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IRS faces steep budget cuts without congressional action

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The Treasury Department is warning Congress that it needs lawmakers to unlock $20 billion in funding for the Internal Revenue Service that could be rescinded due to duplicative legislative language.

The $20 billion is targeted at IRS enforcement and is separate from the more than $20 billion that has already been clawed back from the Inflation Reduction Act’s extra $80 billion in funding for the IRS over a decade. If Congress doesn’t act during the appropriations process before the end of President Biden’s term, the $20 billion may be rescinded, putting at risk the IRS’s ability to hire more employees and carry out its duties next tax season.

“The IRS is going to potentially have to make dramatic decisions about stopping hiring and starting to budget for a world [in] which they don’t have $20 billion, which will stop a lot of their progress,” Treasury Deputy Secretary Wally Adeyemo said during a call with reporters Tuesday, according to the Associated Press. “If they don’t get that $20 billion that is at risk, they would run out of enforcement money at the current pace sometime in fiscal year 2025.”

The IRS received an extra $80 billion in funding over 10 years for enforcement, taxpayer service and technology upgrades as part of the Inflation Reduction Act of 2022. But as part of a deal to raise the debt ceiling in 2023, the funding was reduced by $1.4 billion, and later as part of another agreement last year an additional $20 billion of the tax enforcement money was distributed to other federal agencies for nondefense spending. That $20 billion cut was mistakenly duplicated in the legislative language, so the IRS faces another steep budget cut unless Congress acts to amend the language during its year-end appropriations process.

The budget cuts could also exacerbate the deficit as the extra money for tax enforcement was expected to generate tax revenue. The Treasury estimated the national debt could grow by $140 billion without the extra funding for tax enforcement.

The incoming Trump administration is already expected to slash IRS enforcement funding once President-elect Trump takes office. Republican lawmakers have been calling for cuts in the IRS budget, including the elimination of the Direct File free tax preparation program that the IRS began pilot testing last year in a dozen states. Last month, the Treasury announced that it’s planning to expand the Direct File program next year to 24 states, double the number that were pilot testing it last tax season.

Despite opposition among many Republicans in Congress to the Direct File program, Direct File may have the support of Tesla CEO Elon Musk, who has been assigned by President Trump to head a new Department of Government Efficiency with former GOP presidential candidate Vivek Ramaswamy with the goal of cutting waste and inefficiency in the federal government. On the recently created X account for DOGE, they posted last week about the need to simplify the tax-filing process, leading to a temporary drop in stock prices for Intuit and H&R Block

“In 1955, there were less than 1.5 million words in the U.S. Tax Code,” said the DOGE account. “Today, there are more than 16 million words. Because of this complexity, Americans collectively spend 6.5 billion hours preparing and filing their taxes each year. This must be simplified.”

However, that doesn’t necessarily mean the Trump administration will preserve the IRS Direct File program after next tax season.

“I would anticipate that it goes forward this coming year, in other words, for the 2024 filing season,” said former Intuit CEO Bill Harris, who developed TurboTax when he was president of ChipSoft, which Intuit acquired in 1993. “I’m sure it’s already all baked. The following year, it could just go away. I would bet more that it just withers on the vine. But I think that’s too bad too because one of the things that the IRS really needs to do is take a customer-focused view.”

He acknowledged, however, that Intuit and other tax software companies have been fighting to end the Direct File program. 

“Some people, for instance, at the tax preparation software companies, are against it because they perceive it to be competition,” said Harris, who is now founding CEO of Evergreen Money, a development-stage financial services company. “I really don’t think that that’s the proper view. I think the proper view is that for the kinds of simple returns that they’re capable of handling, I think that’s great, and people should have a free mechanism to do that. And it’s also clear that the government will never be in a position to build something that’s terribly sophisticated. And so even for people with moderately complex taxes, they’re going to need something like professionally and privately built tax software. I see this as an opportunity for an excellent private-public partnership, so I hope the IRS continues with it, and I hope that the private companies embrace it.”

After leaving Intuit in 1999, Harris was co-founding CEO of PayPal, which merged Elon Musk’s X.com with Peter Thiel’s Confinity. Accounting Today asked Harris what he thought of the prospects for Musk’s DOGE to find enough savings from cutting government waste to make up for the lost tax revenue from the extension of the Tax Cuts and Jobs Act and the various tax exemptions proposed by Trump on tip income, overtime pay, Social Security benefits and more.

“Nothing to do with Elon Musk, although I know he’s obviously going to be a part of this, but absent any personalities, it’s remarkably hard even for a Republican administration to rein in costs,” Harris replied. “Certainly the initial Trump administration did not do that. They expanded expenditures. There was a big runup in the debt, particularly as the party has moved from traditional Republican notions of fiscal conservatism to essentially populism.”

Cutting the IRS enforcement budget could contribute to the national debt, as the Treasury Department warned, and could have a spillover effect leading to slowdowns in taxpayer service and technology improvements as well.

“You could see monies being taken away from enforcement, but probably continuing the customer service modernization portion of the IRS,” said Tax Guard CEO Hansen Rada. “The IRS requires a lot of people because the Tax Code is so complicated, and that’s really Congress’s fault. It’s not the IRS’s fault. It’s almost like yelling at the policeman when he pulls you over for speeding. If you want the speed limit raised, you go to your local representatives, you don’t yell at the policemen, and the IRS is just the enforcement arm. Barring any sort of drastic change to simplification of the Code, it’s going to require people, because of deductions and all the other considerations in order to execute that. The vast majority of returns are simple returns, W-2’s, and so this Direct File, or this app that Elon hinted at would be a modernization effort to help the majority of returns, but not the complicated ones, and that still would require people.”

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Accounting

IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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