The 2026 filing season looks stable at first glance. However, these numbers only show early processing, not how the system handles pressure. The real challenges appear later, when errors and backlogs build up.

The Event

In the last two years, IRS modernization funding fell from $80 billion to $26 billion. Of that, $15.7 billion is already spent. The rest now partly covers basic operations instead of long-term upgrades.

During this period, the IRS lost about a quarter of its staff, dropping from around 101,000 employees to 72,000. The biggest losses were in taxpayer services and compliance.

As a result, about 1,500 IT and HR employees were moved to process tax returns, which is not their usual job. Training for these new roles started only after the filing season was underway.

The IRS also made a data-sharing agreement with the Department of Homeland Security, but courts later blocked it. Before the block, data for about 42,000 taxpayers was wrongly shared.

The IRS stopped its own effort to reduce paper processing and switched to using contractors. This change caused delays, training problems, and more paper returns piling up.

The Real Driver

Budget cuts and staff losses are the obvious reasons, but that does not tell the whole story.

The main issue is that resources meant for long-term improvements are now being used just to keep things running in the short term.

When funding is uncertain and leaders change often, organizations focus on survival. The IRS used modernization funds to keep the filing season going, moved staff from specialized jobs to basic processing, and tried to outsource key tasks to make up for lost capacity.

Each choice seems reasonable on its own, but together they weaken how the system works as a whole.

The data-sharing case fits this pattern. Giving greater access to taxpayer data was intended to help enforcement, but it clashed with privacy rules. The outcome was expected—the system could not handle the change without problems.

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The Pattern

This is not about mismanagement. It is how the agency adapts when resources are tight.

This series of events is common in large organizations.

First, funding increases with the goal of modernization. The IRS got $80 billion to improve enforcement and operations.

Second, funding is reduced or redirected before modernization is complete. The IRS lost more than two-thirds of that allocation.

Third, the agency uses what is left to keep basic operations going, while long-term upgrades are put off.

Fourth, operational workarounds replace structured systems. Staff is reassigned. Contractors are introduced. Processes become fragmented.

Fifth, failures appear at the margins. Privacy breaches. Processing delays. Training gaps.

This pattern repeats because the incentives are stable. Congress prioritizes short-term fiscal control. Administrations prioritize visible outcomes, such as refund timing. The agency prioritizes keeping the system running.

No actor is incentivized to absorb the cost of long-term disruption in the moment. So the system accumulates that cost over time.

Implications

The immediate effect is uneven service quality.

Early filers see normal processing. Later filers, especially those with complex returns or errors, face delays. Paper filers are particularly exposed because paper processing is slower and more resource-intensive.

The stronger effect is reduced trust in compliance.

The data-sharing incident signals that taxpayer information may be used beyond traditional boundaries. That changes behavior, especially among populations already sensitive to enforcement risk. Lower voluntary compliance reduces revenue without changing statutory tax rates.

The system shifts from a high-trust, high-compliance model toward a more enforcement-dependent model. That is more expensive to sustain and less predictable in outcome.

Lessons for Practitioners

• Stable filing season metrics early in the year do not reflect system capacity under stress; delays tend to surface later in the cycle

• Funding reductions often reallocate resources away from modernization toward basic operations, even when modernization was the stated goal

• Workforce losses in compliance and taxpayer services directly affect both enforcement reach and service quality

• Reassigning specialized staff to general processing tasks signals capacity gaps rather than efficiency gains

• Expanding data access across agencies increases legal and operational risk when existing privacy constraints remain unchanged

Human Element

People within the system respond to incentives rather than mission statements. Employees reassigned to unfamiliar roles often have limited motivation and training. Leadership changes decrease continuity. Contractors face different constraints than permanent staff. Each group acts according to what the structure permits, not necessarily what the system ideally requires.

Forward View

The current structure holds as long as demand remains predictable and error rates stay low. That is a narrow window.

As the filing season progresses into extension deadlines, more complex returns enter the system. That is where processing delays, correspondence errors, and service gaps tend to appear. The system has fewer buffers to absorb that load.

Future cycles will follow the same path unless the underlying constraint changes. Funding volatility and shifting mandates will continue to force short-term adaptations at the expense of long-term stability.

The IRS is not failing. It is operating exactly as a constrained system does when it is required to deliver continuity without the resources or structure to support it.

This is just a budget request from the president, not a law. Congress will decide what actually gets approved.

The Law in Play

This is part of the federal appropriations process governed by Congress, not a change to the Internal Revenue Code.

The proposal sets the funding amounts for both the IRS and its oversight group, the Treasury Inspector General for Tax Administration.

The main question is how to divide the money, not who has control. It’s about deciding how much should go to enforcement compared to taxpayer services and modernization.

Supporters say the changes will improve service and make the IRS more efficient with technology. Critics believe that cutting enforcement will hurt compliance and reduce the agency’s ability to audit.

Timeline

• 2022: Congress provides expanded IRS funding through tax and climate legislation

• Fiscal 2025: IRS funding stands at about $12.3 billion

• January 2026: Funding drops to $11.2 billion, and prior funds are rescinded

• Fiscal 2027 proposal: Administration proposes $9.8 billion total funding

• Present: Budget enters congressional appropriations process

The Larger Story

This debate is not just about budget details. It’s really about the role the IRS should play.

In recent years, changes in funding have sent the agency in different directions. Sometimes the focus is on enforcement and modernization, while other times it shifts to service and cutting costs.

As a result, the agency struggles to plan for the long term. There are periods of hiring followed by layoffs, technology projects that begin but then stop, and enforcement efforts that grow and then shrink.

Oversight is becoming stricter. At the same time, cuts to TIGTA funding mean there will be less outside monitoring, even as the agency faces more pressure to perform.

What It Means in Practice

• Expect fewer audits, especially in resource-intensive areas like high-income and complex filings.

• Review positions that previously relied on low audit risk, especially aggressive structures

• Document support more carefully for positions tied to enforcement-sensitive areas.

• Monitor IRS processing timelines, as staffing and tech cuts can affect delays.

• Watch TIGTA reports less closely tied to enforcement expansion, given reduced funding.

Next Steps

Congress will review the proposal as part of the appropriations process. The funding amounts could change significantly before anything is finalized. The final budget will decide how many people the IRS can hire, how much enforcement it can do, and how much it can modernize for the 2027 tax season.

One More Thing

These funding choices are slowly changing, whether the IRS acts more like a service provider or an enforcement agency.

Holding

The Seventh Circuit decided that §6201(a)(4)(A) lets the IRS assess and collect the full amount of criminal restitution for tax-related crimes, including those under Title 18, and follow its own collection schedule.

Why It Matters

• Confirms broad IRS collection power. The IRS can treat criminal restitution as a tax liability and pursue full collection immediately.

• Overrides criminal payment schedules. The IRS is not bound by installment terms set in the criminal judgment.

• Applies beyond Title 26 convictions. Restitution tied to Title 18 offenses that involve tax loss still qualifies.

• Practical exposure increases. Taxpayers face accelerated collection actions, including liens and levies, regardless of court-imposed payment plans.

Key Facts

• Paul Daugerdas designed and promoted a large-scale fraudulent tax shelter.

• A federal jury convicted him of conspiracy, mail fraud, tax evasion, and obstruction.

• The sentencing Court ordered:

  • 15 years in prison

  • $164.7 million in forfeiture

  • $371 million in restitution

• The criminal Court set a payment schedule of 10% of the monthly income after release.

• The IRS later:

  • Assessed the full $371 million under §6201(a)(4)(A)

  • Treated it as immediately due

  • Filed a Notice of Federal Tax Lien

Statutory or Regulatory Framework

• §6201(a)(4)(A): Requires the IRS to assess and collect criminal restitution “as if such amount were such tax.”

• 18 U.S.C. §3556: Authorizes courts to order restitution in criminal cases.

• 18 U.S.C. §3663A: Mandatory restitution for certain offenses against property, including tax-related fraud.

• §6321: Creates a federal tax lien when a taxpayer fails to pay assessed amounts.

• §6201(a)(4)(C): Bars challenges to the amount of restitution in IRS administrative proceedings.

Arguments

Taxpayer argued:

• §6201(a)(4)(A) applies only to Title 26 convictions, not Title 18 offenses.

• The IRS must follow the criminal Court’s payment schedule.

• The IRS’s actions exceeded statutory authority and raised constitutional concerns.

Government argued:

• The statute applies to restitution arising from tax-related offenses, including Title 18 crimes.

• The IRS may assess and collect restitution as a tax, independent of criminal payment terms.

• The lien and collection actions were authorized under the Code.

Court’s Reasoning

• The statute requires the IRS to assess restitution ordered under §3556 when it relates to unpaid taxes.

• The underlying conviction involved a conspiracy to deprive the government of tax revenue, which qualifies.

• The cross-reference to §3556 shows Congress intended to include Title 18 offenses tied to tax loss.

• Limiting the statute to Title 26 convictions would render the cross-reference meaningless.

• The IRS may treat restitution as a tax liability, including immediate assessment and collection.

• The statute does not require the IRS to adopt the criminal Court’s payment schedule.

• The lien was valid because restitution assessed as tax triggers standard lien rules.

• No constitutional violation arises from parallel civil and criminal enforcement mechanisms.

Result

The Seventh Circuit affirms the Tax Court’s decision sustaining the IRS’s assessment and collection actions.

The Takeaway

Criminal restitution in tax cases is not limited to the criminal judgment. Once the IRS assesses it, the debt is treated like a tax, and the IRS decides how fast to collect it.

Holding

The Court ruled in favor of the government on refund claims for 2019 to 2022 and dismissed the rest for lack of jurisdiction.

Why It Matters

• Reinforces a basic rule: a refund requires proof that taxes were actually paid to the IRS.

• Confirms that IRS account transcripts carry strong evidentiary weight and shift the burden to the taxpayer.

• Highlights that self-generated tax forms without independent support have little value in litigation.

• Shows strict enforcement of administrative exhaustion and sovereign immunity limits in refund and damages claims.

Key Facts

• Taxpayer sought more than $6 million in refunds for 2019–2024 and $1 billion in damages.

• Claims relied on W-2 and Form 941 filings from five entities she owned or controlled.

• Reported wages and withholding were extremely large, including:

  • $50 million wages and $50 million withholding (2020)

  • $150 million wages and $150 million withholding (2022)

• IRS had no record of:

  • Employer payroll filings

  • Deposits of withheld taxes

  • Corporate tax returns for the entities

• IRS transcripts showed no overpayments and no refund due.

• The taxpayer did not file returns for 2023 or 2024.

Statutory or Regulatory Framework

• §7422 allows refund suits only after proper administrative claims have been filed.

• §7433 permits damages for wrongful collection but requires exhaustion and is subject to limited jurisdiction.

• IRS assessments are presumed correct.

• The taxpayer must produce credible evidence to rebut that presumption.

• Sovereign immunity bars suits unless statutory requirements are strictly met.

Arguments

Taxpayer argued:

• Employers withheld taxes exceeding actual liability.

• W-2s, Forms 941, and bank records proved overpayment.

• IRS improperly denied refunds and owed damages.

Government argued:

• No evidence that any taxes were deposited with the IRS.

• IRS transcripts show no overpayments.

• Claims rely on self-created documents with no credibility.

• Jurisdiction is lacking for later years and damage claims.

Court’s Reasoning

• IRS transcripts are presumptively correct and establish that no refund is owed.

• Burden shifted to the taxpayer to produce credible contrary evidence.

• W-2s, Forms 941, and returns were self-prepared and unsupported by independent verification.

• No competent witness or third-party evidence supported the claimed withholdings.

• The alleged business bank statement lacked credibility and showed no IRS deposits.

• Without proof of payment to the IRS, no refund can exist as a matter of law.

• Claims for 2023–2024 failed because no returns or administrative claims were filed.

• The damages claim was barred by sovereign immunity and lack of administrative exhaustion.

Result

Case dismissed with prejudice; no refunds or damages awarded.

The Takeaway

This case is a straightforward example of settled law. The main point is clear: paper claims of withholding mean nothing unless the IRS actually got the money.

Taxpayers who use only their own forms, without outside proof, will not be able to challenge the IRS’s records.

List of Citations

• Lewis v. Reynolds, 284 U.S. 281
  Establishes that a refund requires proof that the government holds taxpayer money.

• United States v. Wales
  Confirms IRS transcripts are sufficient evidence of liability.

• Mays v. United States
  Rejects self-serving tax returns as proof without corroboration.

• 26 U.S.C. §7422
  Governs refund claims and administrative prerequisites.

• 26 U.S.C. §7433
  Limits damages actions for IRS misconduct.

• 28 U.S.C. §2680(c)
  Bars tort claims related to tax assessment and collection.

Holding

The Court rejected the motions to dismiss from the IRS, Treasury, and Booz Allen, so claims of wrongful disclosure under §6103 and §7431 will move forward.

Why It Matters

• Expands exposure beyond formal employees
  The decision allows plaintiffs to argue that a contractor may qualify as a government “employee” under common-law control principles.

• Confirms vicarious liability pathway
  Employers, including contractors like Booz Allen, can face liability for employee misconduct under §7431.

• Signals litigation risk from data breaches
  The ruling keeps alive large-scale claims tied to the Littlejohn disclosures, which involved high-profile taxpayer data.

• Procedural, but consequential
  This is a motion-to-dismiss ruling, not a final decision. Still, it clears a key hurdle and allows discovery to proceed.

Key Facts

• IRS contractor Charles Littlejohn accessed and leaked confidential tax return information.

• Disclosures included data shared with media outlets, including reporting on high-net-worth individuals.

• Littlejohn pleaded guilty to unlawful disclosure under § 7213 and received a 5-year sentence.

• IRS notified affected taxpayers in 2024.

• Plaintiffs filed a class action seeking damages under §7431 for violations of §6103 confidentiality rules.

Regulatory Framework

• §6103
  Requires tax returns and return information to remain confidential unless disclosure is authorized.

• §7431
  Allows civil damages for unauthorized inspection or disclosure of tax information.

  • §7431(a)(1): Claims against the United States for acts by federal employees

  • §7431(a)(2): Claims against non-government persons

• Control test
  A common-law agency standard used to determine whether a worker qualifies as an employee based on the degree of supervision and control.

Arguments

Taxpayer argued:

• Littlejohn served as a government employee because of the IRS's control over his work.

• IRS and Booz Allen failed to implement safeguards to protect taxpayer data.

• Booz Allen is liable for its employee’s actions under a vicarious liability theory.

Government argued:

• Sovereign immunity bars claims because Littlejohn was a contractor, not a government employee.

• §7431 does not permit extending liability under common-law agency principles.

Booz Allen argued:

• §7431 does not allow vicarious liability claims against employers.

• Littlejohn acted outside the scope of his employment.

Court’s Reasoning

• The complaint plausibly alleges that Littlejohn could qualify as a government employee under the control test.

• The IRS exercised detailed supervision, provided tools, and controlled access to systems.

• §7431 does not define “employee,” so courts apply common law agency principles.

• Sovereign immunity does not bar claims at this stage because plaintiffs plausibly allege an employee relationship.

• §7431(a)(2) does not preclude vicarious liability claims against non-government employers.

• The complaint plausibly alleges that Booz Allen failed to supervise and safeguard access to taxpayer data.

• Determining employment status and scope of employment requires factual development, not dismissal.

Result

Motions to dismiss by the IRS, Treasury, and Booz Allen are denied; the case proceeds.

The Takeaway

This decision makes it easier for taxpayers to bring data breach claims related to IRS systems.

If contractors work under government control or within an employer’s scope, both the government and private contractors could face real liability.

List of Citations

• 26 U.S.C. §6103
  Establishes the confidentiality of tax returns and return information

• 26 U.S.C. §7431
  Provides civil damages for unauthorized inspection or disclosure

• United States v. Littlejohn, No. 23-cr-343 (D.D.C.)
  Criminal case confirming unlawful disclosures

• Biden v. IRS, 752 F. Supp. 3d 97 (D.D.C. 2024)
  Supports use of common law agency principles in §7431 context

• Cilecek v. Inova Health Sys. Servs., 115 F.3d 256 (4th Cir. 1997)
  Defines the control test for employee status

• Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989)
  Provides common law factors for employment classification

IRS reports advance pricing agreement activity for 2025

The IRS published its 2025 Annual Report on Advance Pricing Agreements, showing that companies still want both bilateral and multilateral agreements. Processing times are still long because of limited resources and complex cases. The report shows that APAs remain a key way to manage transfer pricing risk.

Why It Matters:

• Confirms APAs remain a primary tool for pricing certainty.

• Processing delays affect planning timelines.

• Reflects sustained cross-border tax complexity.

Takeaway:
Taxpayers continue to accept longer wait times in exchange for more certainty in transfer pricing.

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Senator sues Booz Allen over IRS data breach tied to contractor safeguards

Richard Lynn Scott v. Booz Allen Hamilton Inc.

Senator Rick Scott filed a lawsuit claiming that Booz Allen did not properly protect IRS data, which led to a breach involving contractor systems. The complaint looks at security measures and how third parties access data, rather than focusing on the IRS’s own systems.

Why It Matters:

• Shifts attention to contractor risk in tax data protection.

• Expands liability beyond government agencies.

• Raises the stakes for outsourced IRS operations.

Takeaway:
Now, every contractor involved must take responsibility for protecting tax data.

Court upholds 40% penalty in microcaptive case after finding no economic substance

Royalty Management Insurance Co. Ltd. v. Commissioner

The Tax Court upheld a 40 percent penalty after deciding that the microcaptive arrangement did not have real economic substance under §7701(o). The court found that the structure did not actually change the taxpayer’s financial situation and was mainly set up for tax benefits.

Why It Matters:

• Reinforces the strict application of the economic substance doctrine.

• Confirms continued scrutiny of microcaptive insurance structures.

• Sustains enhanced penalties where the substance is absent.

Takeaway:
Microcaptive structures that lack real substance are still being rejected.

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Court orders IRS to release records in Schiff FOIA fight

Peter Schiff v. IRS

A federal district court told the IRS to release records after a FOIA request about enforcement actions. The court said the IRS did not give enough reason to withhold some materials under the exemptions it claimed.

Why It Matters:

• Reinforces limits on FOIA exemptions.

• Expands access to IRS enforcement-related records.

• Signals judicial willingness to compel disclosure.

Takeaway:
FOIA is still an effective way to require the IRS to be transparent.

IRS proposes updated arbitrage rules for tax-exempt bonds

Internal Revenue Bulletin 2026-14

The Treasury suggested changes to the arbitrage rules for tax-exempt bonds, focusing on how compliance and yield restrictions are calculated. The goal is to update rules that have mostly stayed the same even as market conditions have changed.

Why It Matters:

• Affects issuers and advisors structuring tax-exempt bonds.

• Updates compliance mechanics tied to yield calculations.

• Reflects ongoing refinement of municipal finance rules.

Takeaway:
Arbitrage rules are being updated to better fit today’s markets.

Overall Takeaway

This week showed a balance between transparency and enforcement. Taxpayers continued to look for certainty through APAs. Courts made sure that only real substance, not just structure, was accepted. FOIA cases gave people more access to IRS records. Meanwhile, data security risks are now more about contractors, and Treasury is updating old bond rules. The system is not slowing down; it is becoming stricter about how information and structure work together.

Overview of the Report

The IRS has published its annual report on Advance Pricing Agreements (APAs) for 2025. The report covers the number of applications, completed agreements, processing times, and key trends in the APMA program.

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Why It Matters

• Routine but important: Annual APA reports do not change the law, but they signal how transfer pricing is administered in practice.

• Processing delays persist: Completion times remain long, especially for bilateral APAs, affecting planning timelines.

• Bilateral dominance continues: Most applications and completed cases involve foreign tax authorities, reinforcing treaty-driven enforcement.

• Method consistency: Continued reliance on CPM or TNMM confirms IRS preference for profit-based methods over transaction-based methods.

Key Data Points

Applications (2025):

• 178 total applications filed

  • 23 unilateral

  • 153 bilateral

  • 2 multilateral

Executed APAs (2025):

• 110 total executed

  • 14 unilateral

  • 90 bilateral

  • 6 multilateral

Pending Inventory (year-end 2025):

• 622 pending cases

  • 543 bilateral cases dominate the backlog

Withdrawals:

• 10 applications withdrawn in 2025

Processing Time

• New APAs:

  • ~50 months for bilateral cases

• Renewals:

  • ~38 months overall

Translation: expect 3 to 4 years unless everything goes unusually well, which it rarely does.

Structural and Transaction Trends

Relationships:

• Even split between:

  • U.S. parent with foreign subsidiary

  • Foreign parent with U.S. subsidiary

Transaction types:

• Services dominate APA coverage

• Tangible goods and intangibles follow

Tested parties:

• Non-U.S. service providers increased significantly

• U.S. entities are now less than half of the tested parties

Transfer Pricing Methods

• CPM/TNMM is used in 86% of cases

• Operating margin is the most common profit level indicator

• Berry ratio and return-on-sales are used less frequently

The IRS continues to favor methods that reduce arguments, even if they flatten economic nuance.

APA Terms and Structure

• Average term: 6 years

• Most agreements target at least 5 years

• 23% include rollback years

Adjustments:

• Results outside the range require adjustment to the median or the nearest boundary

Critical assumptions:

• No material business or accounting changes

• Violation can trigger cancellation

Compliance Requirements

• Annual reports are required for each APA year

• IRS reviews compliance contemporaneously

• Documentation must reconcile financial data with APA methodology

Result

The IRS released its 2025 APA report, showing steady demand, a strong focus on bilateral agreements, and ongoing long processing times.g times.

The Takeaway

APAs remain the most organized way to manage transfer pricing risk, but they require a lot of time. The IRS also continues to standardize results using profit-based methods rather than examining each transaction individually.

Filing

The filing alleges negligence, privacy violations, and vicarious liability on the part of Booz Allen, as well as intentional misconduct by the employee responsible for the disclosures.

Why It Matters

• Shifts focus from individual misconduct to system failure
  The complaint reframes the IRS data leak as a failure of contractor controls, not just a criminal act by a single employee.

• Contractor liability is now front and center
  If successful, this theory expands firms' exposure to taxpayer data under §6103(n).

• Treasury’s contract termination becomes key evidence
  The January 2026 termination of Booz Allen contracts is positioned as an official acknowledgment of inadequate safeguards.

• Signals scrutiny of the IRS outsourcing model
  The case highlights structural risk in granting private contractors broad access to sensitive tax data.

Key Facts

• Plaintiff: U.S. Senator Richard Scott.

• Defendants: Booz Allen Hamilton and former employee Charles Littlejohn.

• Timeframe of alleged misconduct: 2018–2021.

• Scope: Hundreds of thousands of taxpayer records were accessed and disclosed.

• Data recipients: Media organizations, including ProPublica and The New York Times.

• Criminal case: Littlejohn pled guilty under § 7213 and received a 5-year sentence.

• Government action: The Treasury terminated Booz Allen’s contracts on January 26, 2026, citing failures in safeguards.

Regulatory Framework

• §6103 governs the confidentiality of tax returns and return information.

• §6103(n) permits contractors to access taxpayer data under strict safeguards.

• §7213 criminalizes unauthorized disclosure of tax return information.

• Contractors are required to implement administrative, technical, and physical safeguards to maintain compliance.

Arguments

Taxpayer argued:

• Booz Allen allegedly failed to implement adequate monitoring, audit controls, and access restrictions.

• Insider misuse was foreseeable due to prior breaches and known industry risks.

• The contractor’s failures allegedly enabled prolonged, large-scale data extraction.

• The 2026 contract termination by the Treasury is cited as confirmation of inadequate safeguards.

• Booz Allen is alleged to be both directly and vicariously liable for the employee’s conduct.

Government posture (implied from prior proceedings):

• Criminal liability rested with the individual employee under §7213.

• Previous enforcement efforts focused on unauthorized disclosure rather than contractor systems.

Legal Theory

• Contractors with §6103(n) access owe a duty to safeguard taxpayer data.

• Insider threats are well-known and require active monitoring controls.

• Failure to detect repeated abnormal access suggests deficient safeguards.

• The extended duration of the misconduct supports an inference of systemic failure.

• The Treasury’s contract termination is presented as evidence of causation and breach of duty.

• Employee access was enabled entirely through contractor systems.

• Therefore, contractor negligence is alleged to have plausibly contributed to the breach.

Result

The complaint seeks compensatory and punitive damages from Booz Allen and the individual employee.

The Takeaway

This case will determine whether IRS contractors can be held financially responsible for failures in access controls, not just for employee misconduct.

If this theory prevails, any firm handling IRS data could face litigation, not merely compliance obligations.

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Holding

The Tax Court upheld a 40% accuracy-related penalty under §6662(i) because the taxpayer’s microcaptive insurance arrangement did not have economic substance and was not properly disclosed.

Why It Matters

• Not a new rule. Strong application. Courts have been rejecting microcaptives for years. This case reinforces that trend and extends it to the enhanced penalty.

• Disclosure is doing real work now. Simply listing “insurance expense” is not disclosure. You need enough detail to flag the issue for the IRS.

• Economic substance still dominates. §7701(o) remains the central filter. If the transaction fails, penalties follow automatically.

• Penalty risk escalates quickly. Once a transaction is deemed to lack economic substance, the jump from 20% to 40% depends almost entirely on disclosure.

Key Facts

• The taxpayers set up a microcaptive insurance arrangement that involved related companies.

• They deducted about $1.1 million in “premiums” as a business expense.

• In an earlier decision, the Court had already found that the arrangement was not real insurance.

• The only question left was whether the 40% penalty should apply.

Statutory Framework

• §7701(o) defines the economic substance doctrine. A transaction must:

  • meaningfully change the taxpayer’s economic position, and

  • have a substantial non-tax purpose.

• §6662(b)(6) imposes a 20% penalty for underpayments tied to transactions lacking economic substance.

• §6662(i) increases that penalty to 40% if the transaction is not adequately disclosed.

• Adequate disclosure requires enough detail to alert the IRS to the nature of the transaction.

Arguments

Taxpayer argued:

• The economic substance doctrine should not apply to microcaptives structured under §831(b).

• The arrangement qualified as a legitimate insurance structure encouraged by the Code.

• Disclosure through return items was sufficient.

Government argued:

• The arrangement was not real insurance and lacked economic substance.

• The doctrine applies regardless of §831(b).

• The returns failed to disclose key facts about the transaction.

Court’s Reasoning

• The economic substance doctrine applies to microcaptive arrangements.

• The arrangement failed the objective test because there was no real risk transfer or change in economic position.

• Funds circulated among related entities and effectively returned to the taxpayer.

• The arrangement failed the subjective test because the primary purpose was tax reduction.

• Premiums were excessive relative to the underlying risk.

• The taxpayer did not meaningfully investigate or obtain real insurance coverage.

• The tax return disclosed only a generic insurance deduction, which did not provide enough detail to alert the IRS.

• Since the transaction lacked economic substance and was not properly disclosed, the 40% penalty was applied.

Result

The Tax Court ruled in favor of the 40% accuracy-related penalty.

The Takeaway

Microcaptive cases now involve more than just the loss of deductions. If the arrangement lacks real economic substance and the tax return does not clearly explain it, the penalty rate can double.

List of Citations

• §7701(o)

  • Defines the economic substance doctrine and its two-prong test.

• §6662(b)(6)

  • Imposes 20% penalty for lack of economic substance.

• §6662(i)

  • Increases penalty to 40% for nondisclosed transactions.

• Patel v. Commissioner, 165 T.C. (2025)

  • Clarifies when the economic substance doctrine applies and how disclosure is evaluated.

Holding

The district Court gave both sides a partial win. It found the IRS did a proper search for Schiff’s first FOIA request but did not justify withholding records under Exemptions 5, 7(A), and 7(E). The IRS must process most of Schiff’s second request, except for one broad part about unnamed foreign tax authorities.

Why It Matters

• This decision is a significant FOIA setback for the IRS. While the agency succeeded on the search issue, it lost on the more important question of disclosure.

• The opinion makes clear that generic explanations are insufficient to satisfy FOIA exemptions. Agencies have to explain why an exemption applies and how releasing the records would actually cause harm.

• The Court draws a practical line on broad keyword requests. Requests tied to specific names or terms can be valid even if they are large.

• This case is not about tax enforcement against Schiff or Euro Pacific Bank. It is about how the IRS must handle records requests under FOIA.

Key Facts

Peter Schiff sent two FOIA requests to the IRS after Euro Pacific International Bank was shut down in 2022. This happened after public statements from the Joint Chiefs of Global Tax Enforcement (J5), an international group that includes the IRS.

Schiff’s first request, filed in 2023, asked for records related to two J5 press conferences. He wanted things like recordings, transcripts, media lists, website materials, and communications involving former IRS Criminal Investigation chief Jim Lee.

The IRS found 473 pages of records that matched the request. It withheld 264 pages in full and withheld parts of another 172 pages.

The second request, filed in June 2024, was much wider in scope. It asked for twenty types of records mentioning Schiff, his bank, J5, “Atlantis,” “OCIF,” and different tax authorities.

The IRS said the second request was too broad and not clearly described. Since the parties could not reach an agreement, both sides asked the Court to decide the case.

Statutory Framework

FOIA requires agencies to produce nonexempt records when the request “reasonably describes” the records sought.

An agency defending its response generally must show two things:

• It ran a search reasonably calculated to find responsive records.

• Any withheld records fall within a FOIA exemption.

After FOIA’s 2016 amendment, that is still not enough. The agency must also show foreseeable harm, meaning a concrete reason disclosure would harm the interest protected by the claimed exemption.

The exemptions at issue were:

• Exemption 5, which covers certain privileged internal agency materials, including predecisional deliberations.

• Exemption 7(A), which protects law enforcement records whose release could interfere with enforcement proceedings.

• Exemption 7(E), which protects law enforcement techniques, procedures, and certain investigative guidelines.

Arguments

Taxpayer argued:

• The IRS did not conduct an adequate search in response to the first request.

• The IRS improperly withheld records under FOIA exemptions.

• The second request was clear enough for the IRS to process.

Government argued:

• Its search for the first request was reasonable.

• Exemptions 5, 7(A), and 7(E) justified withholding many of the responsive records.

• The second request was overly broad and failed to provide a reasonable description of the records sought.

Court’s Reasoning

• The IRS succeeded on the search issue because it identified which offices likely held the records, conducted electronic searches of Jim Lee’s materials, performed manual searches elsewhere, and explained these steps in sufficient detail.

• Schiff’s challenge to the search did not succeed because he mainly claimed it was inadequate without showing what the IRS did wrong.

• The IRS lost on Exemption 5 because it used vague descriptions of many withheld documents and failed to connect them to a real deliberative process with sufficient specificity.

• The IRS also did not meet the foreseeable-harm rule for Exemption 5. The argument that releasing the records would discourage internal discussion or cause confusion was too vague and speculative.

• The IRS lost on Exemption 7(A) because it only mentioned “ongoing investigations” without saying which enforcement action or investigation would be affected by disclosure.

• The IRS also lost on Exemption 7(E) because it largely repeated the law’s language and did not explain which specific law enforcement technique or procedure would be revealed.

• For the second request, the Court held that seeking records mentioning “Peter Schiff,” “Euro Pacific Bank,” “Euro Pacific International Bank Inc.,” “J5,” “Atlantis,” “Operation Atlantis,” “OCIF,” and similar terms was sufficiently specific. The IRS could find these records using keyword searches.

• The Court disagreed with the IRS’s argument that the requests were too large. A request is not invalid just because it covers a lot, as long as the records can be identified.

• However, the Court agreed that Schiff’s request for records mentioning the “tax authority, or authorities” of the United States and several foreign countries was too vague. This wording was not clearly linked to a subject, entity, or specific set of records.

• The Court also dismissed the IRS’s objections about the time frame. It found that, based on the context, Schiff’s request covered records dating back to January 1, 2020.

Result

The Court ordered the IRS to release records it wrongly withheld from the first request and to process most of Schiff’s second request, except for the last part about unspecified tax authorities in several countries.

The Takeaway

This opinion is more important for FOIA practice than for tax law, but it still helps tax professionals who deal with IRS records requests. The Court made it clear that the IRS cannot rely on generic exemption claims or vague statements about harm. Broad searches based on names are valid if they clearly show what to look for. Institutions often claim a request is too much work or not specific enough, but the Court recognized these are not the same.

List of Citations

• 5 U.S.C. § 552(a)(3)(A), FOIA reasonable-description requirement for records requests.

• 5 U.S.C. § 552(a)(8)(A)(i), foreseeable-harm requirement added by the 2016 FOIA amendments.

• 5 U.S.C. § 552(b)(5), Exemption 5 for privileged inter-agency or intra-agency materials.

• 5 U.S.C. § 552(b)(7)(A), Exemption 7(A) for law enforcement records that could interfere with enforcement proceedings.

• 5 U.S.C. § 552(b)(7)(E), Exemption 7(E) for law enforcement techniques, procedures, and guidelines.

• Truitt v. Dep’t of State, 897 F.2d 540 (D.C. Cir. 1990), adequacy-of-search standard.

• Oglesby v. Dep’t of Army, 920 F.2d 57 (D.C. Cir. 1990), agency affidavits can establish a reasonable search if they are detailed enough.

• Reps. Comm. for Freedom of the Press v. FBI, 3 F.4th 350 (D.C. Cir. 2021), foreseeable-harm requirement demands a focused and concrete showing.

• Citizens for Resp. & Ethics in Wash. v. DOJ, 746 F.3d 1082 (D.C. Cir. 2014), generic statements do not justify Exemptions 7(A) and 7(E).

• Shapiro v. CIA, 170 F. Supp. 3d 147 (D.D.C. 2016), name-based requests can reasonably describe records.

• Dale v. IRS, 238 F. Supp. 2d 99 (D.D.C. 2002), sweeping requests lacking specificity can fail FOIA’s reasonable-description requirement.

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Holding

The IRS issued proposed regulations updating arbitrage and refunding rules under §§148 and 150, primarily to clarify existing rules, incorporate prior guidance, and address technical gaps.

Why It Matters

• Mostly clarification, not expansion. The proposal formalizes positions already outlined in notices and revenue procedures, so it is largely a cleanup rather than a new law.

• Refund timing rules get clearer. Issuers now have more explicit deadlines to recover rebate overpayments, reducing procedural risk.

• Anti-abuse gaps are closed. The IRS targets technical interpretations that could avoid rebate obligations through valuation or refunding mechanics.

• Student loan bond market gets relief. The rules confirm that certain refinancings of student loans will not trigger taxable advance refunding treatment.

Key Facts

• Proposed regulations under §§148 and 150 update arbitrage restrictions for tax-exempt bonds.

• Focus areas include:

  • Rebate overpayment refund timing

  • Treatment of transferred proceeds

  • Allocation of bond proceeds to expenditures

  • Definitions of “tax-exempt bond” and “refunding issue”

• Comments are due by May 11, 2026.

Statutory Framework

• §103 excludes interest on state and local bonds from income.

• §148 prevents arbitrage, meaning issuers cannot profit from investing bond proceeds at higher yields.

• Rebate rules require excess earnings to be paid to the U.S.

• Refunding rules govern when new bonds replace old ones and whether the tax exemption continues.

Key Changes

1. Rebate overpayment claims

• Filing deadline expanded to align with Rev. Proc. 2024-37.

• Issuers can claim refunds within two years of either:

  • 60 days after the final computation date, or

  • The date of a late payment.

2. Transferred proceeds valuation

• Clarifies that valuation limits apply for all purposes under §148, not just yield restriction.

• Prevents issuers from switching valuation methods to avoid rebate liability.

3. Allocation to expenditures

• Funds must exist at the time of the cash outlay to be allocated.

• Eliminates arguments that later-acquired funds can be retroactively allocated.

4. Definition updates

• Adds certain Treasury-issued certificates (including special 90-day instruments during debt limit periods) to the definition of tax-exempt bond.

• Expands clarity around what counts as “proceeds” in refunding analysis.

5. Student loan refinancing

• Bonds used to refinance qualified student loans within two years are not treated as refunding bonds.

• Prevents inadvertent classification as taxable advance refunding.

6. Administrative updates

• Removes outdated filing addresses.

• Allows the IRS to publish filing locations via website or bulletin.

IRS Position

• Existing regulations created ambiguity in several areas.

• Some issuers interpreted gaps in ways that reduced rebate liability.

• Updates are needed to ensure the consistent application of arbitrage rules.

Practical Impact

• For issuers:

  • Less room for aggressive structuring around rebate and valuation rules

  • Clearer compliance deadlines and mechanics

• For advisors:

  • Prior guidance now has regulatory backing

  • Fewer gray areas to rely on in planning

• For the market:

  • Student loan bond structures get more certainty

  • No major shift in the economics of tax-exempt financing

The Takeaway

This is the IRS doing housekeeping with a purpose. Nothing revolutionary, but it quietly removes a handful of loopholes that creative bond lawyers were probably enjoying a little too much.

Court denies sealing of tax advice tied to return preparation

United States v. Stratics Networks Inc.

A federal district court denied a request to seal tax advice documents related to return preparation. The court determined the materials did not warrant protection over public access, so the documents remain in the record.

Why It Matters:

• Limits confidentiality claims for tax advice tied to filings.

• Reinforces transparency in litigation records.

• Signals risk when advisory work intersects with compliance.

Takeaway:
Tax advice tied to filings may not stay private in Court.

IRS allows withdrawal of §163(j) real estate and farming elections

Rev. Proc. 2026-17

The IRS issued guidance allowing certain taxpayers to withdraw previous §163(j) elections for real estate and farming businesses. The procedure outlines conditions and deadlines, giving taxpayers flexibility to reassess interest limitation strategies.

Why It Matters:

• Provides planning flexibility for affected industries.

• Allows reevaluation of prior election decisions.

• Reflects evolving interpretation of §163(j) rules.

Takeaway:
Prior §163(j) elections are not always permanent.

Bigger refunds are real, but the $1,000 claim looks far off

IRS data shows average refunds reached $3,623 through mid-March 2026, an increase of about 10.8 percent from the prior year. This rise is due to timing and filing patterns, not recent legislative changes. The widely cited $1,000 increase is not supported by current data.

Why It Matters:

• Clarifies the gap between policy claims and actual outcomes.

• Highlights how refund timing distorts perception.

• Grounds expectations in reported IRS data.

Takeaway:
Refund increases are real, but not at the scale being claimed.

Trump v. IRS and the fragility of tax privacy

We examined how the Trump-related disclosure controversy revealed a deeper issue. The IRS holds the nation’s most sensitive financial data, and trust in the system relies on strict data containment. Once that boundary is breached, the system may function, but public confidence is much harder to restore.

Why It Matters:

• Highlights the central role of §6103 in taxpayer trust.

• Shows how insider disclosures can destabilize confidence.

• Raises long-term questions about data governance inside the IRS.

Takeaway:
Tax administration runs on trust as much as law.

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Uber issued false 1099s to non-drivers, lawsuit alleges

A class action lawsuit alleges Uber issued Forms 1099 reporting income to individuals who never drove for the platform. The complaint claims thousands of false filings, potentially exposing affected individuals to IRS notices and compliance burdens for income they did not earn.

Why It Matters:

• Raises risk of downstream IRS enforcement based on incorrect data.

• Highlights reliance on third-party reporting in the tax system.

• Creates potential liability for information return errors.

Takeaway:
When reporting breaks, enforcement follows the wrong signal.

Social Security benefits remain taxable even if later repaid

Michael Smith v. Commissioner

The Tax Court ruled that Social Security benefits are taxable in the year received, even if later repaid. The Court applied standard income inclusion rules and did not permit retroactive adjustments to the original tax year.

Why It Matters:

• Reinforces the annual accounting principle.

• Limits relief when income is later reversed.

• Requires taxpayers to seek corrections in subsequent years.

Takeaway:
Tax follows timing, not hindsight.

Overall Takeaway

This week highlighted the system’s reliance on accurate data and controlled access. Reporting errors, data disclosures, and legal transparency increased public scrutiny. Courts reinforced timing rules and rejected attempts to alter outcomes retroactively. The system is tightening, making concealment increasingly difficult.

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Putting aside the media noise, this situation reveals some important facts about how the tax system and the courts really work.

1. The structural problem: the president on both sides

The lawsuit stems from the leak of tax return information by Charles Littlejohn, a government contractor who illegally accessed IRS databases and disclosed tax data from 2018 to 2020. He later received a prison sentence for it. The leak included information related to Donald Trump and other wealthy taxpayers.

Trump’s lawsuit seeks $10 billion in damages from the IRS for the unauthorized release of his return information.

There is a clear constitutional twist here. Trump is the plaintiff, but the defendant is the United States government. The government is usually represented by the Department of Justice, which is part of the executive branch led by the president.

This creates an unusual situation:

• Trump as a private litigant

• Trump as the head of the executive branch

• DOJ as the defense lawyer for the government

Courts dislike cases where one person can influence both sides. The legal system needs real conflict between parties to work well. If both sides are not truly independent, the court cannot properly test the evidence and arguments.

Luckily, the courts have ways to handle this. A federal court can appoint an independent lawyer or special representative to defend the government’s side. This makes sure the defendant is not under the plaintiff’s control.

This process exists because conflicts like this sometimes happen in constitutional systems. The law expects that people will sometimes run into confusing overlaps of power, so it creates solutions ahead of time.

2. The privacy principle behind the lawsuit

If you ignore the people involved and the politics, the main issue in this case is one of the strictest rules in the U.S. tax system: keeping tax returns confidential.

Under Internal Revenue Code §6103, tax return information is heavily restricted. IRS employees and contractors cannot disclose it except under tightly defined circumstances.

There is a practical reason for this rule, not an emotional one.

The U.S. tax system relies heavily on voluntary reporting. The government asks people to reveal income, assets, business activity, and financial relationships. People comply partly because they trust that information will not become public or political ammunition.

When a breach happens, the harm goes beyond just the person affected. It shows that the system meant to protect this information might not be as strong as people thought.

The Littlejohn leak was one of the biggest IRS data breaches in recent times. It showed that sensitive information could be reached through contractor systems and gaps in monitoring.

Afterward, the Treasury Inspector General for Tax Administration issued dozens of recommendations to tighten internal controls.

Those reforms focused on mundane but critical safeguards:

• stricter access logs

• automated alerts when data is queried

• chain-of-custody tracking for records

• tighter permissions for contractors

Security systems usually do not fail because of a single missing rule. They fail when several small problems happen at the same time.

3. The policy contradiction underneath

At this point, the policy debate shifts from dramatic arguments to deeper structural issues.

At the same time, this lawsuit demands massive damages for a data breach, and federal policy has moved in two directions:

1. IRS funding cuts and rescissions of modernization funds

2. Expanded inter-agency data sharing

Those forces pull in opposite directions. These changes work against each other. Every expansion of access points, whether through contractors or other agencies, increases the surface area for breaches.

Data security improves through:

• modern infrastructure

• monitoring systems

• personnel controls

• auditing and compliance tools

All of those require sustained investment.

Reducing resources while allowing more access does not remove risk. It actually increases it.

Recent controversies around information sharing between the IRS and the Department of Homeland Security illustrate the tension. Each new data pipeline requires new safeguards. Otherwise, the system becomes harder to monitor.

Institutions tend to act in expected ways when their goals or incentives conflict.

4. The broader civic lessons

If you look past the people involved, a few important principles stand out.

First, courts are built to manage structural conflicts. Even when the parties are politically powerful, judges can reshape the litigation structure to preserve independence.

Second, taxpayer privacy is not symbolic. It is one of the pillars that support voluntary compliance.

Third, data systems require constant investment. Security is not a one-time upgrade. It is an ongoing process.

Fourth, expanding data access increases responsibility. The more agencies and individuals who can view sensitive information, the stronger the oversight mechanisms must become.

None of this depends on political alignment with Trump or with his critics. The structural issues exist regardless of who the plaintiff is.

The tax system depends on two fragile forms of trust:

• trust that private financial information will remain private

• trust that neutral courts will resolve disputes with the government

When those structures hold, the system works.

When these structures fail, people eventually notice—usually after something embarrassing has already happened.

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Why It Matters

• §7434 risk is real and mechanical. Each false information return can trigger at least $5,000 in damages. Scale matters more than individual cases.

• Information reporting is a strict system. Errors from identity mismatches create immediate downstream harm, including IRS notices and compliance costs.

• Plaintiff frames this as willful conduct. That is the key threshold under §7434. Negligence is not enough.

• Routine allegation, high-stakes exposure. False 1099 claims are not new, but a nationwide class tied to platform onboarding practices raises the stakes.

Key Facts

• Plaintiff alleges Uber issued a 2021 Form 1099-NEC reporting $1,236.50 of income to him.

• Plaintiff claims he never drove for Uber and received no payments.

• Plaintiff incurred $6,505 in out-of-pocket costs to fix the problem.

• Complaint alleges a broader pattern affecting thousands of individuals.

• Proposed class includes all individuals who received 1099s from Uber without receiving income.

• Statute at issue provides minimum damages of $5,000 per false return.

Statutory Framework

• §7434: Allows a civil action when a person willfully files a fraudulent information return.

• Information return: Includes Forms 1099 reporting payments to contractors.

• Damages: Greater of $5,000 per return or actual damages, plus costs and potential attorney’s fees.

• Reporting rules (§§6041, 6041A): Require accurate reporting of payments over $600 to contractors.

Arguments

Plaintiff argues:

• Uber knowingly allowed drivers to use stolen or mismatched personal information to sign up.

• Uber then reported income under the wrong identities through 1099 filings.

• Uber had sufficient data to detect mismatches but ignored it to reduce onboarding friction.

• Filing false 1099s was willful, not accidental, because the system design enabled it.

Uber position (anticipated from complaint context):

• Any false reporting likely resulted from third-party misuse of personal information.

• Uber may argue a lack of intent or willfulness, which is required under §7434.

• Identity fraud by drivers could be framed as an intervening cause.

The Takeaway

This case is not about a $1,200 reporting error. It is about whether a platform’s onboarding and reporting system can turn identity mismatches into thousands of statutory violations. If willfulness sticks, the math becomes the story.

List of Citations

• 26 U.S.C. §7434: Civil damages for fraudulent information returns

• 26 U.S.C. §§6041, 6041A: Information reporting requirements for payments to contractors

Holding

The Tax Court determined that SSDI benefits received in 2022 must be included in income under §86, even if the taxpayer paid them back in later years.

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Why It Matters

• Annual accounting controls
  Income is calculated for each year separately. Changes made in later years do not change the tax results for earlier years.

• Repayment timing is critical
  Only repayments made in the same year as the benefits were received can reduce taxable Social Security benefits under §86(d).

• Common taxpayer mistake
  Many taxpayers think that if they repay benefits, those benefits are not taxable. This case shows that this belief is incorrect.

• Routine application, not a new rule
  This decision follows long-standing rules. It highlights the risk of not following them, but does not change the law.

Key Facts

• The taxpayer worked for part of 2022 and earned $16,535 in wages.

• He applied for SSDI benefits and got $26,802 in 2022, which included a retroactive lump sum.

• Later, the SSA decided he was not eligible for benefits because he was working.

• He repaid all the benefits during 2023 and 2024.

• The taxpayer did not include the SSDI income on his 2022 tax return.

• The IRS decided that $22,782, which is 85% of the benefits, was taxable.

Statutory or Regulatory Framework

• §61(a) defines gross income broadly to include all income unless excluded.

• §86(a) includes up to 85% of Social Security benefits in gross income.

• §86(d)(2) allows reduction only for repayments made in the same tax year.

• §451(a) reflects the annual accounting principle, which requires income to be included when received.

Arguments

Taxpayer argued:

• He argued that the SSDI payments were an overpayment and were basically a loan.

• He said that since he paid the money back, it should not be taxable.

Government argued:

• The government argued that the benefits were received in 2022 and must be included in income under §86.

• They also said that repayments made in later years do not change the income for 2022.

Court’s Reasoning

• The taxpayer received SSDI benefits. §86 clearly says that Social Security benefits are included in gross income. Social Security benefits are included in gross income.

• The law only allows reductions for repayments made in the same year the benefits were received.

• Repayments made in 2023 and 2024 cannot lower the income reported for 2022.

• The annual accounting rule means that income must be figured out one year at a time.

• The claim-of-right rule applies here because the taxpayer received the money believing he was entitled to it.

• Any relief for repaying the benefits must be handled in the years when the repayment occurred, not in earlier years.

The Court ruled in favor of the IRS on the tax owed, but the government dropped the penalty.

The Takeaway

Timing is key in this situation. If someone gets Social Security benefits in one year and pays them back later, the income stays in the year it was received. Any relief must be handled in the year of repayment.

List of Citations

• §61(a) – Defines gross income broadly.

• §86 – Governs taxation of Social Security benefits.

• §86(d)(2) – Limits repayment offsets to same-year repayments.

• §451(a) – Establishes annual accounting principle.

• North American Oil Consolidated v. Burnet, 286 U.S. 417 (1932) – Claim of right doctrine requiring inclusion when received.

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This is relevant because refund season now serves as a political measure for the 2025 tax law. Republicans cite larger refunds as evidence that the law benefits households ahead of the November 2026 midterms, while early IRS data indicate the gains are real but uneven and still evolving.

The Law in Play

The filing-season change traces back to the One Big Beautiful Bill Act, which the IRS says was signed into law on July 4, 2025, as Public Law 119-21. For individual filers, the most visible new provisions are deductions for qualified tips, qualified overtime, certain car loan interest, and an enhanced deduction for seniors. Taxpayers claim these items on the new Schedule 1-A.

The main question is practical: how much of the new deductions will appear in 2026 refunds, and for which taxpayers? The administration argues the law should materially increase refunds throughout the filing season. However, many new deductions phase out by income, depend on specific circumstances, and may benefit later filers more than early ones.

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Timeline

• July 4, 2025: President Trump signed the One Big Beautiful Bill Act into law.

• September 10, 2025: The IRS published withholding guidance tied to the new 2025 tax law changes.

• January 26, 2026: The White House said average refunds were estimated to increase by about $1,000 per filer.

• March 2, 2026: The IRS released new Schedule 1-A instructions for taxpayers claiming the four new deductions.

• March 10, 2026: Treasury said over 27.5 million returns, or nearly 45% of processed returns, had claimed at least one new deduction.

• March 13, 2026: The IRS reported an average refund of $3,623, up 10.8% year over year.

• Present: Refunds are higher than last year but remain well below the White House’s advertised $1,000 average increase.

The Larger Story

This clearly illustrates the difference between enacted tax relief and visible household benefits. A deduction can be real and legally effective, yet still result in uneven refunds due to eligibility rules, withholding practices, and taxpayer behavior.

It also demonstrates how refund politics reduce tax administration to a single headline figure. This number is easy to communicate but difficult to interpret. Refund size reflects not only tax cuts, but also timing, withholding, filing order, and taxpayer eligibility for new deductions.

What it Really Means in Practice

• Review 2025 returns using Schedule 1-A carefully. The new deductions are separate from the standard itemized deduction process.

• Do not interpret average refund data as evidence that every client benefited equally. These aggregate figures can be skewed by the order in which returns are filed.

• Verify income phaseouts and eligibility rules before assuming refund increases from tips, overtime, car loan interest, or the senior deduction.

• Expect middle- and higher-income households to continue evaluating the political claims, as some targeted benefits may appear later in the filing cycle. This inference is based on the structure of the deductions and current filing-season timing.

• In planning discussions, distinguish between refund amounts and total tax savings. A taxpayer may owe less overall without receiving a large refund if withholding was already adjusted during the year.

The next real checkpoint is the final month of filing season through April 15, 2026. Updated weekly IRS filing statistics should show whether the average refund keeps drifting down along its usual path or starts to reflect more late-filed returns claiming the new deductions.

The main point is not that refunds are small. Still, that tax-law messaging promised a universal result from deductions that actually operate more selectively and in more technical ways.

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Holding

The IRS permits taxpayers to withdraw certain §163(j) elections, make related depreciation elections, revise CFC group elections, and file amended partnership returns for 2022 through 2024 under specified procedures.

Why It Matters

• This transition relief responds to changes in the 2025 legislation that modified interest limitation calculations.

• Elections previously considered permanent may now be reversed for certain years.

• Taxpayers can re-optimize interest deductions and depreciation, directly impacting taxable income.

• Relief is available only through amended filings, with a strict deadline and required coordination among partners and entities.

Key Facts

• Applies to elections made for tax years 2022, 2023, and 2024.

• Covers:

  • Electing real property trades or businesses

  • Electing farming businesses

  • Excepted regulated utility trades or businesses

• Permits withdrawal of these elections and related adjustments.

• Allows amended Form 1065 and Schedule K-1 filings for partnerships.

• The deadline is generally October 15, 2026, or earlier if the statute of limitations expires.

Statutory or Regulatory Framework

• §163(j) limits business interest deductions to:

  • Interest income

  • 30 percent of adjusted taxable income (ATI)

  • Floor plan financing interest

• Certain trades or businesses can elect out of §163(j), but must:

  • Use slower depreciation methods

  • Forgo bonus depreciation under §168(k)

• The 2025 law restored depreciation addbacks in ATI, which may make prior elections less advantageous.

IRS Position

• Taxpayers may withdraw prior §163(j)(7) elections.

• A withdrawal is treated as if the election was never made.

• Taxpayers may also:

  • Make a late election out of bonus depreciation under §168(k)(7)

  • Recompute depreciation and taxable income

• CFC group elections may be changed without the standard 60-month restriction for the first period after 2024.

• Eligible partnerships may file amended returns rather than administrative adjustment requests.

Key Mechanics

• Submit an amended return, Form 1065, or an administrative adjustment request.

• Include a statement referencing Rev. Proc. 2026-17.

• Incorporate all related adjustments, including changes to depreciation.

• Amend subsequent years if they are affected.

• Partnerships must provide revised Schedule K-1s.

The Takeaway

This is a rare opportunity for correction. Taxpayers who previously made unfavorable §163(j) elections may now reconsider, but must act promptly and coordinate amended filings across entities and years.

List of Citations

• Rev. Proc. 2026-17

  • Provides procedures for withdrawing §163(j) elections and filing amended returns

• §163(j)

  • Governs the limitation on business interest deductions

• §168(k)

  • Governs bonus depreciation and related elections

• Bipartisan Budget Act (BBA) partnership rules

  • Controls amendment procedures for partnerships

Holding

The Court denied the defendants’ motion to seal an email containing tax advice because the communication concerned tax return preparation and did not qualify for the privilege under §7525.

Why It Matters

• This case reflects the routine application of sealing law. Courts maintain a strong presumption of public access, particularly for summary judgment materials.

• There is a clear limit on §7525 privilege. Communications related to tax return preparation are not protected, even if they include tax advice.

• Relevance determines disclosure. Courts are unlikely to seal tax-related documents that are central to the merits.

• There is procedural risk. Parties who overstate privilege or do not justify sealing with specificity are unlikely to succeed.

Key Facts

• The government sued multiple entities and individuals, including Stratics Networks Inc. and related parties.

• The case reached the summary judgment stage.

• Defendants sought to seal Exhibit 150, an email from a tax advisor.

• The email included information about shareholder contributions, retirement accounts, and education savings accounts.

• The Court had already allowed limited redactions of numerical values but rejected broader sealing requests.

• Defendants renewed their motion, arguing the document was privileged tax advice under §7525.

Statutory or Regulatory Framework

• §7525 extends attorney-client–like privilege to certain communications with federally authorized tax practitioners.

• The privilege does not apply to communications related to tax return preparation.

• Federal courts apply a strong presumption of public access to judicial records.

• When documents relate to dispositive motions, parties must show “compelling reasons” to justify sealing.

Arguments

Taxpayer argued:

• The email contained confidential tax advice and personal financial information.

• §7525 protected the communication as privileged advice from a tax practitioner.

• The information was not derived from a tax return, so §6103 did not control.

Government argued:

• The document was relevant to the merits and subject to public access.

• The defendants failed to show compelling reasons to seal the material.

• The communication related to tax return preparation was not privileged.

Court’s Reasoning

• The exhibit was tied to a summary judgment briefing and directly related to the merits of the case.

• The “compelling reasons” standard applied due to that connection.

• General claims of confidentiality or competitive harm were insufficient.

• §7525 privilege can apply to tax advice but excludes return-preparation communications.

• The email analyzed prior-year loan information to prepare upcoming tax filings.

• That function placed the communication squarely within return preparation.

• As a result, the privilege did not apply and could not justify sealing.

• Limited redactions of numerical values remained appropriate, but broader sealing failed.

Result

The Court denied the motion to seal Exhibit 150, except for previously approved redactions of numerical values.

The Takeaway

This case serves as a clear reminder that §7525 privilege is limited. Communications that assist with tax return preparation are not protected. Practitioners should not assume all tax advice is privileged in litigation.

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Dropbox paid $35 million in federal income tax on $508.4 million of net income

Dropbox’s 2025 Form 10-K reports $35 million in U.S. federal income tax paid on $508.4 million in net income. The company disclosed $129.39 million in total global cash income taxes paid. This filing demonstrates ongoing efforts to increase transparency in jurisdictional cash taxes.

Why It Matters:

• Provides an additional data point connecting net income to federal cash tax.

• Enhances comparability among technology companies.

• Highlights divergence. Emphasizes the difference between accounting income and tax payments.

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A sequence of events does not constitute a legal claim.

Peter David Schiff v. IRS

We reviewed the Court’s dismissal of Schiff’s lawsuit and its rationale. The Court stated that a series of adverse events does not establish a conspiracy or legal violation without supporting facts. Allegations must link conduct to a recognized cause of action.

Why It Matters:

• Reinforces the standards for pleading in federal litigation.

• Restricts efforts to reinterpret enforcement outcomes as conspiracy claims.

• Confirms that courts require factual connections rather than narrative structure.

Takeaway:
Timing by itself does not establish liability.

IRS publishes April 2026 AFRs and valuation rates

Rev. Rul. 2026-7

The IRS released the April 2026 Applicable Federal Rates, §7520 valuation rates, and related figures used in tax planning. These rates reflect current interest conditions and apply to transactions closing in April.

Why It Matters:

• Impacts related-party lending and estate planning valuations.

• Influences assumptions in charitable planning and annuity calculations.

• Establishes baseline constraints for various transactions.

Takeaway:
Routine rate updates continue to shape tax outcomes.

Bessent drops acting IRS title but keeps control

Treasury Secretary Scott Bessent relinquished the formal title of acting IRS commissioner after reaching the 210-day limit under the Federal Vacancies Reform Act. He continues to fulfill the responsibilities of the role, while IRS CEO Frank Bisignano manages daily operations.

Why It Matters:

• Demonstrates how legal titles and actual authority can differ.

• Raises questions regarding compliance with vacancies law requirements.

• Indicates continuity in leadership despite formal changes.

Takeaway:

Titles may change without altering actual control.

Treasury updates list of countries tied to international boycott rules

Treasury updated the list of countries associated with international boycott activity for purposes of §§999 and 908. This update affects reporting obligations and potential tax consequences for U.S. taxpayers involved in certain foreign transactions.

Why It Matters:

• Affects reporting requirements under Form 5713.

• Affects foreign tax credit calculations and indicates continued monitoring of geopolitical compliance risks.

Takeaway:
Boycott rules remain an active compliance area influenced by global politics.

Overall Takeaway

This week reinforced the distinction between appearance and function. Courts required facts rather than narratives. Leadership changed in title but not in authority. Treasury updated rules that operate quietly yet consistently. Corporate disclosures continued to reveal actual tax payments.

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The disclosure shows U.S. federal and state payments, one specific foreign country, and a general foreign category. It reveals where cash taxes were paid, but does not give a full list by country.

Country-level tax picture

Dropbox’s cash tax payments are divided between the U.S. and other countries. Most were paid in the United States, with a smaller share going to the United Kingdom and other unnamed foreign countries.

The filing lists five categories of cash income taxes paid.

• Federal: $35.0 million

• California: $19.465 million

• Other state and local: $31.869 million

• United Kingdom: $33.665 million

• Other foreign: $9.391 million

In total, Dropbox paid $129.39 million in cash income taxes.

Concentration and scale

Cash tax payments are split between the U.S. and other countries, but most of the payments were made in the United States.

U.S. jurisdictions made up $86.334 million of the total, or about two-thirds of Dropbox’s worldwide cash taxes. Foreign countries accounted for $43.056 million.

Most of the foreign tax payments went to one country.

• United Kingdom: $33.665 million

• Other foreign jurisdictions combined: $9.391 million

So, the United Kingdom accounts for most of Dropbox’s cash tax payments outside the U.S.

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Year-over-year change

Dropbox’s cash flow statement shows it paid $56.9 million in cash income taxes in 2025, $61.0 million in 2024, and $68.2 million in 2023.

This shows that Dropbox’s total cash taxes have gradually decreased over the past three years.

The filing does not include a country breakdown for previous years, so it is not possible to see which countries caused the change.

Dropbox reported an effective tax rate of 17.7% for 2025.

What the numbers suggest

The data shows a moderate concentration in two places. The United States accounts for most of the cash taxes, and the United Kingdom is the primary foreign jurisdiction for these payments.

There is limited detail beyond these locations. The filing classifies the remaining international tax payments under an 'other foreign' category, so we know Dropbox paid taxes in other countries, but those countries are not named.

Dropbox’s effective tax rate is lower than the U.S. statutory rate. The filing explains that this is partly due to foreign tax effects, such as lower rates in Ireland and other countries.

The filing also identifies a legislative factor affecting 2025 tax results. The OBBBA legislation, passed in July 2025, lowered U.S. cash tax payments but increased tax expense due to changes in research expensing, GILTI, and FDII rules. The U.S. and the United Kingdom were the main foreign countries where it paid taxes.

The disclosure highlights a strong focus on U.S. tax payments but provides little detail on Dropbox’s taxes in other countries.

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