Form 56- Notice Concerning Fiduciary Relationship

Form 1040-Final Individual Income Tax Return and the State Tax Return

Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return 

TAX FILINGS FOR ESTATES AND TRUSTS

FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP

This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address.  By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.

FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN

The decedent’s final individual tax returns, Form 1040 and state return.  The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.

FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN

This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time.  It does not report income and it is not an income tax return.

The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.

There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:

• real estate
• a closely held business
• partnership interests
• jewelry
• art, antiques, and collectibles

The return is required if the net value is in excess of $5.43 million in 2015.  This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.

The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE).  In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.

The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months.  The extension is for filing, not paying. The estate tax is due by the original filing date.

FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN

Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31.  It is important to keep track of income and deductions during these two periods of time.

FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN

• Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
• Gifts are never taxable to the recipient.
• Gifts may be taxable to the giver. 
• You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
• All gifts and the net estate value are totaled on the Form 706.
• Annually, any gifts in excess of $14,000 are reported on the Form 709.
• The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.

What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values

 FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE

 What is Proposition 60?

Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).

 What is Proposition 90?

Proposition 90 has the same provisions and qualifications as Proposition 60.  The difference is that it allows base year transfers from one county to another county in California.  The only counties that have adopted an ordinance to allow values from other counties are:

o    Alameda

o    El Dorado

o    Los Angeles

o    Orange

o    Riverside

o    San Bernardino

o    San Diego

o    San Mateo

o    Santa Clara

o    Ventura

This list can change at any time.  Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.

How do I qualify for these property tax benefits?

1. Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
2. Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
3. As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
4. The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
5. The replacement dwelling must be of equal or lesser value than the original property.
6. The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
7. Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
8. The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
9. Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.

Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?

Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.

Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?

 No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.

What is meant by "equal or lesser value" than the original dwelling?

In general, "equal or lesser value" means:
 
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.

105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.

110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.

Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?

 No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.

If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?

No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.

May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?

No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify.  See the FAQ’s below re Propositions 58 and 193.

Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?

Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified.  You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling.  In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.  

You and your spouse, as the claimants, will use your "one time only" benefit.  An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.

Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?

No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.

May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?

No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.

What if I am the co-owner of a property with more than one residential unit?

 A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).

Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?

Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.

Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?

No. Both properties must be within Orange County. 

Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?

You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.

If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?

Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.

However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.

May parents transfer the family home to their children without a property tax reassessment?

YES.  Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence.  The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.

May parents transfer other property to their children without a property tax assessment?

Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment. 

May grandparents transfer property to their grandchildren without a property tax assessment?

Proposition 193 expanded the benefits of family transfers of real property to grandparents.  They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.

How do the transferor and transferee obtain the relief of Propositions 58 and 193?

In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by  both the property owner or deceased owner’s estate and by the person to whom title is being transferred.  The Claim must be filed within three years of the date of the transfer of the real property.  It is filed with the county Assessor.

The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

Under the “No Tax on Tips” provision, employees and self-employed individuals may deduct up to $25,000 in voluntary cash or charged tips received in IRS-designated tip-based occupations. Tips must be reported on Form W-2, Form 1099 or directly on Form 4137. The deduction phases out above $150,000 in modified adjusted gross income ($300,000 for joint filers). Self-employed individuals engaged in a Specified Service Trade or Business under Code Sec. 199A and employees of SSTBs are ineligible.

The “No Tax on Overtime” provision permits workers to deduct the premium portion of overtime pay required under the Fair Labor Standards Act. The deduction is capped at $12,500 ($25,000 for joint filers), with a similar income-based phaseout.

The “No Tax on Car Loan Interest” rule allows individuals to deduct up to $10,000 in interest on loans used to purchase new, personal-use vehicles assembled in the U.S. Qualifying loans must originate after December 31, 2024, and be secured by the vehicle. Used and leased vehicles do not qualify. The deduction phases out for income above $100,000 ($200,000 for joint filers).

Finally, taxpayers aged 65 or older can claim a new $6,000 deduction per person in addition to the current senior standard deduction. The deduction phases out above $75,000 ($150,000 for joint filers).

All deductions are available to itemizing and non-itemizing taxpayers. Transition relief for tax year 2025 will be provided.

FS-2025-3

Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

A July Government Accountability Office report highlighted three specific challenges that the agency is facing as it works to improve the taxpayer experience.

GAO noted that "uncertainty about stable multiyear funding hinders efforts to modernize IRS computer systems and offer digital services to quickly resolve taxpayer issues. "

IRS had been using the supplemental funding provided by the Inflation Reduction Act to help address these issues, but those fundings have been a constant target for Republicans in Congress as well as the current Trump Administration, despite regular calls for stable and adequate funding.

The second challenge GAO reported was that "complicated and changing tax laws limit IRS’s ability to offer timely guidance to taxpayers," the report states, though agency officials said it had plans in place to ensure the guidance flowing from the IRS is provided in a manner that is accurate, up-to-date, and available in a user-friendly format.

Staffing was highlighted as the third challenge.

GAO reported that "being unable to hire enough staff trained to help taxpayers can undercut the ability to optimally improve taxpayer experiences. IRS officials said IRS had efforts to boost hiring and training as well as improved systems to enable staff to improve taxpayer experiences."

However, in March 2025, "IRS officials said it was unclear how reductions to the IRA funding and to its staffing will affect these efforts to address the challenges," GAO reported.

The government watchdog also noted that IRS has not established key practices to:

• Define taxpayer experience goals related to service improvements;

• Generate new evidence from measures, analytical tools, and dashboards to track progress with the taxpayer experience goals;

• Involve external stakeholders to help assess the affects of its service improvements on the taxpayer experience; and

• Promote accountability for achieving the taxpayer experience goals.

"IRS officials said establishing an evidence-based approach using these and other key practices has been delayed," GAO reports. "The IRS offices that had been coordinating IRA and taxpayer experience initiatives were disbanded in March 2025 and April 2025, respectively, according to IRS officials."

GAO recommends that the agency "fully establish an evidence-based approach to determine the effects of service improvements on the taxpayer experience."

By Gregory Twachtman, Washington News Editor

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

In a report on trends in compliance activities through fiscal year 2023 dated July 10, 2025, examination starts for partnerships increased 63 percent from FY 2020 (4,106 starts) to FY 2023 (6,709 starts), while examination starts decreased 18 percent in the same time frame from 1,700 to 1,400.

For individuals, the overall combined number of examinations open and closed from FY 2020 through 2023 decreased from 466,921 to 400,446. For individuals with income tax returns of $400,000 or less, the percentage of examinations opened and closed dropped from 94.8 percent to 91.2 percent (442,856 to 365,229) while the percentage of examinations opened and closed for individual income tax returns more than $400,000 increased from 5.2 percent to 8.8 percent (24,065 to 35,217).

"The IRS planned to increase enforcement activities to help ensure tax compliance among high-income and high-wealth individuals," TIGTA reported, adding that it planned to use the supplemental funding provided by the Inflation Reduction Act and that the IRS as of May 2024, the agency plans to audit twice the number of individual returns with more than $400,000 in FY 2024 compared to FY 2023.

However, whether the IRS will be able to meet any compliance goals for both individuals as well as partnerships and corporations is questionable, with agency’s "ability to move forward with hiring efforts in these complex audit areas of corporations, partnerships and high-income individuals is uncertain considering the decreased enforcement funding and recent government staffing cuts."

To that end, the agency’s Field Collection, Campus Collection, and Examination staff is already on a downward trend.

TIGTA reported that the staff decreased from 18,472 employees in FY 2020 to 17,475 in 2023 due to attrition. The Collection staff slightly increased from 7,246 to 7,371 and the Examination staff decreased from 11,226 to 10,104.

"The status of the IRS’s IRA plan, other IRA transformational initiatives, along with the IRS’s hiring plans is uncertain, at best," TIGTA reported. "Although the IRS made substantial progress with hiring 4,048 revenue officers and revenue agents in FY 2024, the recissions of IRA funding, the hiring freeze, early retirement incentives, and future reductions in force present a challenge to improving taxpayer service and enforcing the nation’s tax laws."

The report also noted that in FY 2023, $10.1 billion in enforcement revenue was collected by the Automated Collection System. Field Collection collected a total of $5.9 billion.

In a separate report dated July 10, 2025, TIGTA reported the IRS planned to increase examinations across individuals, partnerships and businesses reporting total positive income of more than $400,000 in FY 2024. The average starts from FY 2019-2023 was 29,466 and the IRS planned to increase that to 70,812. At the same time, the number of returns with a total positive income reported of less and $400,000 is planned to decrease from an average of 452,051 from FY 2019-2023 to 354,792 in FY 2024. But it is not clear whether the agency will be able to meet these targets even though it was on track to meet these goals.

The agency "has not defined key terminology or aspects of its methodology for compliance to meet with these goals as outlined in the 2022 Treasury Directive that higher income earners would be targeted for audit," TIGTA reported. "The IRS stated that the FY 2024 plan was created with the assumptions available at the time. Any subsequent decisions about these issues could affect the effectiveness of future examination plans in meeting compliance requirements."

TIGTA did not make any recommendations in either report and the IRS did not make any comments on them.

By Gregory Twachtman, Washington News Editor

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

In the scenario addressed, a plan administrator issued an $800 designated distribution to a former employee, withheld the correct amount of federal income tax under Code Sec. 3405, and sent the remaining balance by check. When that check went uncashed and was subsequently voided, a second check was mailed. Because the original withholding amount was correct and fully remitted, the IRS has concluded that no refund or adjustment is available under Code Secs. 6413 or 6414, as there was no overpayment involved.

For the second check, the IRS has stated that no further withholding is required if the amount reissued is equal to or less than the original distribution. However, if the new amount exceeds the prior distribution—due, for example, to accumulated earnings—the excess portion is treated as a separate designated distribution subject to new withholding under Code Sec. 3405.

With respect to reporting obligations, the IRS noted that Code Sec. 6047(d) requires a Form 1099-R to be filed for designated distributions of $10 or more. For the first check, the $800 distribution must be reported for the applicable year, with the full amount listed in Boxes 1 and 2a, and the tax withheld in Box 4. No additional reporting is required for the second check if the amount is equal to or less than the original. However, if the second check includes an excess of $10 or more, that additional amount must be reported on a separate Form 1099-R for the year in which the second distribution occurs.

Rev. Rul. 2025-15

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The proposed rules were Reg. §1.382-1, proposed on September 10, 2019 (84 FR 47455), and Reg. §§1.382-1, 1.382-2 and 1.382-7, proposed on January 14, 2020 (85 FR 2061). The proposed regulations would have adopted as mandatory, with certain modifications, (a) the safe harbor net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL) computation provided in Notice 2003-65, 2003-40 I.R.B. 747, based on the principles of Code Sec. 1374, and (b) the “1374 approach,” (as described in Notice 2003-65) for the identification of recognized built-in gain and recognized built-in loss. The IRS considered that the 1374 approach would make it easier for taxpayers to calculate built-in gains and built-in losses and comply with Code Sec. 382(h).

The IRS received critical comments from practitioners on the proposed rules, leading the agency to conclude that further study is needed before issuing any new proposed regulations.

The proposed regulations are withdrawn. Taxpayers may continue to rely on Notice 2003-65 for applying Code Sec. 382(h) to an ownership change before the effective date of any temporary or final regulations under Code Sec. 382(h).

Proposed Regulations, NPRM REG-125710-18

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales.

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales. The agencies reverted the relevant text of the CFR back to the text that was in effect immediately prior to the effective date of this final rule.

Congress passed a joint resolution disapproving the final rule titled “Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales.” The Treasury Department and the IRS were not soliciting comments on this action, nor delaying the effective date.

Effective Date

This final rule is effective on July 11, 2025.

T.D. 10021

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

In the "Fiscal Year 2026 Objectives Report to Congress," National Taxpayer Advocate Erin Collins noted that the 2025 filing season marked the IRS’ "third consecutive year of delivering a generally successful filing season, and by some measures, it was the smoothest yet. Most taxpayers filed their returns and paid their taxes or received their refunds without any delays or intervention from the IRS."

The report highlights that more than 95 percent of individual returns were filed electronically and more than 60 percent of taxpayers received refunds, "the majority within standard processing timeframes."

Despite having a successful season, the agency has reduced its workforce by more than 25 percent since the federal government under President Trump began cutting the federal workforce.

In analyzing what agency functions are affected by this workforce reduction, the report states that "many functions are more visible to taxpayers and directly impact service delivery, while other functions play vital supporting roles in providing taxpayer service and delivering on the IRS’s mission."

Collins in the report when on to encourage Congress ignore requests to cut the IRS budget and ensure the agency is properly staffed and financed.

"The Administration’s budget proposal envisions a 20 percent reduction in appropriated IRS funding next year and an overall reduction of 37 percent after taking into account after taking into account the decrease in supplemental funding from the Inflation Reduction Act. A reduction of that magnitude is likely to impact taxpayers and potentially the revenue collected."

The issues of the workforce reduction could be compounded by the expected permanent extension of the Tax Cuts and Jobs Act.

Collins stated that most of the changes related to the extension won’t take effect until January 1, 2026, "but several provisions impacting tens of millions of taxpayers will likely be effective during the 2025. This suggests additional complexity with taxpayers file their 2025 tax returns during the 2026 filing season and more complexity the following year. In addition, the reduction of more than 25 percent in the IRS workforce has the potential to reduce taxpayer services."

The report also echoed ongoing calls it has made in the past, as well as calls by other stakeholders, to continue to improve its information technology modernization strategy. Collins notes that in recent years, "the agency has made notable strides in modernizing its systems. … If this momentum continues, the IRS will be well positioned to deliver high quality service, enhance the taxpayer experience, and perhaps improve tax compliance at a reduced cost."

She highlighted the improvements that were made possible through the supplemental funding from the Inflation Reduction Act, but added that the Trump Administration has paused indefinitely or cancelled projects and replaced them with nine distinct modernization "’vertical,’ which are technology projects designed to meet specified technology demands."

"While these initiatives are promising, the IRS must provide clear and detailed communication to Congress and the public regarding the objectives, scope, business value, milestones, projected timelines, costs, and anticipated impacts of these nine vertical projects on taxpayer service," the report stated. "Without such transparency, there is a real risk these initiatives could stall or deviate from their intended outcomes."

Collins also made a case for sustained funding for IT improvements, recalling a 2023 blog post where she highlighted that large U.S. banks "spend between $10 billion and $14 billion a year on technology, often more than half on new technology systems. Yet in fiscal year (FY) 2022, Congress appropriated just $275 million for the IRS’s Business Systems Modernization (BSM) account. That’s less than five percent of what the largest banks are spending on new technology each year, and the IRS services far more people and entities than any bank."

By Gregory Twachtman, Washington News Editor

IR-2025-71

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. 

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. ETAAC operates under the Federal Advisory Committee Act and collaborates with the Security Summit, a joint initiative established in 2015 by the IRS, state tax agencies and the tax industry to address identity theft and cybercrime.

ETAAC recommended that the IRS update tax return forms to strengthen security and reduce fraud and identity theft. It also advised the agency to revise Modernized e-File reject codes and explanations, expand information sharing with state and industry partners, and continue transitioning taxpayers toward fully digital interactions.

Congress was urged to support tax simplification aligned with policy objectives, grant the IRS authority to regulate non-credentialed tax return preparers, ensure stable funding for taxpayer services and operations, and prioritize sustained technology modernization. For more information, visit the Electronic Tax Administration Advisory Committee (ETAAC) page.

IR-2025-72

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

Taxes and spending

Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff.  Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect.  Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012.  The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation.  Also, the employee-side payroll tax cut is scheduled to expire after 2012.

Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012.  The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended.  Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000. 

President Obama has talked about trimming $4 trillion from the federal budget deficit.  Approximately $1.6 trillion would come from increased taxes on higher income individuals.  To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals.  Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.

The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff.  House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals.  Revenue could also be raised by limiting or abolishing business tax deductions and credits.  Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.

Possible scenarios

Looking ahead, several scenarios may play out before year-end.  President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets.  President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal.  On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled.  The spending cuts also would kick-in as scheduled.

Filing season

Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems.  Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.

IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT.  In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach.  The IRS appears to be anticipating that Congress will patch the AMT for 2012.  If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.

The IRS also must reprogram its processing systems for the tax extenders.  These tax law changes generally do not require the level of reprogramming the AMT patch requires.  The IRS has predicted that any year-end extension of the extenders will be manageable.

Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

Additional tax on higher-income earners

There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.

The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).

Passthrough treatment

For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.

Withholding rules

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

Planning techniques

One planning device to minimize the tax  would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.

Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.

If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.

To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.

Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.

The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.

If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.

Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.

If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:

• Who are your taxable workers?
• What payroll taxes apply?
• What compensation is taxable?
• When are your payroll taxes due?
• What payroll and other returns should you file?

 Taxable workers

The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.

It's more likely that you hire employees.  In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.

There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.

If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.

What taxes apply

Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.

You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.

Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.

Compensation

Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.

There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.

Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.

Deposit schedule

Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.

Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.

Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.

Forms

If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.

The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.

Penalties are costly

Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.

The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.

You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.

Reporting obligations

Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.

Staying out of trouble with the IRS

Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.