Tax Newsletter - February 2026

Basics & Beyond Monthly Update

Tax Newsletter

February 2026 | (Volume 9, Issue 2)

In this Month’s Issue

Issue 1 – Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as part of the One, Big, Beautiful Bill
Issue 2 – Third-Party Network Regulations Proposed
Issue 3 – Congress Passes Disaster-Related Extension Act
Issue 4 – Important: Phase-Out of the Energy Credits Online (ECO) for Clean Vehicle Credits Portal Begins in 2026 - Dealers
Issue 5 – What is Happening in Congress – A Look at Bills Being Considered – Not Current Law
Issue 6 – States Can Participate in New Contribution Tax Credit to Scholarship Granting Organizations
Issue 7 – Updated Publication for e-File Providers
Issue 8 – IRS-CI Issues Fiscal Year 2025 Annual Report Showcasing Banner Investigative Results
Issue 9 – Group Exemption for Non-Profit
Issue 10 – IRS Advisory Council issues Annual Report
Issue 11 – Tax Practice Obligations and the Report of Foreign Bank and Financial Accounts
Issue 12 – National Taxpayer Advocate Issues Mid-year Report to Congress
Issue 13 – Colorado Man Sentenced to 12.5 years in Prison for Promoting an Abusive Tax Shelter and Operating a Multi-million-dollar Investment Fraud Scheme
Issue 14 – Supplemental Housing Allowance Payments to Military Not Taxable
Issue 15 – U.S. Department of Education Delays Involuntary Collections Amid Ongoing Student Loan Repayment Improvements
Issue 16 – Applicable Federal Rates for February 2026, Rev. Rul. 2026-03

Looking ahead to 2026

If you would like to plan your learning calendar, explore upcoming live webinars and self-paced on-demand options.

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FAQs

Q: When does backup withholding apply to third-party network transactions under the proposed TPSO rules?
A: The proposal applies backup withholding only after a payee exceeds both reporting thresholds in § 6050W. - See Issue 2
Q: How does the Disaster Related Extension of Deadlines Act change the refund “lookback” period for disaster postponements?
A: It requires disaster-related postponements to be treated as extensions when calculating the refund lookback period. - See Issue 3
Q: Who must file an FBAR, what is the due date, and what penalties apply for non-filing?
A: The requirements, due date, and civil and criminal penalty framework are summarized with practitioner obligations under Circular 230. - See Issue 11

Issue 1 – Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as part of the One, Big, Beautiful Bill

Treasury and the IRS Has issued Notice 2026-11 📌 that provides taxpayers with guidance on the permanent 100% additional first year depreciation deduction for eligible depreciable property acquired after Jan. 19, 2025, provided by the One, Big, Beautiful Bill. The notice also provides guidance on certain qualified sound recording productions that the OBBB added as property that may be eligible for the additional first year depreciation deduction.

Generally, when taxpayers acquire property for business use, they must depreciate it over several years based on various depreciation schedules.

The notice also provides interim guidance to taxpayers that they may generally rely on the existing additional first year depreciation regulations. The notice provides rules for determining whether depreciable property is eligible for the additional first year depreciation deduction and for determining the amount of such deduction allowable under the OBBB. In general, the OBBB provides a permanent 100% additional first year depreciation deduction for qualified property acquired, or specified plants that are planted or grafted, after Jan. 19, 2025.

Elections related to the additional first year depreciation deduction

The notice also provides interim guidance on elections taxpayers can make for certain property to be eligible for the additional first year depreciation deduction. Under the OBBB, taxpayers may elect:

To deduct 40% (60% for certain property having longer production periods or certain aircraft) instead of the 100% additional first year depreciation deduction for qualified property placed in service during the first tax year ending after Jan. 19, 2025,
To deduct additional first year depreciation for one or more specified plants,
To treat certain acquired or self-constructed components of larger self-constructed property as generally eligible for the additional first year depreciation deduction, and
Not to deduct the additional first year depreciation for a qualified sound recording production.

Sound recording productions added by the OB3

In addition, the notice provides interim guidance for qualified sound recording productions. In general, a qualified sound recording production:

Is treated as acquired on the date principal recording commences,
Is considered placed in service at the time of initial release or broadcast, and
Qualifies for the additional first year depreciation deduction if the sound recording production commences in a taxable year ending after July 4, 2025.

Issue 2 – Third-Party Network Regulations Proposed

The IRS has issued proposed regulations 📌 to update backup withholding rules for payments made through third-party settlement organizations (TPSOs), such as payment apps and online marketplaces. The proposal reflects statutory changes made by the OBBBA and clarifies when third-party network transactions are treated as reportable payments for backup withholding purposes.

Under the proposal, backup withholding would apply only after a payee exceeds both reporting thresholds in § 6050W, which generally require more than 200 transactions and more than $20,000 in aggregate payments during the calendar year.

The IRS also explains that the amount subject to backup withholding includes the full amount of the transaction that causes the payee to cross the threshold, plus any later transactions in that same year.

The proposed rules would apply to payments made in calendar years beginning after Dec. 31, 2024, and would make obsolete any prior IRS notices that conflict with the updated law.

Issue 3 – Congress Passes Disaster-Related Extension Act

H.R. 1491, the Disaster Related Extension of Deadlines Act, 📌 advanced through Congress and was sent to the president for signature on Dec. 18, 2025 and was signed into law on December 26, 2025.

Under current law, taxpayers must generally file a refund claim within three years of filing a federal tax return. The refund amount is typically limited to taxes paid in the three years preceding the claim, plus any extension of the return due date. While the IRS can postpone filing and payment deadlines after a disaster, those postponements do not count as extensions for refund “lookback” purposes. As a result, some tax payments made before the return was filed may fall outside the allowable refund period, even though the taxpayer received disaster relief.

The bill corrects that outcome by requiring the IRS to treat disaster-related postponements as extensions when calculating the refund lookback period. This change helps ensure taxpayers are not penalized for relief the IRS itself granted.

The legislation also updates IRS notice requirements. Currently, the IRS must issue a notice and demand for payment within 60 days of an assessment, but not before the tax due date. Under the bill, the due date includes any disaster-related postponement.

Issue 4 – Important: Phase-Out of the Energy Credits Online (ECO) for Clean Vehicle Credits Portal Begins in 2026 - Dealers

Effective February 1, 2026, a client will no longer be able to submit edits, returns or cancellation requests for calendar year 2024 sales through the Energy Credits Online (ECO) portal.

Effective March 1, 2026, the client will no longer be able to submit late time of sale reports for calendar year 2024 sales through the ECO portal.

Take action now. It is crucial that any client promptly submit time of sale reports, returns, and cancellations to allow sufficient time for processing. This will help your customers avoid problems when trying to claim the credit on their tax returns during the upcoming filing season.

Reminder: You Must Repay the Advance Payment of the Clean Vehicle Credit When Returning or Cancelling a Time of Sale Report

When a dealer submits a return or cancels a time of sale report, they must repay the advance payment of the credit received at the original time of sale.
Pay.gov 📌 electronically sends an invoice and access code to the email address associated with the dealer’s advance payment registration. Payment will not be automatically debited.
When the invoice is received, the dealer should promptly repay the advance payment within 30 days of receipt of the invoice.

If a dealer is unable to locate the email containing the invoice and access code, please contact the IRS at [email protected] 📌 to request a new one.

For more information on the expiration of the clean vehicle credits, see Fact Sheet 2025-05. 📌

Issue 5 – What is Happening in Congress – A Look at Bills Being Considered – Not Current Law

H.R. 5346: The Fair and Accountable IRS Reviews Act requires that, prior to sending any written communication to a taxpayer about proposed penalties, an IRS employee obtains written approval from their immediate supervisor.

H.R. 5349: The Tax Court Improvement Act , 📌 makes four revisions to Tax Court procedures to enhance taxpayer rights. It gives the Tax Court authority to extend certain filing deadlines, expands the role of special trial judges, and allows Tax Court judges to require documents before hearings through subpoena authority. In addition, the bill holds Tax Court judges to the same recusal standards as other federal judges.

H.R. 6506: 📌 The H.R. 6495: Taxpayer Notification and Privacy Act establishes new requirements for IRS notices to taxpayers when the agency plans to request information from a third party.

H.R. 6506, the Taxpayer Due Process Enhancement Act, meanwhile, takes on a recent U.S. Supreme Court decision, Commissioner v. Zuch, which held that when the IRS decides to no longer pursue a levy, the Tax Court loses jurisdiction over a case.

Issue 6 – States Can Participate in New Contribution Tax Credit to Scholarship Granting Organizations

Treasury and the IRS have issued guidance allowing states, including the District of Columbia, to participate in a new non-refundable tax credit for individuals contributing to scholarships for elementary and secondary school students from low and middle-income families.

The maximum credit is limited to $1,700 per taxpayer. To qualify, Scholarship Granting Organizations must be listed on a state list of covered states that elected to participate in the credit for calendar year 2027.

To make this Advance Election, States must submit Form 15714, Advance Election to Participate Under Section 25F, 📌 for 2027 beginning Jan. 1, 2026.

Revenue Procedure 2026-6 📌 allowing States, including the District of Columbia, to make an Advance Election to participate in a new tax credit for calendar year 2027. This new credit, established under the One, Big, Beautiful Bill, is for contributions to Scholarship Granting Organizations that serve elementary and secondary school students from low- and middle-income families.

Beginning January 1, 2027, individual taxpayers may claim a nonrefundable federal tax credit for cash contributions to SGOs providing scholarships for elementary and secondary education expenses. The credit allowed to any taxpayer is limited to $1,700. However, for contributions to an SGO to be eligible for this credit, the SGO must be listed on a state list of one or more covered states for the applicable calendar year. A covered state is defined as one of the States, or the District of Columbia, that, for a calendar year, voluntarily elects to participate in the credit and identifies SGOs in the State.

Revenue Procedure 2026-6 provides that a State may choose to be a covered State for calendar year 2027 before it provides the IRS with a list of the SGOs located in the State, allowing SGOs additional time to prepare for the commencement of this new credit in 2027.

The deadline and procedure for perfecting the Advance Election by submitting the State SGO list will be provided in future guidance. Future guidance also will address how to make an election to participate in the new tax credit for

Notice 2025-70 📌 provides additional guidance and a request for comments regarding State SGO lists and certifications necessary for State elections.

Issue 7 – Updated Publication for e-File Providers

Authorized IRS e-file providers should review the updated Publication 3112, IRS e-file Application and Participation, 📌 to become familiar with the requirements for acceptance and continued participation.

Important tips to remember:

When offering software for resale (rebranding, white label, etc.), the user should use the EFIN of the purchaser, not the reseller.

When adding a new person, IRS e-file providers must resubmit their e-file application for processing.

Issue 8 – IRS-CI Issues Fiscal Year 2025 Annual Report Showcasing Banner Investigative Results

$10.59 billion in financial crimes identified, 25% more search warrants executed and a 60% growth in digital evidence seizures

IRS Criminal Investigation released its Fiscal Year 2025 Annual Report 📌 on Dec. 11, 2025, showcasing banner investigative results fueled by new partnerships and innovative financial investigative techniques.

Investigative Results: By the Numbers

IRS-CI’s investigative strategy produces quantifiable results. In FY25, IRS-CI investigators identified financial crimes totaling $10.59 billion, representing a 15.7% increase from FY24. Of the $10.59 billion, $4.5 billion resulted from tax fraud, marking an increase of 111.8% from FY24. The agency also saw a 25% increase in search warrants and a 14% increase in prosecution referrals to the Department of Justice during the same timeframe.

The number of cases with cyber components also continued to grow in fiscal year 2025, with IRS-CI seizing 2.35 petabytes of digital data, a nearly 60% increase from the previous fiscal year. Additionally, IRS-CI special agents seized more than $800 million in assets and returned $100 million to crime victims in FY25.

IRS-CI leveraged resources to target the most urgent financial crime threats. In FY25, the agency dedicated nearly 64% of investigative time to tax crimes, often using data analytics to uncover tax fraud and payroll schemes.

Eleven percent focused on narcotics-related crimes, resulting in 447 convictions during the fiscal year. The agency continued to target cyber criminals who victimize others through investment and fraud schemes. In FY25, cyber-related cases resulted in defendants being sentenced to an average of 63 months in prison for their crimes.

The IRS-CI team served integral roles in Operation Safe and Beautiful in Washington, D.C., and the Restoring Law and Order Task Force in Memphis, Tennessee, and assisted U.S. Immigration and Customs Enforcement with immigration enforcement efforts. Approximately 190 special agents were also detailed to Homeland Security Task Forces, where they used their specialized expertise in financial investigations to enforce federal law and protect national security.

Launch of New Initiatives

This year, IRS-CI announced CI-FIRST (Feedback in Response to Strategic Threats), a flagship public-private partnership to modernize how IRS-CI works with financial institutions. CI-FIRST addresses Bank Secrecy Act challenges by providing feedback to help banks understand what is most helpful to investigators. IRS-CI’s Optimizing Financial Records Requests initiative, commonly known as OFRR, accelerates investigative timelines by streamlining and standardizing how IRS-CI requests and how financial institutions respond to legal and subpoena requests.

Case Examples

In FY25, several defendants in the Feeding Our Future fraud scheme 📌 were sentenced. The scheme – one of the largest pandemic-related fraud cases in U.S. history – involved the theft of more than $250 million in federal child-nutrition funds intended to feed low-income children. The leader of the scheme, Abdiaziz Shafii Farah, was sentenced to 28 years in prison.

Both Ilya Lichtenstein and Heather Morgan, a married couple responsible for the 2016 Bitfinex hack and laundering nearly $71 million, were sentenced to federal prison. Lichtenstein received a five-year prison sentence 📌 for his role in the scheme, and Morgan was sentenced to 18 months.

Haiping Pan, 📌 a Chinese national, was sentenced to 10 years in prison for laundering and attempting to launder $62 million for drug traffickers in Mexico.

The IRS-CI’s investigation into TD Bank 📌 revealed an anti-money laundering program rife with flaws that allowed more than $670 million of dirty money to pass through the TD Bank accounts from 2019 to 2023. The bank pleaded guilty to Bank Secrecy Act and money laundering conspiracy violations and agreed to pay a record-breaking $1.8 billion in penalties to resolve the Justice Department’s investigation.

Issue 9 – Group Exemption for Non-Profit

Revenue Procedure 2026-08 📌 sets forth updated procedures to obtain recognition of exemption from federal income tax on a group basis for organizations described in § 501(c) of the Internal Revenue Code that are affiliated with and under the general supervision or control of a central organization. The revenue procedure relieves each subordinate organization included in a group exemption letter from filing its own application for recognition of exemption. It also sets forth updated procedures a central organization must follow to maintain a group exemption letter.

IRS will accept group exemption letter requests; issuance of Revenue Procedure 2026-8 and revision of Form 8940

Group exemption letter requests may now be submitted using Form 8940 through Pay.gov. 📌

The required user fee for requesting a group exemption letter is currently $3,500. Applicants must pay the user fee through Pay.gov 📌 when submitting the request. Payment can be made directly from a bank account, credit or debit card.

Updates on Form 8940 can be obtained by subscribing to EO Update, 📌 a free e-Newsletter from the IRS Exempt Organizations and Government Entities function. EO Update provides information on tax policy, services and information that is important to tax-exempt organizations including:

News releases from the IRS related to exempt organizations
New forms, guidance and other publications
Changes and additions to the IRS Charities and Nonprofits 📌 website
Upcoming IRS training and outreach events

For more information, download Publication 557, 📌 Tax-Exempt Status for Your Organization.

Issue 10 – IRS Advisory Council issues Annual Report

The Internal Revenue Service Advisory Council has issued its annual public report, offering recommendations to the IRS on a range of new and continuing issues in tax administration.

The report includes recommendations on 29 issues addressing topics related to IRS operations, taxpayer service, compliance and administrative issues.

Key issues addressed in the report

The report’s top six general issues include:

Funding for IRS Operations
Educating the Public about the IRS Mission
Updating and Improving IRS Websites
Accounting Method Change Requests
Simplification of Online Tax Services
Processing of Form 730 and Excise Tax Payments

The full IRSAC Public Report 📌 is available on IRS.gov.

Issue 11 – Tax Practice Obligations and the Report of Foreign Bank and Financial Accounts

Tax professionals who represents taxpayers or otherwise engage in practice before the IRS (i.e., “practitioners”) are subject to the standards of conduct and the disciplinary rules of Circular 230, 📌 Regulations Governing Practice before the Internal Revenue Service, which are administered and enforced by the IRS Office of Professional Responsibility (OPR). (Circular 230’s regulations are codified in Title 31 of the Code of Fed’l Regulations (CFR) Subtitle A, Part 10.) “Practitioners” are attorneys, certified public accountants (CPAs), enrolled agents, enrolled retirement plan agents, and enrolled actuaries. See Circular 230 sections 10.2(a)(5) (defining “practitioner”) and 10.3(a)-(e).

I. FBAR in General

The FBAR, FinCEN Report 114, is an information report required by the Bank Secrecy Act, 31 USC 5314, and related regulatory provisions in 31 CFR 1010.350. Although the FBAR is not a tax return, it is referenced in U.S. tax returns, such as Form 1040 Schedule B, Interest and Ordinary Dividends, which includes checkboxes to answer questions about foreign financial accounts. Similar questions and boxes are incorporated into Forms 1041 (U.S. Income Tax Return for Estates and Trust), Form 1065 (U.S. Return of Partnership Income), and Form 1120 (U.S. Corporation Income Tax Return) (Schedule N). Reporting of foreign bank or financial accounts is required of:

United States persons who have a financial interest in, or signature or other authority over, a financial account in a foreign country; and
The aggregate value of the account or accounts exceeds $10,000 at any time during the calendar year.

These individuals and entities must report their foreign accounts by (1) completing the applicable sections of U.S. tax or information returns, and (2) filing FinCEN Report 114. 📌 They are also subject to certain associate recordkeeping requirements.

When a person required to file an FBAR does not file the report, the person is potentially subject to civil and criminal penalties for non-filing. Civil penalties apply to both willful and non-willful violations.

Terms

A “United States Person” is:

A U.S. citizen.
A U.S. resident.
An entity, including a corporation, partnership, trust, or limited liability company created, organized, or formed under federal or state law or the laws of the District of Columbia, U.S. territories and possession, or the Indian Tribes.

31 CFR 1010.350(b). For individuals (citizens and resident aliens), a “United States Person” includes a child. Filing for Child | FinCEN.gov. 📌 The reporting requirement also applies to employee benefit plans and to an estate formed under U.S. law.

A “foreign financial account” is one that is located outside of the U.S., the latter meaning the fifty states, the District of Columbia, U.S. territories and possessions, and certain Indian lands. 31 CFR 1010.350(d); 31 CFR 1010.100(h). Reportable accounts include bank accounts (checking, savings, demand deposit, etc.); securities accounts; annuities or insurance policies with a cash value; and mutual funds. 31 CFR 1010.350(c).

A person has a financial interest in a foreign bank, securities or other financial account if they are the owner of record of the account or the holder of legal title to the account. (For the full definition, see 31 CFR 1010.350(e).) 📌

Signature or Other Authority

This element applies, in general, to an individual who has the authority “(alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person [financial institution] with whom the financial account is maintained.” 31 CRR 1010.350(f)(1).

Due Date

The due date for filing an FBAR is April 15 of the year after the year covered by the report. Report of Foreign Bank and Financial Accounts (FBAR) 📌 (“When to file”).

Penalties
Civil penalties

Violations for non-willful failure to file are subject to a penalty up to $10,000 (adjusted for inflation), unless reasonable cause is shown and the account balance at the time of the transaction or the transaction amount was properly reported on a late-filed FBAR. 31 USC 5321(a)(5)(B); 31 CFR 1010.821. willful failure is subject to a penalty not exceeding the greater of $100,000 (inflation-adjusted) or 50 % of “the balance in the account at the time of” a violation, “in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account.” 31 USC 5321(a)(5)(C), (D); 31 CFR 1010.821; Publication 5569, at 8.

Criminal penalty

The penalty for filing a knowingly and willfully false FBAR is a fine up to $10,000- or 5-years imprisonment or both. 18 USC 1001; 31 CFR 1010.840(d); Publication 5569, at 9.

While a penalty of up to $250,000- or five-years imprisonment, or both, may be imposed for a criminal violation of failure to file an FBAR or retain required records. 31 USC 5322(a); 31 CFR 1010.840(b); cf. United States v. Lieber, 626 F. Supp. 3d 310, 318 (D. Mass. 2022) (rejecting defendant’s claim, in criminal prosecution, of insufficient evidence that he willfully failed to file an FBAR for 2014, where “the trial evidence included the engagement letters sent by the tax accountant to Defendant and his wife with a written explanation of the FBAR reporting requirement, [the accountant’s] testimony . . . confirming that the letters were sent, Defendant's signature on the engagement letter for calendar year 2015, and Defendant's 2013 and 2014 tax returns that represented he did not have a financial interest in any foreign account”).

Further, a person can be penalized with both a civil and criminal penalty for the same violation. 31 USC 5321(d).

II. Tax Professionals’ Role in FBAR Compliance

To fulfill their obligations to clients and to tax administration, practitioners, as well as tax return preparers in the IRS’s voluntary Annual Filing Season Program 📌 (AFSP), must adhere to the requirements, limitations, and prohibitions in Circular 230, and, in particular, in the FBAR context, those described below.

Competence

Circular 230 section 10.35 (as amended in 2014) requires a practitioner to “possess the necessary competence to engage in practice before the Internal Revenue Service.” To assist a taxpayer who may own, or have signature authority over, one or more reportable foreign financial accounts, a practitioner should have a baseline knowledge of the reporting requirements and supplement it as necessary. See paragraph (a) of section 10.35, stating, “Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.”

Diligence

Closely related and often linked to competence is diligence. Practitioners who prepare Forms 1040 or other income tax returns or information returns, as applicable, for their clients have a duty of diligence under Circular 230 to inquire of their clients with sufficient detail to ascertain the information necessary to enter correct responses to the foreign-account questions on the clients' returns. The level of diligence required is set out in section 10.22(a) of Circular 230, which requires that a practitioner exercise due diligence in preparing and filing tax returns or other documents on a client's behalf with the IRS. The section also requires practitioners to exercise diligence to ensure that the practitioner's written or oral statements to clients and to the IRS are accurate.

Knowledge

For purposes of due diligence, section 10.34(d) allows a practitioner to generally rely, in good faith and without verification, on information from a client. A practitioner may accept a client’s responses at face value if it’s reasonable to do so, but the practitioner cannot ignore the implications of information the practitioner knows or has received from the client. If the information from the client appears to be incorrect, incomplete, or inconsistent with other facts the practitioner knows, then the practitioner must make further inquiry of the client for an explanation. Good faith reliance and its limits contemplate that a practitioner will make all appropriate inquiries of a client who provides information that indicates possible overseas holdings subject to FBAR reporting.

Additionally, if a practitioner learns that a current client did not comply with requirements for reporting foreign accounts for past tax years, the practitioner must, under section 10.21, promptly inform the client of the “noncompliance, error, or omission” and any penalty or penalties that may apply.

Standards for tax returns and other documents

When a practitioner assists or advises a client in reporting income or other items on a tax return or as to positions taken on a return, the standards in section 10.34 apply to the practitioner’s activities. Section 10.34(c) requires a practitioner to advise a client of any potential penalties likely to apply to a position taken on a tax return that the practitioner prepares for the client or when the practitioner has advised the client about the position taken. A practitioner must also inform the client of any opportunity to avoid any penalties through adequate disclosure.

In the area of FBAR, a practitioner acting as a preparer or advisor to a client may determine whether one or more foreign accounts exist that must be reported in designated places on the client’s tax return. If so, the practitioner should prepare the return or advise the client accordingly. The practitioner is not obligated to prepare the FBAR form itself for the client unless the practitioner feels competent and is willing to do so and the client has agreed to this additional service. Nevertheless, the practitioner does have an affirmative obligation to advise the client of the need to file an FBAR and the consequences of failing to file one.

III. Additional Information and Resources on FBAR

The IRS maintains a webpage specific to the FBAR at Report of Foreign Bank and Financial Accounts (FBAR). 📌 Among other things, the page contains contact information, including telephone numbers for the IRS FBAR Hotline. Readers may also find helpful:

Publication 4261, 📌 Do You Have a Foreign Financial Account? (Rev. 07-2021)
Publication 5569, 📌 Report of Foreign Bank & Financial Accounts (FBAR) Reference Guide (Rev. 03-2022)
Internal Revenue Manual (IRM) Section 4.26.16 📌 (06-24-2021), Report of Foreign Bank and Financial Accounts (FBAR); Interim Guidance on FBAR Examination Case Procedures Due to Supreme Court Decision (Bittner v. US) (06-06-2023)

If you have questions about this article, please contact our office by phone at 202-317-6897 or eFax at 855-814-1722.

Issue 12 – National Taxpayer Advocate Issues Mid-year Report to Congress

Highlights a successful 2025 filing season and challenges for 2026

National Taxpayer Advocate Erin M. Collins today released her Fiscal Year 2026 Objectives Report to Congress, 📌 highlighting a largely successful 2025 filing season while raising concerns about persistent refund delays for victims of identity theft, delays in processing Employee Retention Credit claims, and critical challenges facing taxpayers and the IRS as the agency prepares for the 2026 filing season. The report also outlines the Advocate’s priority recommendations as the IRS continues to modernize its technology systems.

“The 2025 filing season was one of the most successful filing seasons in recent memory,” Collins said in releasing the report. “But with the IRS workforce reduced by 26% and significant tax law changes on the horizon, there are risks to next year’s filing season. It is critical that the IRS begin to take steps now to prepare.”

The 2025 filing season generally ran smoothly

The IRS received nearly 141 million individual income tax returns and processed about 138 million. Over 95% of processed returns were filed electronically, and about 62% resulted in refunds. Figure 1 shows key filing season statistics.

Figure 1

Individual Tax Return Statistics for the 2025 Filing Season

Individual Returns Received	140,663,000
Individual Returns Processed	138,057,000
Refunds Issued	86,021,000
Average Refund Amount	$2,942
Refunds Issued By Direct Deposit	81,032,000

The IRS processed most returns without issues. However, the IRS “suspended” over 13 million returns during processing pending additional review, and these processing delays generally translated into refund delays for the affected taxpayers.

Refund delays for identity theft victims remain a serious concern

One longstanding filing season challenge that remains unresolved is lengthy delays in resolving identity theft cases. There are two categories of identity theft cases. One involves returns that IRS return processing filters flag as potential identity theft; the IRS flagged about 2.1 million such returns. In these cases, the IRS sent a letter to taxpayers notifying them they had to authenticate their identities before receiving their refunds. The IRS typically takes several months to resolve these cases.

In the second category of identity theft cases, a thief has stolen a taxpayer’s identity and filed a tax return using the taxpayer’s name and Social Security number. These taxpayers are victims and may also be experiencing the effects of identity theft beyond the context of their tax returns. Their cases are referred to the IRS’s Identity Theft Victim Assistance (IDTVA) unit for resolution.

As of the end of the filing season, the IRS had about:

387,000 IDTVA cases in inventory, and
The cases were taking an average of about 20 months to resolve.

“These delays disproportionately affect vulnerable populations dependent on their refunds to meet basic living expenses,” the report says. In fiscal year (FY) 2023, 69% of affected taxpayers had adjusted gross incomes at or below 250% of the Federal Poverty Level.

“IRS leadership has repeatedly assured TAS that reducing cycle time for IDTVA cases is a top priority, yet the cycle time remains unacceptably long,” Collins wrote. “I continue to urge the agency to focus on dramatically shortening the time it takes to resolve IDTVA cases, so it does not force victims, particularly those dependent on their tax refunds, to wait nearly 2 years to receive their money.” The report recommends that the IRS reduce the average case resolution time to 4 months.

Operational risks remain a concern as the 2026 filing season approaches

Collins warned that without improved technology in place, IRS staffing cuts could jeopardize the success of next year’s filing season. To deliver a successful filing season, the IRS needs a sufficient number of trained employees to program its processing systems, develop and disseminate timely and clear guidance on tax law changes, answer telephone calls and process correspondence, among other things. See Figure 2 for staffing reductions by business unit.

Figure 2

IRS Personnel Losses by Business Unit (as of June 4, 2025)

IRS Business Operating Division/Function	Staffing as of January 25, 2025	Projected Staffing After Separations	Percent Change From January 25, 2025
Chief Counsel	2,740	2,387	▼ -12.88%
Chief Financial Office (CFO)	578	404	▼ -30.10%
Chief Operating Officer (COO)	139	71	▼ -48.92%
Chief Tax Compliance Officer (CTCO)	10	1	▼ -90.00%
Communications and Liaison (C&L)	379	211	▼ -44.33%
Criminal Investigation (CI)	3,589	3,221	▼ -10.25%
Direct File (DF)	27	5	▼ -81.48%
Enterprise Case Management Office (ECMO)	51	15	▼ -70.59%
Facilities Management and Security Services (FMSS)	1,212	894	▼ -26.24%
Human Capital Office (HCO)	2,927	2,079	▼ -28.97%
Independent Office of Appeals (Appeals)	1,775	1,275	▼ -28.17%
Information Technology (IT)	8,647	6,316	▼ -26.96%
IRS Headquarters (HQ)	50	22	▼ -56.00%
Large Business and International (LB&I)	6,763	5,402	▼ -20.12%
Office of Chief Risk Officer (CRO)	37	21	▼ -43.24%
Office of Civil Rights and Compliance (OCRC)	178	90	▼ -49.44%
Office of Professional Responsibility (OPR)	21	15	▼ -28.57%
Online Services (OLS)	220	97	▼ -55.91%
Privacy, Government Liaison and Disclosure (PGLD)	656	456	▼ -30.49%
Procurement	585	306	▼ -47.69%
Research, Applied Analytics and Statistics (RAAS)	620	442	▼ -28.71%
Return Preparer Office (RPO)	119	75	▼ -36.97%
Small Business/Self-Employed (SB/SE)	24,120	15,566	▼ -35.46%
Tax Exempt/Government Entities (TE/GE)	2,286	1,670	▼ -26.95%
Taxpayer Advocate Service (TAS)	1,970	1,480	▼ -24.87%
Taxpayer Experience Officer (TXO)	106	55	▼ -48.11%
Taxpayer Services (TS)	42,134	33,053	▼ -21.55%
Transformation and Strategy Office (TSO)	80	4	▼ -95.00%
Whistleblower Office (WO)	94	69	▼ -26.60%
TOTAL	102,113	75,702	▼ -25.86%

The report notes that the IRS’s Information Technology (IT) and Taxpayer Services business units play critical roles in delivering a successful filing season. IT personnel must reprogram IRS processing systems to reflect changes in law, while Taxpayer Services personnel are responsible for processing tax returns, answering telephone calls, and processing correspondence.

As of this month, as Figure 2 shows, IT staffing has been reduced by 27%, and Taxpayer Services staffing has been reduced by about 22%, or by more than 9,000 employees.

The Administration’s FY 2026 budget proposal calls for keeping Taxpayer Services staffing at about FY 2025 levels. Thus, the IRS will need to rapidly hire and train thousands of new Taxpayer Services employees before the 2026 filing season to process returns and deliver timely refunds.

IRS should prioritize three taxpayer-focused IT projects

The report applauds recent progress in IRS technology modernization but urges the agency to stay focused on taxpayer-facing improvements. Collins highlights the IRS’s longstanding challenges in managing antiquated technology systems and recent efforts to modernize its systems. In collaboration with the Treasury Department and the Department of Government Efficiency, the IRS established nine distinct modernization “verticals” (i.e., technology projects designed to meet specific needs). Among them are a unified application programming interface, digitalization of paper returns and correspondence, and improved system interoperability among the agency’s roughly 60 stand-alone case management systems.

The report recommends that the IRS adopt a “digital first” approach to taxpayer service and prioritize three projects:

Creating fully functional online accounts. Collins said the IRS’s number one priority should be to enhance online accounts so taxpayers and tax professionals can view all relevant information and conduct all transactions with the IRS through their accounts.

By contrast, the functionality of IRS online accounts is limited. Taxpayers generally cannot file tax returns, view most notices, or respond to notices through their online accounts. Until recently, they could not make payments. As a result, only about 10% of taxpayers have taken the time to establish online accounts.

Digitizing the processing of paper-filed tax returns, correspondence, and other documents. The IRS estimates it will receive about 43 million paper tax returns, and 19 million paper information returns in 2025, as well as millions of responses to the roughly 170 million paper notices it sends to individual taxpayers each year.

IRS employees manually transcribe data from paper-filed tax returns, digit by digit, into IRS systems. The IRS has allowed taxpayers to upload their responses to IRS notices through a digital “Document Upload Tool,” but it does not have a way to process responses using automation. As a result, it generally must print taxpayer responses and route them to IRS employees for processing as if they had been submitted on paper.

Integrating about 60 case management systems. The report says the IRS currently stores taxpayer data on about 60 distinct case management systems that generally cannot communicate with each other. As a result, a taxpayer who calls the IRS to discuss an account issue may find the customer service representative (CSR) who answers lacks access to the relevant account information or must open multiple case management systems on different screens and toggle among them to answer questions.

Under an initiative known as Taxpayer 360, the IRS addressed these limitations by creating an integrated case management system that consolidates all relevant information a CSR may need to help taxpayers in a single database.

Taxpayer Advocate Service advocacy objectives for FY 2026

The report identifies TAS’s key advocacy objectives for the upcoming fiscal year as law requires. The report sets out nine such objectives:

Improve automation and metrics to enhance the taxpayer experience.
Expand IRS online account functionality.
Reduce Identity Theft Victim Assistance resolution time from nearly 2 years to 4 months.
Strengthen IRS oversight of unethical tax return preparers.
Expedite the resolution of Centralized Authorization File number suspensions to protect tax professionals and taxpayers.
Complete processing of all Employee Retention Credit claims and ensure taxpayer rights are protected.
Improve responses to Freedom of Information Act requests.
Strengthening Appeals’ independence and operational efficiency; and
Improve the IRS’s criminal voluntary disclosure practice.

The IRS agrees to implement most of the proposed administrative recommendations

The National Taxpayer Advocate is required by law to submit a year-end report to Congress that, among other things, makes administrative recommendations to resolve taxpayer problems. Internal Revenue Code § 7803(c)(3) authorizes the National Taxpayer Advocate to submit the administrative recommendations to the Commissioner and requires the IRS to respond within 3 months.

The National Taxpayer Advocate made 77 administrative recommendations in her 2024 year-end report and then submitted them to the Commissioner for response. The IRS has agreed to implement 42 (or 55%) of the recommendations in full or in part.

Read the IRS responses in the 2024 Annual Report to Congress Report Card (PDF). 📌

Issue 13 – Colorado Man Sentenced to 12.5 years in Prison for Promoting an Abusive Tax Shelter and Operating a Multi-million-dollar Investment Fraud Scheme

Timothy McPhee of Estes Park, Colorado, was sentenced to 151 months in prison and ordered to pay more than $59 million in restitution for promoting an abusive tax shelter and operating a fraudulent investment scheme.

McPhee and several codefendants facilitated the layering of a business trust, family trust, and charitable trust, and a private family foundation, to conceal business income from the IRS.

McPhee taught clients to use the trusts and the foundation to avoid paying income taxes and claim only about 2% of their income. In total, the tax shelter caused a loss to the United States of about $45 million in unpaid federal income taxes.

McPhee also operated and promoted a fraudulent investment scheme called the ROI Cash Flow Fund as an opportunity for investors to earn 3% monthly returns. The ROI Cash Flow Fund was actually a Ponzi scheme and resulted in a loss to investors of about $6 million

Issue 14 – Supplemental Housing Allowance Payments to Military Not Taxable

Treasury and the IRS have confirmed that supplemental basic allowance for housing payments made to members of the uniformed services in December 2025 are not to be included in income by those who received the payments; they are not taxable.

In the One, Big, Beautiful Bill enacted last July, Congress appropriated $2.9 billion to supplement the basic allowance for housing payable to members of the uniformed services. In December, President Donald J. Trump announced that 1,450,000 military service members would receive a special “Warrior Dividend” before Christmas.

The resulting one-time supplemental payments of $1,776 made primarily to active-duty members of the uniformed services in the pay grades of O-6 and below and eligible Reserve Component members as of Nov. 30, 2025, of the Army, Air Force, Navy, Marine Corps and Space Force were funded by this appropriation.

Federal tax law specifically excludes from gross income a “qualified military benefit.” The basic allowance for housing payments are qualified military benefits and, therefore, are not taxable.

Issue 15 – U.S. Department of Education Delays Involuntary Collections Amid Ongoing Student Loan Repayment Improvements

The U.S. Department of Education (the Department) have announced that it will delay the implementation of involuntary collections on federal student loans, including Administrative Wage Garnishment (AWG) and the Treasury Offset Program (TOP).

The temporary delay will enable the Department to implement major student loan repayment reforms under the Working Families Tax Cuts Act (the Act) to give borrowers more options to repay their loans. These reforms, which include simplifying repayment options and providing an additional opportunity for borrowers to rehabilitate their federal student loans, reflect the Trump Administration’s commitment to provide better support for current and future borrowers in repayment.

The Act reduces the number of federal student loan repayment plans, eliminating a confusing maze of options and making it easier for borrowers to select either a single standard repayment plan or income-driven repayment (IDR) plan that best meets their needs.

This includes a new IDR plan that waives unpaid interest for borrowers with on-time payments whose payments do not fully cover accrued interest, and that includes small matching payments from the Department in certain circumstances to ensure that outstanding principal is reduced each month. The plan will be available for borrowers beginning July 1, 2026. The delay in collections will give defaulted borrowers additional time to evaluate these new repayment options once they consolidate their loans or complete a repayment or rehabilitation agreement.

The Act also gives borrowers a second chance to rehabilitate a defaulted loan, allowing them to get their repayments back on track and get the loan out of default. Prior to passage of the Act, the law only permitted borrowers to provide a single rehabilitation opportunity. The delay in collections will give defaulted borrowers additional time to begin the rehabilitation process, including the ability to rehabilitate their loan a second time.

During the delay, the Department encourages borrowers in default to explore their options 📌 for resolving their defaulted student loans with the defaulted federal loan servicer. The Department reports student loan defaults to credit reporting agencies, which may adversely impact borrower credit reports.

Issue 16 – Applicable Federal Rates for February 2026, Rev. Rul. 2026-03

REV. RUL. 2026-2 TABLE 1

Applicable Federal Rates (AFR) for February 2026

	Period for Compounding
	Annual	Semiannual	Quarterly	Monthly
Short-term (≤ 3 years)
AFR	3.56%	3.53%	3.51%	3.50%
110% AFR	3.92%	3.88%	3.86%	3.85%
120% AFR	4.28%	4.24%	4.22%	4.20%
130% AFR	4.64%	4.59%	4.56%	4.55%
Mid-term (> 3 years, ≤ 9 years)
AFR	3.86%	3.82%	3.80%	3.79%
110% AFR	4.24%	4.20%	4.18%	4.16%
120% AFR	4.63%	4.58%	4.55%	4.54%
130% AFR	5.03%	4.97%	4.94%	4.92%
150% AFR	5.81%	5.73%	5.69%	5.66%
175% AFR	6.80%	6.69%	6.63%	6.60%
Long-term (> 9 years)
AFR	4.70%	4.65%	4.62%	4.61%
110% AFR	5.19%	5.12%	5.09%	5.07%
120% AFR	5.66%	5.58%	5.54%	5.52%
130% AFR	6.14%	6.05%	6.00%	5.98%

REV. RUL. 2026-2 TABLE 2

Adjusted AFR for February 2026

	Period for Compounding
	Annual	Semiannual	Quarterly	Monthly
Short-term adjusted AFR	2.70%	2.68%	2.67%	2.67%
Mid-term adjusted AFR	2.92%	2.90%	2.89%	2.88%
Long-term adjusted AFR	3.56%	3.53%	3.51%	3.50%

REV. RUL. 2026-2 TABLE 3

Rates Under Section 382 for February 2026

Adjusted federal long-term rate for the current month	3.56%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.)	3.56%

REV. RUL. 2026-2 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for February 2026

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit	7.99%
Appropriate percentage for the 30% present value low-income housing credit	3.43%

REV. RUL. 2026-2 TABLE 5

Rate Under Section 7520 for February 2026

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest	4.60%

IRS Applicable Federal Rates page 📌 Rev. Rul. 2026-2 📌

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