It is not surprising that a new Republican administration in the White House would create issues for the Internal Revenue Service. Past Republican administrations tended to starve the IRS for funds, resulting in a decline in audit activity and customer service.
The new administration will have a new Treasury secretary and a new IRS commissioner. New executive orders have already had an impact on the IRS. The last Trump administration placed limits on new federal regulations, and the IRS has been active since the November election in promulgating new regulations. The new Treasury Secretary, Scott Bessent, has indicated that his top priority is extension of the expiring provisions of the Tax Cuts and Jobs Act, many of which expire at the end of 2025.
Executive orders
One executive order of the new administration has placed a freeze on almost all federal hiring. For most federal departments, the freeze only lasts long enough for the departments to prepare plans justifying additional hiring. For the IRS, however, not only the Treasury secretary but also Musk's Department of Government Efficiency are required to approve any resumption in IRS hiring. The agency has been forced to revoke hiring offers to new graduates and others. Legislation has already reduced the $80 billion in funding the IRS received under the Inflation Reduction Act by $40 billion.
An executive order also directed withdrawal of any U.S. support for the Organization of Economic Development's Pillar One and Pillar Two initiatives on international taxation to address base erosion and profit-shifting and a minimum corporate tax. The primary concern of the administration is that countries might be able to tax a multinational corporation doing business in the country if it was not paying at least a minimum corporate tax.
The executive order on Schedule F reclassification of federal workers, if upheld in the courts, could expose more IRS employees to termination by removing their protected status as Civil Service employees.
The Tax Cuts and Jobs Act
Republicans in Congress are still working on how to approach extension of the expiring provisions of the Tax Cuts and Jobs Act. The House is focused on one budget reconciliation bill that would address both border and tax issues, while the Senate would prefer two reconciliation bills, with the tax bill coming later in the year.
There is also some debate about whether extending existing provisions of the Tax Code requires revenue offsets in the legislation. Some Republicans are concerned about adding too much to the federal deficit, and the Republicans need to hold almost all Republican votes together to pass a budget reconciliation bill with a simple majority in both chambers of Congress. The narrow majorities might also force Congress to raise the $10,000 limit on the state and local tax deduction to gain the support of Republicans from New York and other high tax states.
There are also a few business provisions in the Tax Cuts and Jobs Act that started phasing down a few years ago: the expensing of bonus depreciation, the limitation on the business interest deduction, and the research and experimentation expense deduction. Efforts to renew those through last year had proposed retroactivity back to the start of the phase-downs. If those are still retroactive in the tax legislation this year, the changes could retroactively impact 2024 tax returns as well as earlier returns.
IRS regulations
As is common at the end of the year, the IRS released a lot of regulations at the end of the 2024, but also in January before President Trump was sworn in. The first Trump administration had placed restrictions on issuing new federal regulations. Some of the regulatory effort may have been a guard against further regulatory restrictions. IRS regulations are somewhat usual in that regard since taxpayers are often hoping for the issuance of new regulations to provide guidance on ambiguous provisions of tax law, while many other federal regulations may be viewed as a burden to business.
Many of the recently promulgated regulations relate to the clean energy provisions of the Inflation Reduction Act. At the end of 2024 and beginning of 2025, final regulations were issued on:
- The definition of "energy project" for purposes of the Energy Investment Credit;
- The Clean Hydrogen Production Credit and Energy Property Election;
- The Clean Electricity Production and Clean Electricity Investment Credits; and,
- The allocation of the low-income community bonus credit for the Code Sec. 48E Clean Energy Investment Credit.
Plus, proposed regulations were issued on the emission rules for the Code Sec. 45Z Clean Fuel Production Credit, and on the Code Sec. 45W Commercial Clean Vehicle Credit.
The authorization in the Inflation Reduction Act of a study on direct filing of tax returns with the IRS has resulted for 2024 in a Direct File trial program involving 25 states. Republicans seem generally opposed to the Direct File program, although Secretary Bessent has said that it is safe at least for the current filing season.
President Trump has discussed eliminating many of these clean energy credits, especially those related to electric vehicles, although Republicans in some states that benefit from certain of the credits may push for their survival.
Recent regulations in the crypto area include final regulations on digital asset reporting by front-end brokers and final and proposed regulations on digital content and closed transactions. President Trump has also expressed support for the crypto industry, although it is not clear how he views these reporting requirements.
Other recent regulations include:
- Proposed regulations on the Previously Taxed Earnings Credit and basis adjustments;
- Final regulations on retirement of tax-exempt bonds;
- Final regulations on supervisory approval of penalties;
- Final regulations on partnership basis-shifting transactions as reportable transactions;
- Final regulations on certain disregarded payments and dual consolidated losses;
- Final regulations on the resolution of federal tax controversies;
- Proposed regulations implementing catch-up contribution changes;
- Proposed regulations on the executive compensation deduction limit;
- Proposed regulations on corporate separation, incorporation and reorganization matters; and,
- Final regulations on micro-captive transactions and transactions of interest.
Other issues
Congressional legislation has authorized the expansion of Form 1099-K reporting by third-party payment providers of transactions more than $600. The IRS has been delaying implementation of this requirement, and, for 2024, is only requiring reporting of transactions involving more than $5,000 ($2,500 in 2025 and $600 in 2026). Some Republicans have proposed restoring the old $20,000-and-200-transactions limit, or at least keeping it from falling to $600.
President Trump has suggested setting up a separate External Revenue Service to deal with tariff issues.
Summary
The generous funding that the IRS has enjoyed for the last few years seems likely to be coming to an end, perhaps along with improvements in customer service, audits and collections, and system upgrades.
The current tax filing season should be relatively normal; however, the future beyond that is hard to predict. It is likely that significant tax legislation will pass this year; however, with the thin Republican majorities and deficit concerns, the scope of that legislation and possible revenue raisers are also hard to predict. Tariffs may not count as revenue raisers; however, their presence may make some Republicans more comfortable with adding to the deficit in extending Tax Cuts and Jobs Act provisions.
