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IRS noncommittal on future expansion of Direct File free tax prep system

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The Internal Revenue Service declined to commit to expanding its Direct File free tax preparation program nationwide in response to a report from the Government Accountability Office, as the program comes under threat from Republican lawmakers who want to shut it down.

The report, released Thursday by the GAO, found the IRS successfully pilot tested the Direct File program last tax season in a dozen states. The IRS said earlier this year that it would make Direct File a permanent option next tax season and double its reach from 12 to 24 states in 2025.

However, the program has attracted the opposition of Republican lawmakers and the commercial tax prep software industry. Last week, a group of 29 GOP members of Congress sent a letter to President-elect Donald Trump urging him to end the Direct File service. The IRS is already facing the likelihood of steep budget cuts next year. The continuing resolution that Congress will need to pass by this weekend to avoid a government shutdown includes a $20 billion cut in the IRS budget.

IRS commissioner Danny Werfel has been a major proponent of the Direct File effort, but Trump has already named a new IRS commissioner, Billy Long, three years before the end of Werfel’s term in November 2027. Werfel declined to comment on whether he plans to resign during a press conference last week. 

The GAO report found the IRS is already behind schedule with recruiting and training customer service agents to help taxpayers use it in the 24 states where Direct File is slated to be available next tax season, due in part to insufficient coordination among various IRS offices. 

The IRS limits participation in the Direct File program to taxpayers who live in certain states, facilitating coordination between federal and state tax filing. However, the GAO found the IRS could face challenges in reaching agreements with all 50 states, raising equity concerns for taxpayers who are unable to access Direct File due to where they live.

Last tax season, during pilot testing, the IRS accepted 140,803 Direct File returns in the 12 states where it was available, helping taxpayers with lower incomes fulfill their tax filing obligations. Taxpayers reported that Direct File was an easier tax preparation method than they had previously used, according to the report, and that factor contributed to the IRS’s decision to make Direct File a “permanent” option.

The IRS is planning to expand the scope of taxpayers who can use Direct File in 2025 by adding support for the premium tax credit for health insurance coverage under the Affordable Care Act, along with other tax provisions, and by allowing residents of the additional 12 states to use the federal Direct File system. 

The report also looked at the online tax filing systems used by some foreign tax authorities, including Australia, Belgium, Estonia, France, Ireland and New Zealand, as well as the U.S. territory of Puerto Rico, and found they prepopulate their taxpayers’ tax returns with information already on file, such as wages reported by employers. The IRS started offering limited prepopulation in April 2024 during the pilot phase of testing Direct File. IRS officials told the GAO they are considering additional prepopulation of taxpayer data but are still in the early stages of planning. Identifying additional data for prepopulation in Direct File and developing a plan for testing its accuracy could enable the IRS to reduce taxpayer burden, the GAO noted.

The GAO made four recommendations in the report to the IRS, including improving coordination among relevant offices to ensure the recruitment of customer support employees, opening Direct File to all eligible taxpayers in the future, and identifying additional data that could be prepopulated in Direct File and testing its accuracy. 

The IRS agreed with three of the GAO’s recommendations, but neither agreed nor disagreed with its recommendation to continue coordinating with state revenue agencies to expand access to Direct File and, as necessary, take steps to ensure the availability of the federal Direct File program to eligible taxpayers in all 50 states.

“We acknowledge GAO’s interest in seeing Direct File offered nationwide with expanded eligibility for taxpayers with more complex tax situations, and your recognition of the challenges we continue to explore in the expansion of Direct File,” wrote IRS deputy commissioner Douglas O’Donnell in response to the report. “The complex and nuanced nature of our nation’s tax laws require careful thought and consideration before support for any additional tax provisions can be added to Direct File to ensure nothing compromises its accuracy or usability for taxpayers.”

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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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