Shutdown concerns, the quest for tax guidance, the future of IRS service

Sponsored by Thomson Reuters

Melanie Lauridsen, the AICPA’s vice president–Tax Policy & Advocacy, joined the JofA podcast on Tuesday to provide context on the government shutdown and its effect on IRS services, along with discussion on other tax advocacy topics. The interview was conducted the day before the IRS announced that most of its operations were closed and that a plan to furlough employees had begun “for everyone except already-identified excepted and exempt employees.”

In the Q&A, Lauridsen also provided background on shutdowns and their effect on filing season. She also explained why the IRS announcement in September that it was phasing out paper checks for tax refunds has generated so much buzz among practitioners.

What you’ll learn from this episode:

• A history lesson on government shutdowns, which previously went by a different name.
• Why the IRS definition of “filing season” is different than reality for many tax practitioners.
• Why the IRS announcement about ending tax refunds by paper check has been a popular topic among practitioners.
• An example of the guidance “trickling in” on new tax provisions.
• Estimated cost savings for certain businesses as a result of the preservation of the state and local tax deduction for pass-through entities.
• The filing-season concerns that “get ramped up” because of the government shutdown.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Hello, listeners. Welcome to this collaboration episode of the Journal of Accountancy podcast and the Tax Section Odyssey podcast. I’m Neil Amato with the JofA, and for this episode, I’m joined again by Melanie Lauridsen, the AICPA’s vice president–Tax Policy & Advocacy. You’ll hear the conversation with Melanie right after this brief sponsor message.

[Sponsor message]

As of this recording, the afternoon of Tuesday, Oct. 7, the federal government remains shut down. One of several topics we will address is how the shutdown affects IRS service levels. We’ll get right to it. Melanie, welcome back to the podcast and to start, what do taxpayers and tax practitioners need to know about how IRS operations have been affected by previous shutdowns, and what do they need to know specifically about this shutdown, which began about a week ago?

Melanie Lauridsen: First of all, thank you for having me back. And the government shutdown really is something that is at the top of mind of millions of Americans across the country. Before I dive into what we really need to know, I want to provide a little bit of history so that people can understand how this came about.

Officially, what we know as the government shutdown really is a lapse in government appropriations. Really it’s a funding gap, and they date back to 1976. However, back in the ’70s, the shutdowns, they weren’t actually tied to funding gaps. In other words, between ’76 through ’81, there were six funding gaps and they lasted a couple of days, eight to 17 days, but the government agencies themselves were maintained open. So it wasn’t until 1981 where we actually first saw the funding gap combined with an actual government shutdown.

Now the shutdowns since 1981, we’ve had 15 funding gaps, and they’ve lasted anywhere from one day to 34 days, which the 34 days is the most recent government shutdown that we had, which was back in December of 2018 through January 2019. At that time, it actually pushed forward the start of the filing season. It impacted our members and practitioners in that their filing season was a little bit more compressed.

With that in mind, you need to understand what the contingency plan is. Specifically for the IRS, there are two parts to a contingency plan. The first one is filing season and the second one is the non-filing season. This is a point of contention for me, and it really gets under my skin because the filing season viewed from the IRS perspective is that it starts in January and ends in April. The October filing season that, as you know, our members are in the heart of, and it’s very difficult in practice – to me, it was like do or die, you had no choice, you had to get these tax returns done – the IRS doesn’t deem it as a filing season. When you look at a contingency plan, it shows you what their plan is for filing season and non-filing season. Again, the October filing season is considered non-filing.

But when they look at it, they also deem how many people they’re going to keep [working], and the contingency plans, and we’ve seen everything, everything from they’re going to be 100% open to nobody is opening the doors at the IRS. Of course, there’s some pieces in the middle with percentages of people that they furlough.

But to be very clear, there are no winners when there is a government shutdown. There are always delays, there’s always hardships, and there always some impact to taxpayers and to practitioners, too. The current contingency plan came out on Sept. 29 right before the Oct. 1 shutdown.

As of today, like you said, Oct. 7 and we are in the early afternoon, the contingency plan hasn’t been updated. But what that contingency plan said: It said that it would accept 100% of the IRS employees for five business days. What that means is IRS has their doors 100% open for five business days, and guess what today is.

Amato: It’s the fifth business day, yes.

Lauridsen: It sure is, which makes people sit back and wonder what’s going to happen? What was really frustrating to me when I read the plan is they even make a point of saying that they don’t think they’re going to need to use the contingency plan, and therefore they gave zero information with that.

Now, having said that, we have seen the reports coming out that they’re looking at furloughing almost 50% of the IRS employees. I’ve reached out and I’ve connected with some of my contacts, and the truth behind it all, Neil, is no one knows what’s really going to happen after today. The IRS employees, they have not been given an updated contingency plan. They don’t know who has to work and who doesn’t have to work and who will be furloughed or not. Now, my understanding is this 46.6% furloughing of the agency – they are rumors right now, to be very clear. But they have a grain of truth to them, and that is what people are thinking will be happening with this contingency plan.

Amato: Is there a requirement by a certain day, time, whatever, that the IRS post a new contingency plan?

Lauridsen: By law, the contingency plan needs to be updated once a year every year. That’s the law. Technically, Neil, it was updated and there was a new contingency plan. But people really do need to know what they’re going to do. I’m making assumptions here. My guess is that at the IRS [Tuesday night], people are going to head home. If they have laptops, they’re going to take those laptops with them because no one knows exactly who is deemed essential or not essential. If you’re not essential, you’re going to be furloughed.

Just so that you understand what that means to the IRS because I get this question oftentimes. Those that are essential or not essential, nobody gets paid. Nobody is getting paid while the government is shut down. Now, historically, they have retroactively paid the IRS employees their full wages, but that’s not statute, meaning that’s not an automatic given that they’re going to get paid back.

The ones that are essential, that means they still need to show up and they still need to work and provide those services without pay until they are able to get back pay for that. It can be very disheartening for IRS employees right now.

Amato: Yes, in any shutdown, as you said, no winners, and there are plenty of concerns just among the general public. But specific to AICPA membership and tax practitioners, what are the specific concerns as you see them?

Lauridsen: Neil, we definitely have a lot of concerns, and our biggest concern is, and we’ve been very public about it, where we’re saying the IRS needs to be maintained open at 100% to be able to continue to function. Because right now, this particular year, we have H.R. 1 that’s getting implemented, and there’s lots of regulations that we’re looking forward to.

That’s top of mind for us. We also are concerned as this continues to drag on, what does that mean for the start of the filing season which creates again that workload compression for our members and for taxpayers. Then quite frankly, it just jeopardizes compliance overall. Of course, you saw what happened during COVID with the backlogs.

There’s always a risk of future backlogs. Again, we’ve had a lot of concerns. We’ve been very public and we’ve actually had other stakeholders reach out and thank us for being public about it. We’re still going to be pushing those issues.

Their concerns, liens and levies that people are facing. How can they get help during this period of time? If you’ve got questions. Again, I’ve always said this. If our members have a question of the IRS, it’s only the IRS who can answer. It’s not a quick little Google search to give them an answer. There’s a lot of things at play here and like you and I have both said, there just are no winners when there’s a government shutdown.

Amato: Let’s talk now about the IRS saying in late September that it was moving away from paper check  tax refund payments. I guess aligning with Executive Order 1427 from March. We’ll link to our coverage from the Journal of Accountancy in the show notes for this episode. It’s a topic that has been popular among participants in the AICPA’s Town Hall. Why is it a big deal?

Lauridsen: It’s a big deal because we’re in the middle of filing season, but we’re also in the process of doing estimated payments for the next filing season. We’re looking to get refunds, we’re also looking to make payments. When an executive order comes out, the IRS absolutely has to implement it one way or another.

But if you take a good look at the executive order and keep in mind, it is somewhat vague. It does say that payments that are going from the IRS out to taxpayers, need to be in some electronic form starting Sept. 30. Now, IRS confirmed that Sept. 30 date and there was a lot of panic about how do we make our payments electronically?

Because a lot of people will do paper checks. Or what about the elderly who don’t necessarily have the bank accounts to get those deposits, or what about people who live abroad and their bank systems don’t necessarily align. There’s all sorts of scenarios.

What about trusts, where there isn’t a specific person and a specific bank account. With trusts, how do you receive and make those payments? There was a lot of heart palpitations, I would say, around this executive order and the Sept. 30 kickoff date. But we finally did get some guidance, but that guidance is going to come in two pieces.

The first piece of guidance that they clarified and they said that it is the paper tax refund checks for individuals. Meaning the checks that the IRS is cutting to individuals, those will be phased out starting back on Sept 30, as far as they’re allowed to permitted by law. Now, the majority of individuals, I believe the stat is something around 93% of the refunds that they receive, are already in an electronic format.

This isn’t a huge upsetting news. But of course, if you fall into that 7% category, there is no additional guidance for you. Now, the other thing that they made clear is that the payments going to the IRS for now to continue on as business as usual. However you made that payment to the IRS, that’s the way you can do it. Yes, it does include paper checks that can be submitted to the IRS. I get asked that a lot. You can continue on.

The other thing that the IRS also said is that for the next filing season, they were going to provide more details about those electronic payments and refunds and that they would do it before the start of the 2026 filing season.

Again, we’re waiting on that guidance, and if there’s a government shutdown in which IRS closes its door, what does that mean for the next filing season and the payments that we need to make?

Amato: Exactly. Now, you’ve mentioned the legislation that I’m going to bring up now. Obviously over the summer, H.R. 1, PL 119-21, commonly known as the One Big Beautiful Bill Act or OBBBA – all that alphabet soup, all those numbers. It was passed, and now the guidance is starting to trickle in on the numerous provisions in that legislation. What are some of the highlights on what’s been released and on what remains outstanding?

Lauridsen: OK, let me start by saying that a lot of the guidance that we’ve received has been in the form of proposed regulations and also draft forms that we are beginning to see. We haven’t really seen anything final and official and coming out like, “This is it. This is how you move forward.” Of course, the devil’s always in the details.

One of the most notable pieces of proposed regulations that we’ve received has to do with no tax on tips. With it, there were a couple of surprises on how people view certain tax. For example, when you go to a restaurant and you’re with a group, and I think the example in the proposed regs. is if you go with a group of eight people and in the menu it says you get a mandatory service charge of 18%, that would not be a qualified tip. A lot of people are scrambling and they have questions on it and they’re like, is this a loophole? Is this not a loophole? How do you account for this?

And we still have a lot of questions on if you’re payroll processor, how do you account for all of this? How do you account what is a qualified tip and what isn’t a qualified tip? Of course, we’ve seen the draft forms with it, which then we start to ask more questions. My point of that specific example is, yes, we’ve seen some guidance. Like you said, it is trickling in, but we still have a lot of questions. Currently, we’re waiting on a lot, Neil. Pretty much everything in that bill.

But the most notable that we’re waiting on right now has to do with the international provisions because the IRS has said that they will be releasing something in that area soon.

Amato: Great. One part of that legislation that the AICPA was vocal about was the preservation of the state and local tax deduction for passthrough entities, which includes CPA firms.

Lauridsen: Absolutely.

Amato: It’s another alphabet soup – PTET SALT, SSTBs, all of those acronyms. What specifically, for people who may not know why it was so important, what are the cost savings for CPA firms as a result of that deduction being preserved?

Lauridsen: That alphabet soup, the PTET SALT deduction. Why it became so important, Neil, is quite frankly, it was a targeted provision that was targeting those that are in the specified service trade or business, SSTBs, and where no longer were they able to take the state and local deductions for their passthrough entities. and it puts the profession at a disadvantage.

Let’s say you’re about to go into school and you’re going to own your own business because you are an entrepreneur, you’re already starting at a disadvantage where you can’t even take a deduction which other businesses can. That was something that we really activated the entire membership to push because it has real consequences to businesses and small businesses in particular, where oftentimes they take whatever money they get and the profits and they reinvest it into their business.

To answer your question, Neil, we were able to defeat those provisions from being included in the bill and to keep things a status quo. That essentially had an approximate $928 billion of cost savings over 10 years for passthrough entities. That’s a huge number and very impactful.

Amato: Yeah, that was billion with a B. That was a lot.

Lauridsen: Yeah.

Amato: Wow. Thank you for that. That’s a good reminder on PTET SALT. We’ve talked about IRS service levels. We’ve talked about how the IRS may or may not be having its doors open or putting out guidance or whatever. But one topic recently in the news was a service level grading for the IRS. A TIGTA report and other evidence [showed] 2025 spring filing season overall got high marks. But what do you expect for service levels in the 2026 spring filing season?

Lauridsen: It’s not a surprise that the IRS got high marks for the spring 2025 filing season. The reason being is usually for the IRS to implement successfully a filing season, things need to be done a year in advance. Before a year ago, they had already started this planning for both the spring and the fall filing season.

Now, we also did a survey, and the information that came back from our members was consistent with the TIGTA report in that, yeah, it was a pretty smooth filing season. Every year, there’s always concerns for the filing season. When is it going to start? What’s happening? What about new legislation?

Those are the concerns that start to bubble up organically in every single year. When you have a year where you have broad sweeping tax law changes, where a lot of new things need to get implemented, that’s when we start to worry about what that impact means because the IRS really needs to get moving to provide that guidance so that they can start that filing season.

Under normal circumstances, we would have those concerns already in place of when will the filing season start and what does this mean? This year with everything that’s going on with the IRS, including now the shutdown, those concerns start to get ramped up.

That’s why quite frankly, the AICPA has started to become more and more vocal because there are concerns as to how everything is going to fall into place, that regulation, that guidance that we desperately need to be compliant. What about the services that we’re going to get? Because you know they’re going to get flooded with additional questions because there’s so many new pieces.

Amato: Melanie, thank you. This has been excellent. Any other advocacy points of emphasis while we’re talking in early October 2025?

Lauridsen: You know, Neil, I think I’m going to wrap it up there, and you can have me back as new things pop up.

Amato: Exactly. We’ll be sure to try to make it work with your very busy schedule and thank you so much for being on the JofA podcast.

Lauridsen: Thank you, Neil.