Accounting
IRS contingency plan for government shutdown unclear
The Internal Revenue Service’s contingency plans for a government shutdown are currently unknown, with the
Former IRS acting commissioner Doug O’Donnell, who is now a senior managing director of KPMG’s Washington national tax practice, discussed the possibilities during a
Now the IRS is facing the prospect of a government shutdown at midnight on Oct. 1 if Senate Republicans and Democrats can’t agree on a compromise to pass a continuing resolution to keep the government running.
“There is not a ton of communication that goes on about where the budget is and what’s happening and what the IRS is planning with respect to a potential lapse,” said O’Donnell. “That is not inconsistent with the past. This is basically an MO for the IRS and most federal government agencies. Those decisions on what to say and when to say it are largely managed by senior members of the administration. In the case of the IRS, it was [the Office of Management and Budget], and then the Treasury Secretary, so that’s not unlike what it’s been in the past. So the fact that the plan is not out, and there’s not a lot of chatter about what’s happening, that is consistent with the past. In my experience, there’s a reason for that, and it’s largely due to their not wanting to be a signal by the agencies themselves that they know something about what’s happening, because they don’t. That’s all being worked at a very different level.”
The Treasury Department did not immediately respond to a request for comment about the latest contingency plans. But the IRS is no doubt preparing for the possibility of a shutdown. “There’s this legal framework around government spending, and the Anti-Deficiency Act basically says you can’t spend that which you don’t have,” said O’Donnell. “If you don’t have appropriated funds of some manner, the agencies can’t operate. And in the instance of the IRS, if there’s a budget lapse, what ends up happening is that there are a number of activities that are not considered to be essential, and those activities do not continue. And it’s important to understand what those are. And it’s useful to have what the contingency plan is that the agency puts together, because they’ll spell out what those activities are, the numbers of people that will be available, and the services that will be available.”
He noted that it can be a very fluid environment. “In my experience at the agency we made sure that there were new people that were coming into the planning process for the contingency plan, so that we were thinking about what has changed in the agency,” said O’Donnell. “A plan to respond to a lapse could look the same from year to year, but typically there are differences.”
It will be important for tax professionals to reassure their clients and colleagues during any shutdown. “I think for the clients of KPMG, for our colleagues at KPMG, understanding what’s actually happening and what it may mean is super important, just so that you can manage expectations, your own or those you work with, because it does evolve over time,” said O’Donnell. “If it lasts more than a couple of hours, one does need to be paying attention to what does this mean? What do I need to do? How should I respond? And how should we be thinking about what could happen if this goes longer than we may have thought originally?”
The duration of the shutdown will be key. “There are times where the lapse of the budgets will run up till midnight on a day, and at that point, if there’s no funding, then operations would halt,” said O’Donnell. “Frequently in most government agencies, certainly the IRS, once you get past the end of the normal workday, there are not a ton of people that are working in any event. There are the campuses where returns are processed and accounts are adjusted, but typically, the majority of employees are not going to be working. And so if, if there were a lapse that occurred at, say, 12:01 a.m., and it were resolved by 6 a.m. that would be a blip. You’d read about it, you’d hear about it, but the effects would be very minimal. When it’s a couple of days out, it depends on what your frequency of interaction is with the agency. If you’re involved in something where there’s been an ongoing effort to try to resolve a question or a challenge or an account issue, and that person is no longer available, that becomes difficult, because managing that without somebody being available can be very difficult. And so there does begin to be a greater impact to taxpayers, to tax professionals, if it runs longer.”
During the 35-day lapse from December 2018 to January 2019, the lapse actually lasted until the beginning of the tax filing season. “There were impacts that at the outset were minimal, not even really considered,” said O’Donnell. “But as time went on, it was a very different scenario.”
IRS leadership conducted daily calls to decide what to do. “Some of these issues that we wouldn’t normally worry about, we need to start talking about, and we need to be thinking about whether our plan for only having 30% of the workforce, or 40% of the workforce in, does that work?” said O’Donnell. “And then that turns into a communication with Treasury Department, who will be working with the Office of Management and Budget to understand whether there’s any flexibility, because that which we thought was essential for a day is one thing, but when you get out a week or two weeks, it becomes a very different matter, and that’s something that leadership will know about and will be prepared for. And there are leaders at the IRS who have been through this, and do appreciate that if something were to happen, the pivot to this is not an hour or a day, it’s something more than that. They do have experience with that and how to make the case for allowing additional folks to be involved in some of the work. It doesn’t turn everything back on, but some of the things that you need to make sure you do that are essential to the operation of the IRS that they will be turned back on.”
Accounting Today asked about where the contingency plan could be. “I’ve been looking around and poking,” said O’Donnell. “I can’t find an official updated version, but my sense is that there will be an updated version, because that’s an ongoing exercise. It’s done by top level leadership to take a look at the programs across the board. And it’s a heavy lift initially, and then it’s got to be a close read by the different operational components to understand what might be happening, what’s different about the way we’re operating now than last year, and so that’s an ongoing effort to update.”
Accounting Today also asked about the staffing cuts at the IRS and how those would affect the shutdown. President Trump and White House Office of Management and Budget director Russell Vought have threatened mass firings of federal employees in the event of a shutdown, although the IRS was
“They lost a significant number of people through the Deferred Resignation Program and other reductions in force, and they then have moved to hire and there’s also this offer for people that did take the Deferred Resignation Program to come back,” said O’Donnell. “We don’t know how many, and we don’t know the classes of employees, and we don’t know how many accepted it, but there is a move to make sure that there is some rebuild of the staff, but they’ve got to get in and get trained up, and that’s got to happen before they can do some of this work that I was talking about, like answering phones, staffing walk-ins, adjusting accounts. And so it all begins to work together in terms of the environmental challenges that the Service is going to face that are primarily focused on the individual work. But this affects entities large and small, because anything that they may need to do to interact with and the professionals that represent them to interact with the IRS is going to be in the same bucket of demand that everything else is, where we’ve got this environment with new provisions, a lot of new people, fewer people, and in a relatively challenging environment, so that the Service is going to be thinking about this very carefully, about how to best position. They could make an argument that some of these activities that would not normally be considered essential could be categorized as essential.”
The IRS will need to train employees about the new tax law as it tries to rehire staff. “We’re in an interesting period here in the United States where there’s an effort to hire,” said O’Donnell. “It was reported in late August, roughly 3,500 employees, which seem to be mostly in the customer service space, will be coming in to do this work where typically phones are being answered, amended returns are being processed, accounts are being adjusted, and those folks will need to be trained for a much longer period. That typically takes three-plus months to bring them up to speed.”
The One Big Beautiful Bill Act adds new complications. “And then there are the folks that need to be trained in the new tax law, which, this year there was significant change to provisions for tax year 2025 that affect millions of individuals: the overtime, the tips, the deduction of interest on automobiles,” said O’Donnell. “That is a bit nuanced. And there’s other provisions, but those are going to affect large numbers of individuals that don’t have access to, for example, a KPMG to help them navigate. And that will spike demand for assistance, and that’s going to come at a time where there may be fewer people, and there may be fewer people that have the deep level of expertise that may have existed before the 6,000 or so employees in the customer service representative space did leave, and actually a number of them that took the Deferred Resignation Program, the majority of them will leave payroll September 30. They’ve not been working since the middle of May. So there’s a lot that’s going on in that space. And then if you get into the filing season, there’s a completely different set of decisions that need to be made. We are now in the really primary season for the IRS. Processing returns and taking in payments are two of the essential functions that the IRS has. The good thing for the IRS, for the United States, frankly, is that most individual returns, like 95 or 96% of the individual returns, are filed electronically. So that process happens, it works, but there are still paper returns that are coming in.”
The IRS will need to communicate in the event of a shutdown. “If there is a lapse, there will be communications that will be out there about what what functions are on and which ones are off,” said O’Donnell.
“Managing expectations becomes really important, and that’s on the part of the IRS and for their employees, understanding what’s going to happen,” he added. “They know when they come back to work if there is a lapse that there are a lot of things that need to be turned back on, that need to be restarted. Even when there is a lapse that ends, if it’s longer than a couple of days, turning things back on is not an inconsequential challenge, and it’s something to keep in mind. So I think it’s really important to pay attention to what the IRS puts out. They’ll put things out on
Hardin Tanguay summed it up. “The IRS has been here before,” she said. “There are playbooks for shutdowns. Essential operations will go on, how those are defined will meet the needs of the moment, but taxpayers should potentially expect a slower service on everything else in the event that we do face a shutdown. The key is to stay informed and continue meeting your tax obligations as normal.”
O’Donnell said taxpayers and tax professionals should continue to file. “Make sure you’re doing the things we normally do, to file, to make the payments, keep your records, pay attention to how things are evolving, and make sure for us, we’ll be communicating within the firm and then sharing that information with clients, but It’s going to be really important for all of us to just keep track of what’s happening,” he said.
The National Treasury Employees Union is urging a resolution before the shutdown. “Hardworking Americans deserve better than the current chaos in Washington,” said NTEU national president Doreen Greenwald in a statement Thursday. “We elect leaders to work together to ensure government provides the necessary services effectively and efficiently for its citizens. Instead of the parties working together, we face another potential government shutdown. This is politics at its worse, using the federal budget as a game of chicken with federal employees as the collateral damage. Again. And this time even more so with the Administration’s latest illegal threat of mass layoffs if the government shuts down. This needs to stop. We must expect more from the government and stand with federal employees so they can continue to provide the services we rely on and are not used as political pawns. We all need to call on Congress and the Administration to do their jobs. The mandate is clear: Negotiate a bipartisan deal to fund the government so that services continue and taxpayer dollars are not wasted by a shutdown that serves no one.”
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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