Basics & Beyond Monthly Update
Tax Newsletter
July 2026 | Volume 9, Issue 7
July Highlights
Basics & Beyond’s July update highlights practical developments affecting individual taxpayers, tax professionals, and client planning conversations. Use the issue list below to jump directly to the topics most relevant to your practice, then follow the 📌 markers for source materials and additional resources.
Navigation Tips: Click on the Issue # link to jump directly to that section. Click any Basics logo to return to the Issues List. The 📌 icon marks an embedded resource link.
Looking ahead to 2026
If you would like to plan your learning calendar, explore upcoming live webinars and self-paced on-demand options.
In this Month’s Issue
- Issue 1 – Estates & Trusts Taxation
- Issue 2 – 2027 HSA Limits
- Issue 3 – Citizenship Question on Tax Forms
- Issue 4 – Cannabis Rescheduling Limits
- Issue 5 – Dietary Supplement Tax Reform
- Issue 6 – Trump Accounts via IRS Online Account
- Issue 7 – Draft Form 945-X Corrections
- Issue 8 – Summer Day Camp Tax Credit
- Issue 9 – Responsible AI in Tax Practice
- Issue 10 – USPS Postmark Timing Reminder
- Issue 11 – Federal Scholarship Tax Credit
- Issue 12 – Tax Professional Management Office
- Issue 13 – Tax Court Practitioner Rules
- Issue 14 – July 2026 AFRs
Issue 1 – Taxation of Estates & Trusts
The cost of an estate tax closing letter (also referred to as IRS Letter 627) will increase from $56 to $76 if proposed regulations issued by the IRS (REG-103193-26) become final.
The IRS set the $56 user fee on December 1, 2025. Also in 2025, the IRS conducted a biennial review of the estate tax closing letter user fee and determined that the full cost of issuing estate tax closing letters to authorized persons is $76, an increase of almost 36%.
Issuing an estate tax closing letter is a service that confers special benefits to authorized persons requesting such letters beyond those accruing to the general public. And under the Independent Offices Appropriations Act of 1952, services that an agency provides should be self-sustaining to the extent possible.
The IRS, in its 2025 biennial review, determined the full yearly cost (direct and indirect costs) of the estate tax closing letter program to be $615,593, with the estimated annual number of requests to be 8,053, which brought the cost per request to $76.
The regulations are proposed to apply to requests for an estate tax closing letter received by the IRS on or after the date that is 30 days after the date final regulations are published in the Federal Register.
Issue 2 – HSA Inflation-adjusted Maximum Contribution Amounts for 2027 Announced
The IRS has announced the updated amounts in Rev. Proc. 2026-24, 📌 issued pursuant to § 223(g). The revenue procedure also includes the revised maximum amount that may be made newly available for excepted-benefit health reimbursement arrangements (HRAs) under Regs. § 54.9831-1(c)(3)(viii).
HSA contributions
The maximum contribution to an HSA that may be made for calendar year 2027 by an individual with self-only coverage under a high-deductible health plan (HDHP) will be $4,500, a $100 increase from 2026. For an individual with family coverage, the maximum contribution will be $9,000, which is $250 higher than the current limit.
The $1,000 “catch-up” additional contribution that may be made by individuals who are age 55 or older before the end of the tax year is unchanged because it is set by statute (§ 223(b)(3)).
HDHP amounts
With either type of coverage, an eligible individual must be covered under an HDHP — and may not be covered under any other health plan that provides coverage for any benefit that is covered under the HDHP. The minimum annual deductible amount and maximum out-of-pocket amounts of HDHPs are also adjusted for inflation.
For 2027, a qualifying HDHP must have an annual deductible of at least $1,750 for self-only coverage ($50 higher than for 2026) or $3,500 for family coverage (a $100 increase). In addition, annual out-of-pocket expenses, including deductibles, copayments, and other amounts, exclusive of premiums, may not be more than $8,700 for self-only coverage or $17,400 for family coverage — increases, respectively, of $200 and $400.
Excepted-benefit HRA maximum
For plan years beginning in 2027, the maximum amount that may be made newly available for an excepted-benefit HRA under Regs. § 54.9831-1(c)(3)(viii) is $2,250, which is $50 higher than the 2026 amount of $2,200.
Direct primary care service arrangements
Under H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act, a direct primary care (DPC) service arrangement — a subscription-style arrangement for primary care services — is not treated as a health plan for purposes of § 223(c)(1)(A)(ii), provided the monthly fees do not exceed $150 ($300 for arrangements covering more than one individual).
Previously, an individual enrolled in a DPC service agreement was not eligible to contribute to an HSA.
The dollar amounts are adjusted for inflation for months beginning after December 31, 2026.
| Tax Year | HSA Self-Only Contribution Limit | HSA Family Contribution Limit | Catch-Up Contribution (Age 55+) | Minimum HDHP Deductible (Self) | Minimum HDHP Deductible (Family) | Maximum HDHP Out-of-Pocket (Self) | Maximum HDHP Out-of-Pocket (Family) |
|---|---|---|---|---|---|---|---|
| 2024 | $4,150 | $8,300 | $1,000 | $1,600 | $3,200 | $8,050 | $16,100 |
| 2025 | $4,300 | $8,550 | $1,000 | $1,650 | $3,300 | $8,300 | $16,600 |
| 2026 | $4,400 | $8,750 | $1,000 | $1,700 | $3,400 | $8,500 | $17,000 |
| 2027 | $4,500 | $9,000 | $1,000 | $1,750 | $3,500 | $8,700 | $17,400 |
Issue 3 – US Tax Officials Consider Adding Citizenship Question to Tax Forms
By Jacob Bogage, Reuters
The U.S. Internal Revenue Service is debating requiring taxpayers to disclose their citizenship status on next year's tax forms as the Trump administration intensifies attempts to link federal agencies to its sprawling immigration enforcement and anti-fraud drive.
IRS officials are considering two versions of Form 1040; the primary paperwork individuals use to report earnings and claim tax benefits.
The first version contains minor updates to reflect changes in tax laws. The second includes those updates and a check box labeled: "Check this box if you are a non-U.S. citizen or have dual citizenship."
Immigrants, including undocumented immigrants, are required to file taxes and use the same IRS forms as tax filers with citizenship. Paying taxes has long been seen as a key factor for undocumented immigrants to obtain legal status.
The Treasury Department and the Department of Homeland Security spent much of 2025 attempting to collaborate, sharing confidential taxpayer data with immigration officials to assist in the Trump administration's deportation campaign.
The IRS in February admitted to the court that it had erroneously shared the data of more than 42,000 taxpayers with DHS.
Tax preparers nationwide reported encountering clients frightened to file taxes in 2025 due to the IRS's collaboration with immigration enforcement.
The IRS is considering other methods of determining a taxpayer's citizenship status. Non-citizens can file taxes using a nine-digit "individual tax identification number" in place of a Social Security number. Tax officials have discussed differentiating codes to denote a filer's immigration status.
Parts of this article originally appeared on Reuters.com. Editing by Colleen Jenkins, Rosalba O'Brien, and Nick Zieminski.
Issue 4 – Cannabis Rescheduling Arrives, With Limits: What the DOJ's Final Order Does and Doesn't Do
On April 23, 2026, the U.S. Department of Justice (DOJ) and U.S. Drug Enforcement Administration (DEA) announced the issuance of a final order, 📌 signed by Acting Attorney General Todd Blanche, rescheduling two categories of cannabis from Schedule I of the Controlled Substances Act (CSA) to the less regulated Schedule III: (1) FDA-approved cannabis products; and (2) cannabis regulated under a state medical cannabis license.
A Notice of Proposed Rulemaking 📌 (NPRM) also accompanied the Order, initiating an expedited administrative hearing process to consider the broader goal of rescheduling all cannabis (not just medical cannabis) from Schedule I to Schedule III.
The Order marks the most concrete shift in federal cannabis policy in decades. But it does not legalize cannabis. Nor does it fully resolve the conflict between state and federal cannabis laws. Instead, it introduces a partial rescheduling that may ease specific regulatory burdens for certain sectors of the industry (specifically, medical cannabis) while leaving the broader legal framework essentially unchanged for everyone else.
The two-track approach
The Order and NPRM sets out a two-track approach to reforming federal cannabis policy. Track one is the Order itself, which took effect upon publication in the Federal Register on April 28, 2026.
It moves to Schedule III: (1) all drug products containing cannabis that have received FDA approval (currently Epidiolex, Marinol, Syndros, and Cesamet); and (2) all cannabis that is subject to a state-issued license to manufacture, distribute, or dispense cannabis for medical purposes. Forty states now have such medical cannabis licensing regimes in place.
The DOJ issued the Order pursuant to its authority under § 811(d)(1) of the CSA, which authorizes the Attorney General to reschedule substances to carry out U.S. treaty obligations under the 1961 Single Convention on Narcotic Drugs. That treaty-based pathway allowed the DOJ to bypass the traditional notice-and-comment rulemaking process and act immediately, a legally aggressive move that will almost certainly draw legal challenges.
Track two is a notice of proposed rulemaking and hearing, set to begin June 29, 2026, and conclude no later than July 15, to take evidence on whether all cannabis, including recreational cannabis, should be transferred from Schedule I to Schedule III. This is a fresh start.
What this means for the cannabis industry
The practical consequences for state-licensed medical cannabis operators are immediate.
Since 1982, IRC § 280E barred businesses trafficking in Schedule I or II controlled substances from deducting ordinary business expenses, which has been a significant financial burden for state-legal cannabis companies. The Order eliminates that burden for medical cannabis companies starting in tax year 2026.
The DOJ has also directed the IRS to consider retrospective relief from 280E liability for prior tax years, and on April 23, the Treasury and the IRS announced plans to issue guidance, 📌 acknowledging that rescheduling will have "significant positive tax consequences" for the medical cannabis industry.
Statement on Guidance from DOJ
Treasury and the IRS expect DOJ’s action to have significant positive tax consequences for businesses in the medical marijuana industry, and Treasury and the IRS plan to issue guidance to address the principal federal tax issues stemming from the Final Order.
Section 280E of the Internal Revenue Code generally disallows deductions and credits for any amounts spent in carrying on a business that consists of trafficking in Schedule I or II controlled substances prohibited by federal or state law. Accordingly, rescheduling generally removes section 280E as a bar to claiming deductions and credits for businesses that as a result of the Final Order no longer traffic in Schedule I or II controlled substances under the CSA. Guidance is expected to clarify the ways in which, for businesses with multiple activities, section 280E applies only to those activities related to trafficking in Schedule I or II controlled substances (e.g., by apportioning expenses).
Guidance is also expected to include a transition rule providing that, for purposes of section 280E, rescheduling generally will be considered to first apply for a business’s full taxable year that includes the effective date of the Final Order, for the business’s activities that do not involve Schedule I or II controlled substances as a result of the Final Order.
Importantly, this offers no relief to recreational operators holding adult-use licenses, which remain subject to § 280E.
Another significant development is the Order's treatment of state cannabis regulatory frameworks. The Order defines one of the qualifying categories for rescheduling by reference to state medical cannabis licenses — effectively ratifying state licensing regimes as the vehicle for federally compliant medical cannabis. For an industry that has spent years operating in the gap between state legality and federal prohibition, this is a profound change.
Schedule III status for state-legal medical operators is not automatic, however. Operators must affirmatively register with the DEA. Registrants must pay an annual $794 fee and complete an application spanning seven sections covering business and ownership information, state license details, criminal and licensure history, and a detailed compliance section requiring disclosure of operating procedures for everything from ordering and storage to theft reporting and security measures.
The DEA opened its Medical Marijuana Dispensary Registration Portal on April 29. Operators who file applications within 60 days of the Federal Register publication date (by June 27) may continue operating under their state licenses while their applications are pending. As of early May, several leading multistate operators (MSOs) have already filed applications, including Trulieve Cannabis Corp., Green Thumb Industries Inc., and Glass House Brands Inc.
More broadly, it is important to keep in mind what the Order does not do. It does not legalize cannabis federally. It does not decriminalize possession. It does not expunge or modify any prior cannabis convictions. It does not open the doors of federally insured banks to cannabis businesses (which still must adhere to the Bank Secrecy Act's anti-money-laundering framework), and the SAFE Banking Act still hasn't passed.
Nevertheless, by moving medical cannabis to Schedule III, the Order reduces one layer of federal legal risk for medical operators. Critically, however, the Order does not have any effect on the status of state-legal recreational cannabis, which remains a Schedule I controlled substance.
What comes next
Legal challenges are coming. Attorney General Blanche's novel use of the treaty-power provision of the CSA to bypass notice-and-comment rulemaking is untested. Opponents will almost certainly argue that this move violates both the Administrative Procedure Act and the CSA's own procedural requirements.
Smart Approaches to Marijuana (SAM), one of the most prominent anti-legalization groups in the country, has already announced plans to sue and has retained former Attorney General Bill Barr (who served under the prior Trump Administration) to lead the effort. SAM Condemns President Trump's Decision to Move Marijuana into Schedule III, 📌 Dec. 17, 2025.
The Order's severability provision, which seeks to keep the remaining provisions in effect in the event a court were to strike or stay part of the Order, suggests the DOJ expects pieces of it to be challenged and has attempted to structure it in a way to survive partial invalidation.
The broader rulemaking, meanwhile, is set to progress on a tight timeline. Notices of intention to participate in the hearing are due May 24. The DEA will select participants by June 22. The hearing is set for June 29 and, according to the NPRM, will conclude no later than July 15, 2026. If the timeline holds, a final rule could land by late 2026, though litigation will likely delay that.
The cannabis industry should be watching closely, and not just as spectators. The rulemaking will provide an avenue for rescheduling adult-use cannabis. The outcome could bring all cannabis into Schedule III or it could formalize a federal dividing line between medical and recreational cannabis that might persist for years.
Alexander Malyshev and Sarah Ganley are regular, joint contributing columnists on legal issues in the cannabis industry for Reuters Legal News and Westlaw Today.
This article previously appeared on Westlaw Today.
Alexander Malyshev is a partner at Carter Ledyard & Milburn LLP and the chair of its cannabis, hemp and CBD industry group. He can be reached at [email protected]. Sarah Ganley is an associate in the litigation department of the firm and can be reached at [email protected].
Issue 5 – Tax Treatment of Dietary Supplements Needs Reform
A group of lawmakers asked the IRS to revise guidance to allow tax-favored health savings accountholders to use their account funds for dietary supplements without a physician's prescription.
Publication 502 Revision Requested
Tax Code sections concerning health savings accounts (HSAs), health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs) refer to the definition of medical expenses under § 213(d). That section generally allows a deduction for medical costs for the diagnosis, cure, mitigation, treatment, or prevention of disease.
IRS Publication 502 provides additional details on what medical expenses are deductible under § 213. Qualified medical expenses include everything from lead-based paint removal to service animals to pregnancy test kits. Nutritional supplements, however, are excluded unless they are specifically recommended by a medical practitioner to treat a physician-diagnosed medical condition.
The Dietary Supplements Access Act, 📌 S. 4587, 📌 has been introduced which would introduce an annual expenses cap. In addition a companion bill, H.R. 8933 📌 has also been introduced in the House.
The bill would revise § 223 and § 106 to allow HSA, FSA, and HRA participants to use their tax-favored health account funds to cover up to $500 annually in dietary supplement costs ($250 annually for married taxpayers filing separately). The bill would make the changes for supplement expenses incurred after December 31, 2026.
The bill would also revise § 220 regarding Archer MSAs, tax-favored accounts to help self-employed individuals and those working for certain small employers cover their medical costs. Generally, these accounts are only available to those who were active participants as of 2007.
Issue 6 – Trump Account Application Can Now Be Set up Through an IRS Online Account
The Working Families Tax Cuts 📌 allows parents, guardians and other authorized individuals to establish a new type of individual retirement account for their children, called Trump Accounts.
The account is for a child who has not turned 18 before the end of the calendar year in which the election is made and has a valid Social Security number. It features a pilot program contribution of $1,000 for children born between January 1, 2025, and December 31, 2028, and who are U.S. citizens with a valid Social Security number. For additional information, go to trumpaccounts.gov. 📌
To get started, clients can sign in to their IRS account with ID.me and submit Form 4547.
Get started
The entire process should take 5 to 10 minutes.
The client will need
- An ID.me account
- Their child’s Social Security number.
- Their child’s date of birth and address.
Trump Account Basics
Trump accounts, established by the One Big Beautiful Bill Act (OBBB) under § 530A, are a new tax-favored investment vehicle for children under age 18. The accounts are structured like IRAs, but have unique rules for contributions, investments, distributions, and reporting.
Contributions may be made to Trump accounts starting on July 4, 2026. Accounts can be funded through nonprofit and government contributions, employer contributions, contributions from the accountholder's parents or others, and qualified rollover contributions. Distributions are generally prohibited until the accountholder turns 18.
Because favorable tax treatment is contingent on leaving money untouched in these accounts for a long period or restricting the use of funds to specific purposes, the accounts are less useful for lower-income households.
Taxpayers benefit from greater transparency through real-time visibility into the Trump Account election process. Electronic submissions also improve accuracy, speed up processing times, and reduce delays associated with paper forms.
Issue 7 – Draft Form 945-X Revises Correction Process for Annual Withholding Returns
The IRS released 📌 a draft version of Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund, revised February 2027.
Use Form 945-X to correct administrative errors only on previously filed Form 945. An administrative error occurs if the federal income tax (including backup withholding) reported on Form 945 is not the amount actually withheld from payees.
For example, if the total federal income tax actually withheld was incorrectly reported on Form 945 due to a mathematical or transposition error, this would be an administrative error.
Use Form 843, Claim for Refund and Request for Abatement, to request a refund or abatement of assessed interest or penalties. Do not request a refund or abatement of assessed interest or penalties on Form 945 or 945-X.
Select ONLY One Process
Because Form 945-X may be used to file either an adjusted return of withheld federal income tax or a claim for refund or abatement, you must check one box on either line 1 or line 2. Do not check both boxes.
1. Adjusted Return of Withheld Federal Income Tax
Check the box on line 1 if the client needs to correct underreported amounts or overreported amounts and they would like to use the adjustment process to correct the errors.
If correcting both underreported amounts and overreported amounts on this form, you must check this box. If you check this box, any negative amount shown on line 5 will be applied as a credit (tax deposit) to the Form 945 for the year in which you are filing the form.
If you owe tax.
Pay the amount shown on line 5 by the time you file Form 945-X. Generally, you will not be charged interest if you file on time, pay on time, enter the date you discovered the error, and explain the correction on line 7.
If you have credit.
If you overreported withheld federal income tax (you have a negative amount on line 5) and want the IRS to apply the credit to Form 945 for the period during which you filed Form 945-X. The IRS will apply the credit on the first day of the Form 945 year during which you filed Form 945-X.
However, the credit shown on Form 945-X, line 5, may not be fully available on Form 945 if the IRS corrects it during processing or the client owes other taxes, penalties, or interest. The IRS will notify the client if the claimed credit changes or if the amount available as a credit on Form 945 was reduced because of unpaid taxes, penalties, or interest.
Do not check the box on line 1 if correcting overreported amounts and the period of limitations on credit or refund for Form 945 will expire within 90 days of the date you file Form 945-X.
2. Claim
Check the box on line 2 to use the claim process if correcting overreported amounts only and the client is claiming a refund or abatement for the negative amount (credit) shown on line 5. Do not check this box if correcting any underreported amounts on this form.
You must check the box on line 2 if there is a credit (a negative amount on line 5) and the period of limitations on credit or refund for Form 945 will expire within 90 days of the date you file Form 945-X.
The IRS usually processes claims shortly after they are filed. The IRS will notify the client if the claim is denied, accepted as filed, or selected to be examined.
Unless the IRS corrects Form 945-X during processing or you owe other taxes, penalties, or interest, the IRS will refund the amount shown on line 5, plus any interest that applies.
Issue 8 – Summer Day Camp
If a client is sending a child to summer day camp, the cost may count toward the Child and Dependent Care Credit. 📌
Along with the lazy, hazy days of summer come some extra expenses, including summer day camp for working parents.
If you paid someone to care for a child or a dependent so you could work, you may be able to reduce federal income tax by claiming the credit for child and dependent care expenses on the tax return.
This credit is available to people who work or to look for work, have to pay for childcare services for dependents under age 13. The credit is also available if the client paid for the care of a spouse or a dependent, of any age, who is physically or mentally incapable of self-care.
The Child and Dependent Care Credit is available for childcare expenses incurred during the summer and throughout the rest of the year. Here are five facts to remember about this credit:
- The cost of day camp may count as an expense toward the Child and Dependent Care Credit.
- Expenses for overnight camps do not qualify.
- Whether the childcare provider is a sitter at the client’s home or a daycare facility outside the home, they may get some tax benefit if you qualify for the credit. You will need the name of the childcare provider, the address, the identification number (i.e. Social Security number or employer identification number) and the total amount paid.
- The credit can be up to 35 % of qualifying expenses, depending on the income.
- Clients may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
Issue 9 – Introductory Guidelines for Responsible AI Use in Federal Tax Practice
Artificial intelligence (“AI”) is a rapidly evolving technology that has been adopted by many tax practitioners, some of whom have even developed their own AI platforms. Because AI technology and applications continuously change, there is no decisive definition of AI that describes all its forms and functions. At a basic level, AI can be defined as the use of machines in a way that mimics human cognitive skills, including judgment, perception, and prioritization. Virtually all professional tax firms use some form of AI, whether they are aware of it or not. From document review platforms and advanced legal research products available from providers, such as Thomson Reuters’ Westlaw Edge, Bloomberg Tax, and Lexis-Nexis, AI is ubiquitous in modern law and accounting offices.
As of late, there are open-source programs that use generative artificial intelligence (“GAI”), meaning that they generate original content. These programs have the ability to make discretionary decisions, devoid of any human interaction. This capability is a result of GAI’s use of complex pattern-recognition capabilities that continually interact and evolve, allowing the program to learn from itself. GAI’s transformative potential includes cost savings, rapid data analysis, and, for government tax administrators, in particular the IRS, advanced applications such as fraud detection and audit risk assessment.
Yet, it has limitations—such as fabricated outputs (or, as commonly termed, “hallucinations”), bias, and lack of transparency, and these pose serious ethical and legal risks. As a result, the use of GAI presents concerns involving privacy, confidentiality, and data protection. For example, client privacy can be compromised when data generated for one client is repurposed by the program to respond to an inquiry concerning another client, or data compiled for a particular issue is spilled over into an algorithm and combined with a related tax issue involving a different client. As such, it is incumbent on any tax professional using GAI to carefully review all documents crafted by technology.
Real-World Consequences of Improper AI Use
Courts have increasingly sanctioned lawyers for improper use of GAI, mainly due to fake citations or other hallucinations contained in legal filings. Typical penalties imposed in these cases have included financial sanctions—often amounting to several thousand dollars; public censure; required completion of legal ethics or professional responsibility courses; default judgments entered against the responsible party; removal from representation of a party to the matter; and disciplinary referrals to state bar authorities.
These sanctions stem from violations of duties of candor and competence, and they often entail reputational harm as attorneys must notify clients and affected judges about the court-ordered sanctions. The consequences emphasize the need for tax practitioners to act with care and precision when using AI tools, reinforcing the importance of diligent human oversight.
While the legal profession has seen the most public court sanctions, they serve as a warning for other tax professionals. Cases imposing sanctions against other types of tax professionals are slowly emerging. For example, the Australian government published a 230-plus page report on its website in July 2025 that Deloitte Australia had prepared for it. The report contained invented quotes attributable to a judge, references to non-existent reports, and books ascribed to the wrong author, all produced apparently by GAI. Deloitte Australia reportedly resolved the matter directly with the Australian government by agreeing to partially refund a portion of the fee it received from the government.
Regulatory Framework: Circular 230 Provisions
1. Section (§) 10.22 – Due Diligence: “A practitioner must exercise due diligence in preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; in determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and in determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.”
When using GAI, practitioners must thoroughly review all AI-created documents and language incorporated into writing before delivery to a client or submission to the IRS. Due diligence requires verifying the accuracy of facts, citations, and calculations produced by AI. Practitioners cannot rely solely on AI; human scrutiny and editing are essential to ensure correctness and compliance with IRS expectations.
2. 10.27(a) – Fees: “A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.”
AI can reduce research and drafting time, such that billing clients for manual labor or time that was not actually spent or double billing for AI-assisted tasks may violate § 10.27, depending on the facts (e.g., a noticeable pattern across clients or the size of the billing differentials). Cost savings should be passed on openly, with billing practices that reflect the efficiencies gained from the use of GAI. Practitioners should not only disclose, in general or specific terms as needed, the AI activities performed, but also fairly credit to the client’s account any cost reductions.
3. § 10.35 – Competence: “A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.”
Practitioners must understand both the law and the technology used in their representation of clients before the IRS, including AI systems’ operational mechanics, limitations, and risks.
They must understand how AI develops content, recognize the potential for bias or errors, and be able to evaluate whether AI outputs are suitable for use in IRS matters. Lack of technological competence could lead to improper advice or flawed filings.
4. § 10.36 – Procedures to Ensure Compliance: “(a) Any individual subject to the provisions of this part [i.e., Circular 230] who has (or individuals who have or share) principal authority and responsibility for overseeing a firm’s practice governed by this part, including the provision of advice concerning Federal tax matters and preparation of tax returns, claims for refund, or other documents for submission to the . . . [IRS], must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with . . . [Circular 230], as applicable. . . . .
(b) Any such individual . . . will be subject to discipline for failing to comply with the requirements of this section if—
(1) The individual through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that the firm has adequate procedures . . . , and . . . [any firm members] are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply . . . ;
(2) The individual through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that firm procedures in effect are properly followed, . . . [resulting] in a pattern or practice . . . or;
(3) The individual knows or should know . . . of . . . a pattern or practice . . . , and the individual, through willfulness, recklessness, or gross incompetence fails to take prompt action to correct the noncompliance.”
Firms must deploy internal policies and procedures for compliance with Circular 230 in the AI space, with coverage that includes:
- Staff
- Comprehensive training on use of AI (the risks – technological and other – and the requirements).
- Rules applicable internally (within the firm)
- Established protocols for secure data handling, AI accuracy monitoring, etc.
- Contracting with external providers
- Outsourced or third-party AI tools should be vetted.
And all steps and processes documented to show adherence to section 10.36.
5. 10.37 – Requirements for Written Advice: “A practitioner may give written advice (including by means of electronic communication) concerning one or more Federal tax matters subject to the requirements . . . of this section. . . . The practitioner must—
(i) Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events);
(ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
(iii) Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter;
(iv) Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
(v) Relate applicable law and authorities to facts; and
(vi) Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.”
Because written advice must be based on reasonable factual and legal assumptions, practitioners cannot rely on GAI projections or representations without verification. For legal documents, citations must be checked and cases read. Financial forecasts, inputs, and formulas need to be confirmed. If the system’s logic is opaque, reliance may be unreasonable under section 10.37.
When drafting written advice with GAI, practitioners must independently authenticate all factual and legal information. Blind reliance on what AI yields, especially when the underlying logic or sources are unclear, may constitute unreasonable reliance. Practitioners should treat the advice as a starting point, subject to thorough review before providing it to clients.
6. IRC sections 6713 and 7216(a): Civil and criminal preparer penalties apply for unauthorized use or disclosure of tax return information.[1] Section 10.51(a)(15) of Circular 230 also prohibits the willful disclosure or use of tax return information in an unauthorized manner, including in violation of the IRC.
GAI platforms may present risks regarding the unauthorized disclosure of sensitive taxpayer information, especially when data is uploaded to unsecured or public systems. Practitioners must strictly handle all client data using only secure, enterprise-approved AI. AI systems should be utilized with robust confidentiality safeguards firmly in place. Willful mishandling of taxpayer information through AI may lead to disciplinary actions under Circular 230.
State Law and Professional Guidance
Several states, including California, Colorado, Illinois, and Utah, have enacted AI governance legislation focusing on transparency, reducing bias, and protecting consumers. In addition, professional organizations such as the American Bar Association have released guidance. For example, the ABA’s Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 512, titled, Generative Artificial Intelligence Tools, on July 29, 2024. This opinion addresses the growing use of GAI in legal practice and discusses key ABA Model Rules of Professional Conduct that practitioners must consider when leveraging AI.
Best Practices for Responsible AI Use
The items listed below have already been amply discussed, but let’s do a quick recap –
- Identify, understand, and stay updated on any relevant federal or state-specific laws, regulations, and guidance that pertain to your professional activities.
- Establish secure AI data handling protocols and access controls.
- Document AI usage and verification processes.
- Foster transparency and accountability in all AI practices.
- Prepare clear procedures for handling breaches or errors.
- Provide necessary staff training.
- Vet third parties’ AI offerings when or before purchasing.
- Never upload sensitive data to unsecured sites.
- Treat the written text that AI generates as drafts.
- Review the resulting documents thoroughly for factual and legal accuracy (e.g., always check citations) and any problematic bias.
Conclusion
GAI holds promise to improve efficiency and professional services in tax practice. However, ethical obligations of competence, diligence, and confidentiality remain unchanged. By implementing robust use-management strategies and maintaining human supervision, tax professionals can harness AI’s benefits while safeguarding reliability and public trust.
As tax practitioners integrate GAI into their workflows, it is crucial to recognize that technology serves as a powerful tool, not a substitute for professional judgment. AI can streamline routine tasks, enhance research, and provide valuable insights, but final decisions must always rest with qualified professionals who understand the complexities of tax law and ethical standards. Practitioners must remain vigilant in reviewing what is produced by AI, validating its factual assertions and citations, and handling sensitive client data safely and securely in accordance with both federal and state regulations.
Also important is ongoing self-education and awareness, as directives and guidance from government agencies and professional bodies continue to evolve. Ultimately, responsible adoption of AI policies lies with the profession, to deliver enhanced value while preserving credibility.
Issue 10 – New U.S. Postal Service Rules Could Affect Whether Your Tax Filing Is Considered on Time – Reminder
You may have heard the phrase “timely mailed is timely filed.” Here’s what that really means: under § 7502, if the tax return or payment is postmarked on or before the due date, the IRS will treat it as timely even if it arrives days later.
That same rule applies if you’re filing a petition with the U.S. Tax Court. But here’s the catch: new U.S. Postal Service (USPS) rules could cause the postmark to be later than the day you or the client actually mailed the documents.
And if the postmark is dated after the deadline – even by a day – the filing would be late, and the client could face penalties.
New USPS rules could mean in some local post offices the postmarks may reflect when mail is processed, not when you or the client send it. To protect yourself and the client file or pay electronically when possible, or if mailing near a deadline, go to a post office counter and obtain a dated postmark and proof of mailing.
The USPS adopted new rules governing postmarks, 📌 effective December 24, 2025. Instead of reflecting on the date when you or the client drops the mail in a mailbox or hand it to a carrier, a postmark may reflect when the mail is first processed at a USPS facility.
While these changes are intended to improve mail processing efficiency at limited post offices, they may have unintended consequences for taxpayers who rely on the mail to file returns or send payments, depending on how the USPS implements its new procedures.
When the IRS receives a tax form or payment after the due date, the postmark date can be the determining factor of whether the submission is considered timely, and whether late filing or late payment penalties may apply. And the U.S. Tax Court 📌 also treats a petition as timely filed if the Tax Court receives it in an envelope bearing a legible USPS postmark dated within the time for timely filing.
When it comes to taxes and deadlines, the importance of making payments and filing returns timely cannot be understated. Filing timely helps taxpayers avoid unnecessary penalties and is critical to preserve their rights.
The date when the USPS first accepts possession of the piece of mail can occur under a variety of circumstances, such as when a letter carrier collects mail from a mailbox or collection box, or when a postal retail associate accepts a piece of mail from a customer at a retail location. Under the new rules, postmarks are applied when mail reaches automated processing, not when USPS first receives it.
The postmark date applied in an originating processing facility is often the same date the USPS first accepted possession of the piece of mail. However, because the USPS has consolidated processing to increase efficiency and reduce costs, the amount of mail where the date of acceptance and the postmark date are different may increase.
The new rules may affect postmarks on mail placed in traditional USPS blue mailboxes, for instance. As a postmark will not be applied until mail reaches an automated sorting facility, the postmark could be one to three days from the date the customer dropped the piece in the mailbox, depending on when the mail is picked up from the blue mailbox and whether the following day is a Sunday or holiday.
For example, a piece of mail that first enters postal possession on a Saturday preceding a Monday holiday may be processed and postmarked on Tuesday – a gap of three days. 📌
One in five taxpayers lives in a rural area, 📌 where it is more likely that postmark dates will be affected by this change. One way USPS is seeking to increase efficiency and reduce costs is through reducing trips between local offices and processing facilities from multiple times per day to a single trip per day. Letters and flat-shaped mail that originate more than 50 miles from a USPS regional processing and distribution center may reflect a postmark date one to three days later than the date of mailing.
If you are close to a filing deadline, do not rely on a mailbox alone. One method of ensuring your postmark date is the same as your date of mailing is by using an authorized private delivery service. 📌 In addition, there are several options available for taxpayers who want to use the USPS and ensure the postmark date is the same as the date of mailing, and equally important, that they have documentation to prove it. Go to a USPS counter and use:
- Certified Mail;
- Registered Mail; or
- Postage Validation Imprint (special marking indicating postage paid and date accepted).
These options provide proof of the mailing, which can protect the client if there’s ever a question about whether they filed on time. And if the required postage (e.g., stamps) is already on the envelope and not purchased at the time of mailing, a customer can request a manual (local) postmark at any post office for free when sending their mail.
This method ensures the postmark reflects the date of mailing, but keep in mind that requesting a free, manual postmark does not create a document the client can retain as proof of the postmark date. It’s also important to note that a pre-printed label applied prior to mailing, such as a private meter mail stamp or postage from a private, online postage-printing service will not serve as proof of a postmark date.
Whenever possible, filing the return or making a tax payment electronically is the safest way to sidestep any issues with postmarks. The client receives confirmation right away, and they do not have to worry about postmarks or mail delays.
However, some forms, such as Form W-7, 📌 Application for IRS Individual Taxpayer Identification Number (and the accompanying return), and Form 706, 📌 United States Estate (and Generation-Skipping Transfer) Tax Return, are not eligible for electronically filing.
If mailing one of these paper forms close to the due date, the best practice is to go to a post office counter and make sure the postmark is stamped on the envelope at the same time you place it in USPS custody and that the client obtains a receipt reflecting that date as the postmark date.
Issue 11 – Majority of States Join New Federal Scholarship Tax Credit Program
A total of 27 states have joined the Federal Scholarship Tax Credit (FSTC) 📌 program created under the One, Big, Beautiful Bill. Starting in 2027, eligible taxpayers can claim a federal tax credit for up to $1,700 for qualified contributions to Scholarship Granting Organizations (SGOs) that fund scholarships for K-12 education expenses and services.
To claim the credit, taxpayers must contribute to an SGO located in a state that participates in the FSTC program and submits a list of qualified SGOs.
Visit Federal Scholarship Tax Credit at IRS.gov 📌 for a complete list of states that have joined the program and to read the most current information.
Issue 12 – The New Tax Professional Management Office (TPMO)
The Internal Revenue Service, effective June 28, is creating a new office to simplify and modernize how it interacts with the tax professional community. The Return Preparer Office (RPO) and the Office of Professional Responsibility (OPR) will align under the new Tax Professional Management Office (TPMO), which will be headed by Chris Pleffner. The change also supports federal workforce management requirements outlined in Executive Order 14210, which focuses on improving organizational efficiency across federal agencies.
The merger will benefit tax professionals and the taxpayer community by creating improved efficiencies and simplified operations, thus making it easier to work with the Service. This reorganization under TPMO will not change the distinction between credentialed tax professionals and uncredentialed tax preparers. The missions of RPO and OPR will remain intact and will operate independently within their respective roles and authorities. Aside from improved efficiencies, the merger will have no impact on how the IRS oversees the professional tax community.
Issue 13 – Tax Court Proposes Updates to Practitioner Rules
Chief Judge Patrick Urda announced that the United States Tax Court has proposed amendments to its Rules of Practice and Procedure. The Court proposes to amend Title XX, Practice Before the Court.
The proposed amendments comprehensively restyle this title to make it clearer, simpler, and more consistent with the restyled Federal Rules of Civil Procedure. In addition, the proposed amendments clarify how non-attorneys may apply for admission to practice before the Court, explain eligibility criteria, and set out specific requirements for letters of recommendation.
They also modify practitioners reporting obligations with respect to disciplinary actions, changes in status, and changes in contact information as well as the procedures the Court will follow for certain disciplinary hearings, reciprocal discipline, and reinstatement.
The proposed amendments are contained in the Notice :
Title_XX_Amendments_05.26.2026.pdf 📌
The Tax Court invites public to comment on the proposed amendments. Comments must be received by Friday, July 24, 2026, and may be emailed to [email protected] or addressed to the Clerk of the Court at United States Tax Court, 400 Second Street, N.W., Room 116, Washington, D.C. 20217.
Comments received will be made available on the Comments and Suggestions page on the Tax Court website. If you have any questions, contact the Public Affairs Office at (202) 521-3355.
Issue 14 – Applicable Federal Rates for July 2026, Rev. Rul. 2026-12
REV. RUL. 2026-12 TABLE 1
Applicable Federal Rates (AFR) for July 2026
| Period for Compounding | ||||
|---|---|---|---|---|
| Annual | Semiannual | Quarterly | Monthly | |
| Short-term | ||||
| AFR | 4.00% | 3.96% | 3.94% | 3.93% |
| 110% AFR | 4.41% | 4.36% | 4.34% | 4.32% |
| 120% AFR | 4.81% | 4.75% | 4.72% | 4.70% |
| 130% AFR | 5.22% | 5.15% | 5.12% | 5.10% |
| Mid-term | ||||
| AFR | 4.35% | 4.30% | 4.28% | 4.26% |
| 110% AFR | 4.79% | 4.73% | 4.70% | 4.68% |
| 120% AFR | 5.23% | 5.16% | 5.13% | 5.11% |
| 130% AFR | 5.67% | 5.59% | 5.55% | 5.53% |
| 150% AFR | 6.55% | 6.45% | 6.40% | 6.36% |
| 175% AFR | 7.67% | 7.53% | 7.46% | 7.41% |
| Long-term | ||||
| AFR | 4.98% | 4.92% | 4.89% | 4.87% |
| 110% AFR | 5.48% | 5.41% | 5.37% | 5.35% |
| 120% AFR | 5.99% | 5.90% | 5.86% | 5.83% |
| 130% AFR | 6.50% | 6.40% | 6.35% | 6.32% |
REV. RUL. 2026-12 TABLE 2
Adjusted AFR for July 2026
| Annual | Semiannual | Quarterly | Monthly | |
|---|---|---|---|---|
| Short-term adjusted AFR | 3.03% | 3.01% | 3.00% | 2.99% |
| Mid-term adjusted AFR | 3.29% | 3.26% | 3.25% | 3.24% |
| Long-term adjusted AFR | 3.77% | 3.74% | 3.72% | 3.71% |
REV. RUL. 2026-12 TABLE 3
Rates Under Section 382 for July 2026
| Adjusted federal long-term rate for the current month | 3.77% |
| 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.) | 3.77% |
REV. RUL. 2026-12 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for July 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 | 8.09% |
| Appropriate percentage for the 30% present value low-income housing credit | 3.47% |
REV. RUL. 2026-12 TABLE 5
Rate Under Section 7520 for July 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 | 5.20% |
REV. RUL. 2026-12 TABLE 6
Blended Annual Rate for 2026
| Section 7872(e)(2) blended annual rate for 2026 | 3.82% |
| IRS Applicable Federal Rates page 📌 Rev. Rul. 2026-12 📌 | |
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