The continuing resolution that the Senate narrowly approved last Friday and President Trump signed on Saturday included a $20.2 billion cut in the Internal Revenue Service’s budget, the third such cut since 2023, clawing back over three-fourths of the $80 billion that the IRS was supposed to receive over 10 years from the Inflation Reduction Act of 2022. The agency is now planning to pause its technology modernization efforts.

The budget reduction occurred as the Trump administration and the Elon Musk-led U.S. DOGE Service have already begun layoffs at the embattled agency, with between 6,000 and 7,000 employees cut from its ranks. According to CNN, 6,700 probationary employees at the IRS have been laid off, and 4,700 accepted the voluntary buyout offer from the Office of Personnel Management’s “Fork in the Road” memo, also known as the “deferred resignation program.” However, IRS employees who accepted the buyout offer have been told to continue working through May 15, a month after the April 15 tax filing date, unlike other federal employees, and the buyout program closed as of Feb. 12. 

After the resignations of former IRS commissioner Danny Werfel, who stepped down shortly before Trump’s inauguration, and the abrupt retirement of acting commissioner Doug O’Donnell, the new leadership at the IRS has reportedly been making plans for staff reduction of up to 50%. That percentage now seems to have been revised down to a reduction of about 20% of the agency’s workforce by May 15. However, it’s unclear what the final number will be in the staff reductions. In January, the IRS reportedly had over 100,000 employees, according to the Federal News Network.

“I’ve seen numbers of 20%, I’ve seen numbers of 30%, I’ve seen numbers of 50%,” said Tax Guard CEO Hansen Rada. “It’s really difficult to tell what is true, and I don’t think anybody knows, because the proposal has been private, so there is definitely a giant question mark as to how strong the IRS will be going forward.”

Treasury Secretary Scott Bessent disputed the numbers that have been reported in the news during an interview Sunday with Kristin Welker on NBC’s Meet the Press. “I will tell you that there were about 15,000 probationary employees that we could have let go,” he said. “We kept about 7,500, 8,500 because we view them as essential to the mission. And we will know once we get inside. But what I can tell you is that we are doing a big review. We’re not doing anything — right now it’s playoff season for us. April 15 is game day, and even employees who could take voluntary retirement — the rest of the federal workforce, their date was in February —our date for them is in May. So I have three priorities for the IRS — collections, privacy and customer service — and we’ll see what level is needed to prioritize all of those.”

Despite the cuts in the IRS budget and staffing levels, the agency has spent relatively little of the funding it was set to receive under the Inflation Reduction Act before and after it was reduced. According to a report released last week by the Treasury Inspector General for Tax Administration, as of Sept. 30, 2024, the IRS has spent approximately $9 billion (16%) of its $57.8 billion in Inflation Reduction Act funding. The biggest expenditure was $3.7 billion for employee compensation. “IRS officials indicated that approximately $2 billion has been used to supplement its annual appropriation because the amount the IRS received was insufficient to cover normal operating expenses,” said TIGTA.

The TIGTA report noted that the Further Consolidated Appropriation Act, 2024, provided annual appropriated funding of approximately $12.3 billion for three out of four IRS primary budget activities for fiscal year 2024. However, Congress provided no appropriated funding for business systems modernization, which normally funds upgrades to IRS information technology systems.  

The IRS originally received $79.4 billion in supplemental funding when President Biden signed the Inflation Reduction Act into law in August 2022, and the extra funding was supposed to be used for improving the IRS’s enforcement, taxpayer services and technology efforts. Congress subsequently rescinded approximately $21.6 billion in IRA funding, reducing the available IRA funding to approximately $57.8 billion. In addition to the rescissions, the American Relief Act, 2025, which provides appropriation funding to federal agencies through March 14, 2025, froze another $20.2 billion in IRA enforcement funds. The report said this supplemental funding is available through Sept. 30, 2031, but it was released before the latest cutback from the stopgap funding bill that passed over the weekend, clawing back another $20.2 billion.

Last week, a senior IRS official told reporters that the IRS would be pausing its technology modernization efforts and reevaluating its approach to leverage artificial intelligence, according to Reuters. The IRS is going to be reviewing a number of its recent initiatives during the “strategic pause,” including its Direct File program for free tax preparation, which expanded from 12 states during a pilot program last year to 25 states this tax season. 

The IRS has also been facing questions over the security and privacy over the data in its systems after DOGE employees demanded access to its systems, leading to the ouster of IRS acting chief counsel William Paul, who was replaced by Andrew de Mello. A court granted a preliminary injunction against DOGE getting access to taxpayer data held by the Treasury Department in response to a lawsuit from 19 states, led by New York.

“The preliminary injunction that’s in place in New York v Trump prohibits any access to IRS data systems by people at DOGE or employed by DOGE,” said Anne Gibson, a senior legal analyst at Wolters Kluwer. “For the moment, that seems like it would prevent their access to IRS data systems, and if they were to access it, it would be in violation of the preliminary injunction. That said, this preliminary injunction is on the basis that the training, vetting and credentialing of the DOGE employees who did have access to Treasury data briefly was inadequate and wasn’t done properly. And the government is given an opportunity to file a report with the court explaining how they would give DOGE employees proper training, proper oversight, proper vetting, and if they could do that, the preliminary injection would be reconsidered, and that process has actually already started.”

A key date in that process is today. “The government submitted a report,” said Gibson. “It seemed to be only in relation to only one employee, but the court, on the basis of them following that report, set up a new briefing schedule, the final pieces of which are due on the 17th of March, so an opportunity for the government to file their motion, and for the states to file their opposition motion, and then for replies. That’s all due by March 17, and then we could see further action from the court, so there’s a possibility that that preliminary injunction, if the court is happy with the government’s new process, could be lifted relatively soon.”

A lawsuit has also been filed by a pair of immigrant advocacy organizations over the Department of Homeland Security’s demands for information from taxpayers suspected of being in the U.S. illegally, specifically from holders of Individual Taxpayer Identification Numbers, also known as ITINs. This reportedly led to O’Donnell’s abrupt retirement, as such a demand could violate Section 6103 of the Tax Code, which provides civil and criminal penalties for improper disclosure of taxpayer information.

“In terms of Section 6103, I think that’s a bigger issue,” said Gibson. “The restrictions on both disclosure of tax return information, or even just accessing tax return information that’s not for one of the specified purposes that’s laid out in that section, it’s very stringent, very strict requirements there, and there are criminal and civil penalties for violating that, and it specifically references the strict requirements for giving tax return information to the executive branch and to the President, in particular the agencies under the president. However, if that section were violated, any criminal or civil penalties would need to come after the Attorney General brings a case. That’s a question if that would happen. On the other hand, taxpayers can bring a lawsuit for money damages if their data has been inappropriately accessed.”

For clients with highly appreciated assets aiming to transfer part of their holdings to an heir in a tax-efficient way while giving to a nonprofit, charitable remainder trusts could be a fit.

Charitable remainder trusts (CRTs), charitable remainder annuity trusts (CRATs), charitable remainder unitrusts (CRUTs) or net income charitable remainder unitrusts (NICRUTs) are simply potential pieces of a multifaceted estate plan — but financial advisors, tax professionals and, especially, their clients could be forgiven for getting a bit of a headache when seeing their accompanying acronyms. At the basic level, wealthy families use charitable remainder trusts to get a tax deduction for the donation, avoid capital gains duties and provide income to a beneficiary.

While they are “something that is not going to be applicable to everyone,” charitable remainder trusts may act as “a spoke in the wheel” in an estate plan, according to Eric Swensen, a wealth advisor and the chief planning officer with Walnut Creek, California-based Adero Partners.

READ MORE: 3 client scenarios that highlight tax advantages of donor-advised funds 

Use cases

The end of the so-called stretch strategy for individual retirement account beneficiaries requiring them to accept the income over no more than 10 years added to the appeal of charitable remainder trusts, which could tack on decades because they’re only subject to a “5-50-10” rule. That means the trusts must pay out between 5% to 50% of their assets each year and leave a minimum of 10% to the charity. Along the way, the tax advantages could aid clients in pushing down their taxable income in retirement while bolstering a nonprofit of their choice and providing for the beneficiary.

“You should be looking at your Social Security, IRAs and 401(k) distributions as your main source of income,” he said. “CRTs can be good for a portion of the assets to help support that primary income in retirement. … If you have enough assets for yourself, and you want to be able to help aging parents or other beneficiaries with income, this can be a good option as well.”

To illustrate what charitable remainder annuity trust can do, a working academic paper posted in December by a researcher at the University of the Cumberlands used the example of a fictional couple named Martha and Benny Franklin. With a net worth of $21.55 million, the Franklins used a CRAT as part of their attempt to ease the tax impact from passing down an array of assets that included $1 million in cash, $6 million in securities, business interests valued at $6 million, real estate investments totaling $3 million and personal residences amounting to $3.5 million. At the same time, the family aimed to ensure each of the children would have enough assets to pay for college some day and set up a special needs trust for one of the couples’ grandchildren. 

“Overall, Benny has been proactive in planning his wealth management by using charitable giving,” the study’s author, Trey Jackson, wrote. “He has set up a CRAT and three irrevocable trusts for his sons. The CRAT was funded with hot stock, evidencing Benny’s commitment to philanthropy while achieving some level of income for their lifetimes. However, the currently existing trusts were not set up in a manner designed to maximize the advantages of annual exclusions, nor were they really designed with ultimate tax efficiency.”

READ MORE: 3 types of trusts that could help wealthy clients’ estate plans

Complicating factors

The paper details the many complexities involved with how each type of asset interacts with the others inside the estate’s holdings, and lays out possible methods for addressing them. The difference between a charitable remainder annuity trust and a charitable remainder unitrust comes from the greater flexibility in the latter vehicle, which enables adjustments to the payments to beneficiaries based on shifts in value each year, Swensen noted. The annuity vehicle pays the beneficiary the same set percentage or dollar amount each year. Alternatively, the net income version could give clients and their heirs more wriggle room if they’re currently living in a high-tax state yet plan to migrate to one with lower duties some day.

“You can set it up now, you can get the deduction now, but you can defer the income until later,” Swensen said. “It’s a great highly leveraged gift, especially if you have a big spread in your cost basis there.”

Charitable remainder trusts pose some risks, though, from the ramifications to their payouts based on downturns in stock values or other problems with the underlying assets. The failure of a business tied to a charitable remainder trust for one Swensen’s clients unfortunately led to the vehicle never passing any assets to the philanthropic recipient, he said.

“I inherited a client who had put an investment in a vineyard into a CRT, and that vineyard went under. Lucky for them, they were able to get the deduction up front,” Swensen said. “These things aren’t bulletproof, and don’t always work out in all the ways.”

READ MORE: The most overlooked aspect of estate planning, and how to address it

Tap a lawyer or a CPA

Those caveats explain why only a few out of more than 900 clients working with his firm are using charitable remainder trusts. Regardless of their level of expertise, advisors could still build up their knowledge of the possible uses for the vehicles by picking the brains of certified public accountants or estate lawyers with an eye toward collaboration in the future, Swensen said.

“Once you build that team, it also helps with confidence for talking with clients about them, too,” he said. “So, when it does come up, I can tell that client, ‘Hey not only do I think this is a great solution for you, but I’ve got a team in place that can make this really easy for you.'”

Imagine a tool so integral to your daily routine that it becomes second nature in your professional life. Generative AI has done that for investment accounting. In just two short years, GenAI’s impact has reimagined how investment accountants interact with data, make decisions and drive financial strategies.

Today, nearly two-thirds of organizations say they regularly use GenAI in at least one aspect of their operations. Such rapid adoption makes it easy to understand why global GenAI spending is set to hit $202 billion — 32% of all AI spending — by 2028. Yet, as the tech continues to take shape and offer more ways to deliver intelligence, its rapid rise has also raised expectations for measurable, higher-level returns on investment. 

In the past year, GenAI has streamlined routine tasks such as document summarization and sifting through mountains of portfolio data to create actionable reports. Beyond these applications, GenAI is tackling more complex work: from demystifying the intricacies of reconciliation work to pioneering multi-country compliance automation. With each breakthrough, we’re eager to see what GenAI can do next — solving data puzzles within middle- and back-office operations is just the beginning.

However, integrating GenAI is a gradual process, with many investment accountants still learning to maximize their return on investment from these tools. The crux of GenAI implementation lies in how it can take very complex work that has involved many teams of experts and engineers harnessing very large datasets and build a data architecture that delivers remarkable output. Thus, the key to unlocking this next level of innovation lies in building a strong data architecture foundation.

Ensuring data integrity and accuracy

 
Much like investment accounting itself, the quality and accuracy of the data inputs into GenAI are essential to the reliability of its outputs. As we pioneer more advanced applications of GenAI, the creation of domain-specific prompts becomes crucial. They act as guardrails, ensuring models capture the granular context of queries and deliver accurate results. Before this can happen, we must ensure our data architecture is not only resilient but entirely without defects.

To prepare for a GenAI-driven future, businesses must maintain impeccable, validated and standardized investment data. Given the heightened regulatory scrutiny they operate in, investment accountants don’t have the luxury of simply writing off minor data errors. Even the smallest hallucination or inaccuracy can escalate into significant regulatory issues, reinforcing the need for rigorous data management practices. With this in mind and to ensure a smooth GenAI deployment, organizations should focus on three key aspects: 

• Establish a data governance framework. Assigning clear responsibilities and processes is crucial. A formalized structure should define roles in data oversight, specify tasks for data quality control, and ensure compliance, all contributing to a trustworthy data environment.
• Enhance data preparation. As the demands for GenAI evolve, so must our data management practices. Organizations must elevate their data preparation processes, such as collecting, formatting and organizing raw data into a structured format suitable for analysis. Automation and validation are critical for transforming data into analytics-ready information, quickly rooting out and addressing any anomalies.
• Break down data silos. Despite more organizations migrating to the cloud, the challenge of unstructured data from disparate systems remains a hurdle for technology success. Centralizing a data story into “data lakes” can boost collaboration, standardize data and streamline data operations, paving the way for a successful GenAI integration.

Address legacy technology barriers that stunt AI overhauls

Financial organizations, especially within back-office functions, are still grappling with outdated legacy technology systems. These systems, although familiar, resist large-scale AI transformations. Internal inertia, external constraints and other reasons keep organizations from breaking free from the status quo. As a result, many organizations tiptoe into AI integrations on a piecemeal basis, hindering their ability to scale and evolve.

While modernizing systems involves complexity, the payoff can be significant. A transition to agile, interconnected systems can result in enhanced operational efficiency, a culture of continuous innovation, and a seamless data flow that’s vital for GenAI’s success. It’s about trading in the old for new ways of working that are more in sync with our dynamic digital world.

A phased approach to replacing legacy systems can minimize disruption and facilitate a smoother changeover. Additionally, fostering open collaboration between everyday users and engineering teams is essential. This partnership ensures upgrades are implemented efficiently and in a way that maximizes ROI — turning the complex task of replacing legacy systems into a rewarding journey of transformation.

Enabling strategic alignment before launch

Organizational adoption of bold technologies like GenAI can often feel like embarking on an epic expedition. The journey begins with grand visions, but can run off course due to competing priorities and misalignments between teams and executive stakeholders. A stark reminder of this is the sobering statistic that only 54% of AI projects make it from pilot to production — with even fewer delivering their intended ROI.

To navigate a successful transition, organizations must have a clearly defined outcome-centric roadmap before launching AI projects. This includes clearly outlining what GenAI can achieve in terms of use cases and what lies beyond its current reach. For instance, while GenAI can automate routine tasks and provide data-driven insights, it may not replace the need for human judgment and decision-making.

Such a roadmap should highlight milestones, pitfalls to avoid, deadlines and expected outcomes, bringing the team closer to realizing the project’s full potential using GenAI. Ultimately, the success of GenAI integration depends on strategic alignment and collaboration — ensuring communication lines are open so every team member, from the front line to decision-makers, is informed and vested in the mission.

Fulfilling the promise of GenAI

As we peer into the future, GenAI adoption within the accounting space is set to skyrocket this year and beyond. It’s natural for business leaders to feel the pressure to dive headfirst into AI initiatives. However, it’s crucial to discern between merely adding GenAI to the toolkit and harnessing its potential to general value-added outcomes. Despite GenAI’s transformative promise, it’s not simply a plug-and-play proposition.

Success depends on several pillars: robust data governance, the modernization of legacy systems and a strategy that aligns with the organization’s objectives. Keeping these considerations front and center, investment accounting organizations can rely on a sound foundation necessary for a thriving GenAI ecosystem. By doing so, they stand the best chance to gain ROI that not only fits, but also advances their organization’s strategic objectives in the short and long term.