Policy updates, data breach response and other IRS developments to watch

5 IRS developments to watch

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With tax season over, the Internal Revenue Service has used the rest of the second quarter to introduce new policy updates, as well as to address a data breach that resulted in a criminal conviction and impacted many taxpayers.

The IRS is reviving the Direct File free tax filing system after a successful pilot program. The agency determined success after analyzing data collected during the pilot, held a number of meetings with various groups of stakeholders and elicited feedback from individual Direct File users, state officials and representatives across the tax landscape. It heard directly from hundreds of organizations across the country, over 100 members of Congress, and from those interested in using Direct File in the future. The agency has also heard from a limited number of stakeholders who believe the current free electronic filing options provided by third-party vendors are adequate.

"We're mindful that the most important decision we made during the pilot was to focus on executional certainty," IRS Commissioner Danny Werfel said during a press call in May. "Accuracy and comprehensive tax credit uptake will be paramount concerns to ensure taxpayers filed a correct return and get the refund they're entitled to. And our North Star will be improving the experience of tax filing itself and helping taxpayers meet their obligations as easily and quickly as possible."

The IRS is simultaneously attempting to recover from a data breach from one of their own former contractors after Charles Littlejohn used his position within the IRS to access and illegally copy tax returns and related documents, which he then provided to the investigative news site ProPublica. This breach has significant implications, not only because of the sensitivity of the data involved but also due to the delayed notification to the affected taxpayers, which only started in April 2024 — long after the breach was discovered and following Littlejohn's sentencing.

Tax professionals now have the responsibility to guide clients through the aftermath of this breach. Mark Friedlich, Esq., CPA, vice president of U.S. government affairs at Wolters Kluwer Tax & Accounting, recently offered suggestions for assisting clients affected by the breach in an AT Think column for Accounting today.

"The IRS data breach has further shaken the public's trust in the tax system," writes Friedlich. "As tax professionals, we have a critical role to play in helping our clients protect their confidential data. We should encourage clients to proactively monitor their tax and financial accounts. and assist them in obtaining transcripts, applying for IP PINs and addressing any suspicious activity. In an era of escalating cyber threats, proactive risk management is essential to protect both your firm and your clients."

Read more about recent IRS developments to watch from Q2.

IRS announces plans to continue Direct File program

The IRS announced plans in May to revive the Direct File free tax filing system that it tested this past tax season, making it a permanent option for future tax seasons and expanding the number of states and tax situations for which it will be available.

The decision comes after a successful limited pilot during this past filing season, in which 140,803 taxpayers in 12 states filed their taxes using Direct File. The IRS invited all 50 states to join the program, along with the District of Columbia.

"We are interested in working with all states that want to partner with Direct File," IRS Commissioner Danny Werfel said during a press call in May. "There will be no limit to the number of states that can participate in the coming year. We are also exploring ways to make additional taxpayers eligible to use the system next year and beyond. Over the coming years, our goal is to gradually expand the scope of Direct File to support most common tax situations, focusing in particular on tax situations that impact working families."

Read more:

IRS plans to make free tax prep permanent

IRS upholds PTIN fee cuts

The IRS announced last October it was slashing Preparer Tax Identification Number fees in response to a lawsuit. The interim final regulations said the application and renewal fee would be reduced to $11, plus an extra $8.75 for payment to a third-party contractor. That's considerably lower than the 2023 fee of $30.75 for renewing or obtaining a PTIN. The move came after a federal district court ruled last year in the case of Steele v. United States that the IRS was charging excessive PTIN fees from fiscal years 2011 to 2017.

No public hearing was requested or held, and no comments were received on the proposed regulations. The final regulations therefore are adopting the text of the interim final rule and proposed regulations without any changes.

Read more:

IRS cuts PTIN fees

Former IRS contractor receives sentence for data breach

Former IRS contractor Charles Littlejohn was sentenced for a crime involving the illicit acquisition and distribution of sensitive data from the IRS, targeting some of the wealthiest individuals and entities in the United States. This breach not only exposed the personal tax information of thousands but also highlighted vulnerabilities within IRS's systems.

The extent of how many taxpayers were affected by the breach was unknown until now. Littlejohn admitted to taking tax information from thousands of wealthy Americans between 2018 and 2020. It's the largest documented data theft at the IRS in history. Notification letters are now being sent by the IRS to affected taxpayers, years after the incidents.

Republicans on the House Ways and Means Committee introduced the Taxpayer Data Protection Act (H.R. 8292) in May in response to the lenient one-year prison sentence and $5,000 fine imposed on Littlejohn. The proposed legislation seeks to significantly increase the penalties for unauthorized disclosure of tax information. Currently, the maximum penalty is a $5,000 fine and five years in prison. The new bill would raise the maximum fine to $250,000 and increase the potential prison sentence to 10 years.

Read more:

Protect your clients and your firm after massive IRS data breach

IRS announces new HSA adjustments

The IRS revealed Revenue Procedure 2024-25 in May, which provides the 2025 inflation-adjusted amounts for health savings accounts as determined under Section 223 of the Tax Code, along with the maximum amount for health reimbursement arrangements under Section 54.9831-1(c)(3)(viii) of the Pension Excise Tax Regulations.

For 2025, the annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan is $4,300, up from $4,150 this year. For calendar year 2025, the annual limitation on deductions for an individual with family coverage under a high-deductible plan is $8,550, up from $8,300 in 2024.

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IRS adjusts HSA amounts for 2025

IRS reveals Strategic Operating Plan update

The IRS announced an update in May of its Strategic Operating Plan, with improvements planned in services and technology for both taxpayers and tax professionals, while dramatically ramping up audit rates on large partnerships, big corporations and the wealthy, as the Treasury and the IRS also released a report on how much they've accomplished on the plan over the past year using funds from the Inflation Reduction Act.

The latest Strategic Operating Plan updates the initial SOP released last April and focuses on five key objectives, including improving taxpayer services, updating technology and developing its workforce.

"These efforts will continue to accelerate as we get deeper into the strategic operating plan and as we continue the work made possible by Inflation Reduction Act funding," IRS Commissioner Danny Werfel said during a press conference in May. "By many measures we have seen an incredible amount of progress since we received this funding less than two years ago."

Read more:

IRS updates modernization plans