with information for 47,000 individuals:

In sum, Plaintiffs have shown that the IRS committed multiple violations of Internal Revenue Code Section 6103(i)(2) when it disclosed confidential taxpayer address information to ICE on August 7, 2025. The IRS’s disclosure of address information for 47,000 taxpayers to a single individual at ICE violated the requirement in Section 6103(i)(2)(A) that the IRS disclose taxpayer information only “to officers and employees of [a requesting] agency who are personally and directly engaged in” a criminal proceeding or investigation. Furthermore, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(i) because the IRS disclosed thousands of taxpayers addresses to ICE without first confirming that ICE provided the “address of the taxpayer with respect to whom the requested return information relate[d].” In addition, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(iv) because the IRS disclosed taxpayer information to ICE even though ICE’s request for disclosure did not adequately set forth the “specific reason or reasons” why taxpayer address information was relevant to a criminal proceeding or criminal investigation under 8 U.S.C. § 1253(a)(1). Finally, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(ii) because ICE’s June 27 request failed to provide “the taxable period or periods” to which its requested taxpayer information related. pages 62-63 (citations omitted).

Regarding the substance of the apparent new address sharing policy:

In sum, Plaintiffs have shown a substantial likelihood that the IRS’s implementation of the Address-Sharing Policy was both arbitrary and capricious and contrary to law. The IRS failed to acknowledge its change in policy and failed to provide a reasoned explanation for its implementation of the Address-Sharing Policy. Furthermore, in implementing the Address Sharing Policy, the IRS failed to consider significant reliance interests that were endangered by its prior policy. Finally, Plaintiffs have shown a substantial likelihood that the Address-Sharing Policy is contrary to the requirements of the Internal Revenue Code. Plaintiffs have therefore made an adequate showing of likelihood of success on the merits as to the Address-Sharing Policy to support a preliminary injunction.

If this is the face of the new IRS, it’s ugly.

The WaPo story says no decision has been made on appeal, but I’m certain it will be, given the administration’s history and the importance it assigns to generating high deportation numbers. Whether this small victory for taxpayer privacy holds is anyone’s guess.

Notes

The New Jersey Department of Revenue, by contrast, estimated that taxpayers who used the system saved $153 per return, as reported by CNET. Not materially different, given New Jersey is a comparatively high-cost state. ↩︎
The story reveals Bessent paid the full Social Security tax, which has a modest income cap, currently $176,100. Obviously, his guaranteed payments exceeded that threshold for each of the years. ↩︎
The memorandum is quite a read WRT the background of the changes in IRS data sharing practices. ↩︎

Tags IRS, OBBBA

income tax tax administration

OBBBA Marketing

OBBA polls poorly

Conventional political wisdom says tax cuts are popular. People don’t like paying taxes and do like when politicians cut them.

TCJA was an exception. For example, a 2018 Pew Poll showed 37% approved and 46% disapproved of its overall long-term effect on the country (without the long-term qualifier the gap was slightly smaller).

Unlike TCJA, OBBBA was not just a tax cut, but a budget bill that cut spending (albeit off in the future) to partially offset the lost revenue from the tax cut. That makes it more challenging politically. Not surprisingly, polling typically finds an approval rate lower than TCJA’s. Pew found 33% approval and 46% disapproval, a 3-percentage point larger gap than for Pew’s 2018 TCJA poll. Small difference and, of course, both are strongly correlated with partisan affiliation.

Refunds to the rescue?

This has the GOP worried.¹ So, their natural reaction is revise how they are marketing it. Everything is a marketing problem. First step is rebranding (i.e., to change the weird name that the Marketeer in Chief gave to it). The NYTimes reports they have settled on Working Families Tax Cut.²

The second step is to stick your head in the sand: “Let’s assume it’s not really a problem because tax cuts are popular.” In a version of this, the Times story says that Republicans are thinking OBBBA’s big refunds will be their political salvation, since the IRS has not put out new withholding tables. According to the Times:

Republicans are also banking on the simple power of direct payments to ultimately buoy the law’s popularity and, in turn, the party’s prospects in midterm elections next year. Under their design, the law will first deliver many of its benefits to American in their tax refunds next year, a lump-sum payment that may make the tax cut particularly visible to voters.

Most of the “cut” is not new, but just an extension of what people already are used to, i.e., the provisions of TCJA that otherwise would have expired. Put another way, TCJA is obviously reflected in current withholding, and its extension won’t generate refunds. Yes, OBBBA layered on new cuts, but they were relatively modest and targeted to narrow constituencies, as the Times story points out:

Republicans did layer some additional tax cuts on top of the extension. While the legislation overall is unpopular, several of these specific ideas, like tax breaks for overtime pay or tipped income, poll well with both parties. But those cuts will be valuable to only a relatively small subset of Americans, not the population overall, potentially limiting their political resonance.

About 3 percent of American workers regularly earn tips, for example, though even some of those workers may not gain anything from the change. Only Americans who owe a lot in state and local taxes will benefit from an expansion of the state and local tax deduction. And only those who buy a new car made in the United States will be able to deduct their auto loan interest.

Favored groups may notice

I thought I would dig a little deeper. The Yale Budget Lab calculated the differential impact of the new provisions versus the TCJA extension. It reports (emphasis in original):³

Many taxpayers will see little-to-no additional tax relief. For tax year 2026, we estimate that about one-third of households will see no additional benefit on top of TCJA extension. Almost half will see a tax cut of less than $100 for the year, and two thirds will see a cut of less than $500.

…

Notable tax cuts are most common in the upper-middle income range. More than half of taxpayers in the fourth income quintile (about $75,000 to $130,000) would see a tax cut of at least $500, and half of top-quintile taxpayers will see a tax cut of at least $1,000. These groups are generally more likely to benefit from the “no tax on…” provisions (including the new senior deduction) and the higher SALT cap.

Tax cuts of $100 will be hardly noticeable. The exact amount of income tax one pays or their typical refund are not very salient, unlike the price of gas which is on big signs everywhere. I would guess most folks only have a general idea of the size of their refund and $75 to $125 more will not particularly stand out. However, a tax cut of $500, which YBL estimates one-third will receive, should be noticed. But I doubt that will matter much politically because of the distribution issue described below.

Because the Joint Tax Committee (JCT) staff prepared estimates under the usual method (present law baseline) and under the Senate’s reconciliation work around (current policy baseline), it easy to filter out the estimated differences in the revenue loss for the TCJA extension versus the new tax cuts.

The new tax cuts for individuals look small compared with the total revenue loss from both the extension and the new cuts. To crudely focus on the tax year 2025 effect, I compared the FY 2025 and FY 2026 numbers.⁴ The total estimated revenue loss was just under $600 billion. By contrast, the new income tax cut for individuals, excluding the business provisions, was about $170 billion, less than a third of the cost.

Probably the bigger problem for the GOP banking on the political benefits of refunds is the concentration of the benefits of OBBBA’s new tax cuts.

The table below lists the provisions, ranked by JCT’s estimates of the revenue loss (a proxy for the tax cut amount). The dollar amounts are for federal fiscal years 2025 and 2026 – i.e., for all of calendar year 2025 and the first three quarters of calendar year 2026. This will capture some of the tax year 2026 effects, since the JCT estimates reflect that people will adjust their estimated payments and withholding during January through September of 2026.

Provision	$ amount	% of total
Expand SALT deduction	(39,247)	22.8%
No tax on overtime	(32,806)	19.1%
Senior deduction	(32,314)	18.8%
Increased std deduct	(26,503)	15.4%
No tax on tips	(10,121)	5.9%
Enhancement of child credit	(10,014)	5.8%
Car loan interest deduction	(7,332)	4.3%
Trump accounts	(7,177)	4.2%
Enhanced rates	(4,948)	2.9%
Enhanced adoption credit	(608)	0.4%
Enhanced child and dependent tax credit	(409)	0.2%
Enhanced dependent care assist	(365)	0.2%
Enhanced employer-provided child credit	(45)	0.0%
Total	(171,889)

GOP political payoff?

The provisions with the largest costs confer benefits on narrow categories of taxpayers. The standard deduction and rate changes apply broadly but are less than 20% of the cut. The senior deduction (another 19%) applies somewhat broadly (TPC estimates about 13% of tax units and half of those over 65). The rest of the cuts – over 60% – are narrowly targeted. Proportionately few households earn material overtime, receive tip income (and have tax), take out a car loan, or had a baby during the year (to get a $1k Trump account).⁵

Expanded SALT deduction

The largest benefit, the increase in the SALT deduction limit to $40k, will narrowly benefit mainly upper middle-income households and often in blue states. Here’s the Yale Budget Lab graph.

Tips and Overtime

The politics are probably going to come down to the refunds generated by the exemptions for tip and overtime pay income, two of Trump’s big headline political points during the campaign.

A preliminary TPC estimate is that the exemption for tip income will benefit 3% of tax units and for overtime pay about 9%.⁶ See the TPC graph below for the distribution of the benefit by income:

This TPC graph shows the distribution of tip income workers by state.

Overtime pay provides a bigger buck exemption and is likely to generate bigger refunds but is also harder to get a handle using government data on who will benefit. The Yale Budget Lab estimates that about 60% of employees qualify for overtime under the Fair Labor Standards Act, but only 8% of hourly employees and 4% of salaried employees regularly collect it.

Midterm benefits?

The political question is whether biggish refunds from expanded SALT deductibility, tips, and overtime pay will help overcome the general antipathy to OBBBA. The crucial focus must be on persuadable or swing voters in the polarized political world we now live in. The vast majority (maybe 90%) of voters are going to vote based on the candidate’s party in almost all cases. That’s even more likely in low-turnout midterm elections. Moreover, these illusive swing voters only matter in the handful of swing districts for House races and states with Senate seats that are actually in play.

Some relevant factors that occur to me:

The benefits (refunds?) from the expanded SALT deduction will be concentrated at the top. Those are not the voters that the Republicans have been gaining ground with; instead, they have been migrating to the Dems. What’s worse for the GOP, the beneficiaries will be disproportionately in blue and purple states. That might help them in arguable competitive Senate races in blue or purple states (Maine, Minnesota, New Hampshire, and North Carolina).
Per the TPC graph, tipped workers are concentrated in red states with Nevada and Wisconsin, two purple states, being the obvious exceptions. (Hawaii is a deep blue state that also has a lot of tipped workers. It’s irrelevant to the political calculations.) That is obviously not a good thing politically for the GOP if they’re looking for an advantage in the midterms. No Senate seat is up in either Nevada or Wisconsin.
Tipped workers are heavily female. According to TPC, over 70% of tipped workers are female. Of course, the Dems do much better with female voters and especially women of color (over 29% of tipped workers according to TPC), the most reliable of the Dems’ base voters. Will the exemption cause a material number of them to instead vote for Republicans? I doubt it. That is probably not good news for the GOP.
Gaming out the effect of the overtime pay exemption is more difficult because of the lack of data. My perception is that unionized workers in the private sector, particularly in manufacturing, and public safety employees (cops and firefighters) are the prime recipients of regular and larger amounts of overtime pay. The GOP already does well with both groups. Cops and firefighters are the outliers among public employees – their partisan allegiance tends Republican. It doesn’t seem like a fertile hunting ground to look for voters to swing from the Dems to the GOP.
More fundamentally, I’m dubious about the political benefits of modest increases in income tax refunds. I suspect that most voters look to the future, rather than rewarding politicians for what they have already done. The tips and overtime pay were modestly big issues in 2024 campaign, Trump won, and the expectations are already baked in. I don’t think the Dems got much mileage in the 2022 midterms out of their generous increase in the child tax credit in the 2021 American Rescue Plan. That expansion had a much broader and more dramatic effect. Its benefits ($85 billion/year) exceeded in dollar terms the sum of the exemptions for seniors, tips, and overtime pay.

Bottom line: I don’t think refunds will bail out GOP from adverse public perceptions of OBBBA. That does not mean opposing OBBBA will be a winning midterm campaign issue for Dems, though. That will depend upon political messaging, media coverage, campaigning, and (potentially) random events (recall how 9/11 threw the 2002 midterms to the GOP).

I know little about effective political messaging, but I’m highly skeptical of what appears to be the Angie Craig approach (see note 1) that muddies what should be unambiguous Dem opposition to OBBBA. Key points in my amateur attempt:

Unaffordable: We can’t afford to borrow money to hand out more tax cuts. That’s what OBBBA does. Federal debt is at unsustainable levels. To the extent they’re paying with tariffs (plenty Trump quotes to cite), that’s anti-growth and a tax that falls heavily on low- and middle-income people.
Unfair: OBBBA is both tilted to the top and picks favorites (tips, overtime pay, car loans, etc.). Sure, tipped employees are deserving and often underpaid, but why should they pay less tax than a factory or warehouse worker with the exact same income? Unless you believe in the fiscal fairy, exempting some means everybody else pays more or gets less.
Cuts crucial services: Cuts to health care (Medicaid and failure to extend ACA tax credits) and food aid (SNAP) hurt many people across all parts of the country, rural and urban, Republican and Democratic.
In short, don’t do anything to imply OBBBA may be okay/good, if only they had modestly changed its emphasis.

Silver Lining

One glimmer of light is that the administration’s political concerns about making sure that OBBBA is administered (i.e., the 2025 tax filing system works smoothly and the refunds get paid) likely means that the IRS will be saved from shutdown revenge reeked on “Democrat agencies.”

That appears to be the case so far. See this table from the NY Times that shows only 2% of Treasury employees have been furloughed:

Environmental Protection Agency — Sources: Official government agency websites; numbers for the Treasury are partial and exclude two small subagencies that have not yet released plans.

Education — Sources: Official government agency websites; numbers for the Treasury are partial and exclude two small subagencies that have not yet released plans.

Agency	Total employees	Planned furloughs	Share
Environmental Protection Agency	15,166	13,432	89%
Education	2,447	2,117	87
Commerce	42,984	34,711	81
Labor	12,916	9,792	76
Housing and Urban Development	6,105	4,359	71
State	26,995	16,651	62
Energy	13,812	8,105	59
Interior	58,619	30,996	53
Agriculture	85,907	42,256	49
Defense (civilian work force)	741,477	334,904	45
Health and Human Services	79,717	32,460	41
Small Business Administration	6,201	1,456	23
Transportation	53,717	12,213	23
Social Security Administration	51,825	6,197	12
Justice	115,131	12,840	11
Office of Personnel Management	2,007	210	10
Homeland Security	271,927	14,184	5
Veterans Affairs	461,499	14,874	3
Treasury	81,165	1,736	2

This Bloomberg article says that if the shutdown persists, IRS plans to lay off 35,000 employees but not those “working on filing season activities, implementing legislation, and IT modernization.” Getting refunds out and implementing their new law is “essential” collecting tax (auditing and exam) is not. Got it.

Notes

Perversely, some Dems, including Angie Craig, are worried (WSJ) but for the opposite reason – parts of OBBBA poll well (e.g., exempting tips and breaks for seniors). The response is to expand them. Yikes. Bad policy idea and it endorses a fundamental flaw in the OBBBA’s strategy, government borrowing to hand out tax cut goodies to favored constituencies. It’s bad both because we can’t afford them and they’re unfair, treating people with the same incomes unequally. All this reflects the uncertainty of political winds and why politicians that try to sail with them, rather than expressing their core convictions (e.g., like AOC and Bernie on the left or Liz Cheney on the right do), look like Caspar Milquetoast. Not what inspires confidence in a leader IMO. ↩︎
I’m sure that the Dems will be in the rebranding business too, claiming OBBBA really stands for One Big Billionaires’ Bailout (or Benefit) Act or something catchier. ↩︎
Because these estimates are for next year (2026), they are likely slightly higher than the 2025 refund effect, but close enough for our purposes. ↩︎
That captures a fair amount of the tax year 2026 effect as well, unfortunately. ↩︎
That assumes they know enough to apply for a Trump account for their baby. Will applications be included in hospital packages for new parents? I would not be surprised if the administration provides a presidential letter claiming responsibility – similar to Trump’s rebate letters during COVID. ↩︎
Of course, it would be no surprise if a lot more tip income miraculously appears (compared to the estimates), once it is exempt. Congress left many issues to the IRS and there is a fair amount of grey area for the aggressive to game, legally or illegally. ↩︎

Tags OBBBA

income tax tax administration

EV = EVery year

Reading pro se tax court case can be amusing and head scratching. As in how could you actually make the court spend so much time on this meritless case?

Case in point: Artena and Kenneth Moon v. CIR. The court disallowed the taxpayer’s claim of a $7,500 EV credit for their Chevrolet Volt in tax year 2019. They bought the car in 2013 and claimed the credit in that year and every year after until the IRS issued a NOD for TY 2019. Makes one wonder what took the IRS so long?

Apparently, taxpayers thought they were placing the car in service each year and, thus, should get the credit each year. The opinion explains what “placed in service” means based on regulations for other Code sections (i.e., a one-time event, the first time you start using a piece of equipment in simplistic terms), and observes:

Accordingly, petitioners’ Chevrolet Volt was placed in service in 2013. We note that prior to the year in issue, petitioners had claimed the maximum $7,500 one-time section [IRC section] 30D credit on their 2013, 2014, 2015, 2016, 2017, and 2018 tax returns. The credit was allowable only for the taxable year petitioners’ vehicle was first placed in service. Petitioners certainly were not entitled to the credit relating to 2019.

Editorial aside: the court’s modifying “placed in service” with “first” is redundant. Judge Foley probably thought it was appropriate to provide clarity and emphasis. I suspect the taxpayer wonder why “first” was not in the instructions/form or the Code.

The taxpayers went through all the necessary procedural steps to get their case heard and decided (37 docket entries in Dawson). I guess they must have bought the narrative that these credits are truly the Green New Scam – otherwise, how could they think they could get tax credits that well exceed what they paid for the car (>$52k, in their case)? Yikes.¹

Their reward: the IRS relented on imposing the accuracy-related penalty. I assume they have gotten NODs for one or two back years, and the accrued interest will likely be substantial. But the statute has surely run on multiple of those years (NOD in the case was issued 5/18/2021; by that point the SOL had run for 2014, 2015, and 2016). It’s likely they came out ahead. Idiocy has its rewards.

Note

If it seems too good to be true, a rational person pauses and double checks. FWIW, the relevant form requires entry of the specific day the vehicle was place in service. The logical conclusion is there is only one day for each taxpayer and car, I’d think. The IRS must have considered this to be self-explanatory; there are no instructions for that line of the form. And nowhere that I can see did the IRS information say the credit was one-time or similar. I suppose these taxpayers entered January 1 for each of the relevant tax year after 2013, the year they purchased and starting using the car, figuring that was the day they put the car in service for that tax year. ↩︎

tax administration

IRS News

Who qualifies for tip exemption?

One of Trump’s dumb tax ideas¹ that Congress codified in OBBBA is an exemption for tip income. Congress, as it often does, punted the details of which occupations qualify to the Deep State (i.e., the IRS).

Axios is out with a story that reports that the IRS will release proposed regulations that designate the qualifying occupations. The list looks consistent with my expectation of which jobs are generally tipped, except:

Home Electricians
Home Plumbers
Home Heating/Air Conditioning Mechanics and Installers

Maybe I’m just a cheapskate or miser, but I have never considered tipping a plumber or electrician. I recently had a new furnace installed and did not tip the two HVAC installers. I should check with Phil Krinkie, one of my old tax chairs who runs an HVAC company, to see how often his employees get tips (maybe they don’t disclose it to their employers?). Maybe it’s a regional thing?

Insider trading

A recent study published on SSRN by three University of Florida accounting professors has some troubling findings about potential insider stock trading by IRS employees. Here’s the abstract:

We investigate the information content of personal stock trades by IRS officials. We collect transaction-level data on over five thousand IRS officials’ personal investments and document substantial trading activity in individual stocks by officials across IRS departments. We find that IRS officials’ trades, predominantly their purchases, generate positive abnormal returns on average, consistent with officials’ information being not yet fully impounded into stock price. Next, we examine whether stock trades by these officials are associated with the firm’s future tax enforcement outcomes. For a given firm, we find IRS officials’ purchases are associated with subsequent decreases in tax reserves and specifically lapses in the statute of limitations. We also find that IRS officials’ sales are associated with subsequent unfavorable tax settlements. These findings suggest that IRS officials possess, and trade on, material tax-related information and that these trades are associated with future tax enforcement outcomes for firms.

A slightly longer and more readable description than the abstract, written by the authors, was published in the Milken Review.

I haven’t carefully read the study, but it looks statistically sound. As a policy problem, insider trading by IRS employees probably pales in comparison with stock trading by members of Congress based on their nonpublic access to information. But it should be addressed by the Service, both as a matter of probity and to maintain public confidence in tax administration. I’m sure doing so in an enforceable and sensible way will not be simple.

Data sharing with ICE

Litigation over the IRS sharing data with ICE for immigration enforcement is ongoing. One case upholding the data sharing is on appeal to the DC Court of Appeals, while another is still in the DC district court.

I assumed that it was illegal for the IRS to provide addresses of ITIN filers to ICE to enforce immigration law. That is what the IRS Manual (see clause 5) says. The statute ((2)(B)(i)) says a qualifying request must include the individual’s address. A natural conclusion is you can’t make a blanket request just to get addresses by asserting an investigation of criminal immigration violations. That appears to me to be what was done here.

Well, the government’s response is that if you provide an address, you can get the current address. With an administration that increasing appears to operate in questionable faith, that would be a major opportunity for mischief. See here (pages 28 – 33) for the government’s substantive arguments as to why it complied with the statute. The case, of course, involves a host of standing and jurisdictional type arguments.

We’ll see how this turns out. I’m not optimistic that the interests of tax compliance will prevail over enforcement of immigration law.

Shift on basis shifting

The IRS has withdrawn its 2024 notice on basis shifting tax shelters in favor of putting out a likely more taxpayer friendly version.

A NY Times article, Trump Administration Halts I.R.S. Crackdown on Major Tax Shelters (9/9/2025), reports on this rollback. These basis shifting shelters were the tax shelters deals of the decade and involve a lot of revenue.

The article also reports on congressional efforts to reign in the agency by members of Congress, which is troubling to me since I consider Larry Gibbs to be a very credible and neutral observer:

In late July, 20 House Republicans asked the I.R.S. to withdraw yet another line of attack on the transactions, one providing guidance to auditors on how to analyze the tax shelter deals.

That letter was “an attempt by elected officials to influence audits by the Internal Revenue Service of specific taxpayers,” said Larry Gibbs, who served as President Ronald Reagan’s I.R.S. commissioner. “From the standpoint of the integrity of the system, I am concerned about it. It’s politicizing the tax process.”

The I.R.S. is also turning on its own staff. Over the past several months, right-wing groups targeted the agency, accusing officials involved in the anti-tax-shelter efforts of being members of a “deep state” and biased against Republicans. The I.R.S. suspended several employees, including some who worked on the crackdowns. The highest-level official, Holly Paz, is a longtime, respected agency official who ran the division that oversees large business and was placed on leave in late July.

“Based on my experience with Holly Paz, over a number of years, she is experienced, she is professional and she has been a leader at the I.R.S.,” Mr. Gibbs said. He added, “I don’t find the attack on her to be credible.”

Notes

It’s a bad idea (policy wise, may be not politically) because it violates the cardinal tax principle of horizontal equity by favoring one type of income over others, while making the tax system less economically efficient and more complex. It encourages recharacterizing income, avoidance, and evasion. Dumb all around, even if tipped employees are a generally deserving class of potential beneficiaries of tax largesse. ↩︎

Tags donald-trump, immigration, IRS

tax administration

Long goodbye

Less than two months into his stint as commissioner of the IRS, Billy Long is out and heading to Iceland as its new ambassador (assuming the Senate confirms him, as it does virtually all of Trump’s appointments). Given that he was totally unqualified for the job, that seems like a good sign to me.

Here’s an excerpt from the NY Times article that broke the story:

Billy Long, the former auctioneer and Republican congressman who was confirmed less than two months ago as head of the Internal Revenue Service, has been abruptly removed from the post by President Trump, the administration disclosed on Friday.

Mr. Long, who had little background in tax policy beyond promoting a fraud-riddled tax credit, had clashed at times with Treasury Secretary Scott Bessent during his brief tenure, three people familiar with the decision said. He also made high-profile mistakes, at one point last month telling tax practitioners that the agency’s all-important filing season would start late next year, a statement that the I.R.S. later said was premature.

A gregarious and colorful personality, Mr. Long had tried to cultivate a connection with the depleted and demoralized I.R.S. work force. He visited I.R.S. locations around the country and repeatedly sent emails to all I.R.S. employees allowing them to leave work early on Friday afternoons.

“With this being Thursday before another FriYay, please enjoy a 70-minute early exit tomorrow. That way you’ll be rested for my 70th birthday on Monday!” Mr. Long wrote to staff on Thursday.

I suspect that somebody in the administration realized that with the depletion of the agency’s staff and the challenge of implementing the myriad tax changes under OBBBA, having someone competent in charge was critical. Trying to cultivate employee morale by giving blanket time off, when the agency is facing massive and critical workload is not a good look.

A disastrous (or just bad) 2026 filing season, major glitches in implementing OBBBA, or similar would all be bad heading into the midterms, to state the politically obvious.

He was on a very short lease, according to the story, which reports that Long told colleagues he needed Treasury Secretary Bessent’s approval for “everything he did at the I.R.S. * * *.”

I take this as a good sign. But that’s like celebrating that you can salvage the toy after spilling the contents of your box of Cracker Jacks on the dirty floor. The administration has done nearly everything possible to wreck the agency. Cashiering an incompetent leader is a baby step forward. I’ll withhold my judgment until they nominate a replacement and enact a budget for the agency. It may be that the submarine’s dive has leveled off but I wouldn’t get my hopes up.

Former commissioner Koskinen had a nice quote, understated but capturing the reality, in the Times story:

“It has to be a new American record for the shortest I.R.S. tenure [for a Senate-confirmed commissioner] in history,” he said. “Obviously, he had no background in tax and no background in management. You give him a 75,000-person agency in charge of the tax code, and it is a bit of a challenge.”

Tags IRS

Trump Sues the IRS

Leadership Shakeup

Relying on IT

Dumb defunding

Status of IRA funding increase

They write letters (on CI)

About your retirement package

TAS annual report

TPC/Brookings webpage

Will AI save the IRS IT modernization?

Trump accounts

Who’s a socialist?

Filing season

Flagging audits

Need to assure donors? Just ask.

Direct file ends

Giving away tax base

Conflicts at the top

MAGA mugging

ICE data sharing case decided

OBBA polls poorly

Refunds to the rescue?

Favored groups may notice

GOP political payoff?

Expanded SALT deduction

Tips and Overtime

Midterm benefits?

Silver Lining

Who qualifies for tip exemption?

Insider trading

Data sharing with ICE

Shift on basis shifting