Accounting
Lessons for tax professionals from the 2025 tax season
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The 2025 filing season has been completed quietly, despite trepidation regarding the Internal Revenue Service’s ability to function effectively in the face of
“It’s been pretty smooth,” according to Roger Harris, president of Padgett Business Services. “A very typical season. Of course, the last four or five days are always a challenge when all the procrastinators come in. There’s always a hiccup during the last week.”
One of the reasons it was smooth was a concerted effort to focus all IRS resources to make it smooth, according to Harris — an important lesson for the future.
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“The IRS needs to have money and technology and people to work effectively,” he said. “It’s easy to pick on them, but the system wouldn’t work without them, so we need a well-functioning IRS. I don’t know how many people or dollars that takes — like many branches, they can probably do more with less — but we don’t want to cross over the line and become nonfunctional. Hopefully this smooth season is a harbinger of what’s coming.”
The ability of the agency to function effectively will be particularly important in the near future.
“There will be a massive tax bill, which will require the IRS to issue guidance and forms,” Harris explained. “They need the resources just to issue resources and to have the ability to process returns under the new rules. Once the law is passed, the burden is on the IRS to implement it. So many senior people and talented people have left, and we don’t know yet how well they will be able to function without them.”
Complexity for everyone
“It seems that no matter how well we have prepared for tax season with education, conferences, chats, what we can never be ready for is America’s changing taxpayer,” said Beanna Whitlock, managing member and executive director of Tax Pro Fellowship LLC, and former director of national public liaison for the IRS. “I remember when my parents went to the ‘tax man’ to have their taxes done. Normally they went just as soon as my dad got his W-2, because of the small refund they expected, which would normally fund our modest summer vacation. Now taxpayers are looking for the ‘great giveaway,’ whether it is the Earned Income Tax Credit, energy credits or the Child Tax Credit. Almost every taxpayer has a credit available to them. Those that partook of the advanced premium tax credit for health insurance through the exchange were shocked at having to pay some back — in many cases, this was a lot of money. Taxpayers do not understand the complexity of anything that has to do with federal, and in some cases, state tax complexity.”
Whitlock summarized her lessons learned during the busy season:
- Know your client. Much of this knowledge will come from requiring a deposit on the work to be done. If they balk now, imagine their attitude when the work is finished.
- Do not feel sorry for your client. You didn’t make their decisions nor were you consulted. The tax professional’s job is to prepare a complete and accurate tax return and, in the process, educate clients about our tax system.
“Our service to America’s taxpayers is of quality return preparation, and representation of our taxpayer at the highest level,” she said. “When we look in the mirror we should like who we see.”
For those who work primarily with individual and family office clients, tax season begins in late November and December, prior to the beginning of the traditional tax season period, according to Jim Guarino, managing director at Top 100 Firm Baker Newman Noyes.
“This is primarily due to the concentrated efforts we spend working with our clients to do year-end tax planning,” he explained. “Most tax seasons include a series of ebbs and flows beginning with year-end tax planning in late fall and continuing into mid-January when fourth quarter estimated tax payments are due. We then experience a minor lull between mid-January and mid-February as clients begin to receive their tax forms and assemble their documents. We typically notice an uptick in client correspondence in late February, which then leads to a period of nonstop tax preparation activity for the final six weeks of tax season, culminating on April 15.”
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Guarino agreed with Harris that the 2025 season was fairly smooth: “This past tax season felt like a traditionally typical tax season without any notable hiccups or announcements other than the disaster relief provisions the IRS put in place to assist communities impacted by natural disasters in 2024 and early 2025. Although this past season was relatively uneventful, especially in comparison to tax seasons past, there are always lessons to be learned.”
That doesn’t mean it didn’t offer lessons, however, he said. “There was less client anxiety about the December 2025 expiration date of the Tax Cuts and Jobs Act,” said Guarino. “Although nothing has officially changed, there was less concern about initiating early 2025 tax planning. Taxable income spikes — required minimum distributions and capital gains — were higher than in 2023. Many of my retiree clients reported substantially larger 2024 RMDs and capital gain distributions (mutual funds) along with increased realized capital gains in their investment portfolios. This resulted in clients incurring higher tax liabilities in 2024 compared to 2023.
The importance of thinking ahead
Proper prior planning, of course, can prevent those shocks.
“For many of our planning clients who had balances due, it was not a surprise, due to the year-end planning we did in November,” Guarino continued. “This prevented April tax trauma, and gave their investment advisors time to accumulate cash so they would have the necessary cash available to make their April tax payments.”
“There was an uptick in the number of clients requesting additional tax planning and tax advisory services,” he added. “In effect, clients are looking for holistic financial planning advice, much of which is centered on how taxes impact their financial decisions. The more frequently requested client inquiries included business owners requesting business succession and retirement planning advice, pre-retirement couples requesting advice on traditional IRA rollover and Roth IRA conversion planning, Social Security claiming options, and IRMAA threshold planning [income-related monthly adjustment amount for Medicare Part B and Part D premiums].”
Guarino described a situation in which the firm’s experience and curiosity saved a client thousands of dollars.
“We encountered an unusual situation concerning a Form 1099 reporting error for one of our clients,” he said. “We noticed a substantial short-term capital gain from the sale of three blue-chip type securities during one of our client engagements. The cost basis was extremely low and was not consistent with the fair market value of the securities during 2024. We suspected that the tax basis only represented the cost for an option to purchase the security instead of the actual price, and asked the client’s investment advisor to review whether the assigned tax basis was correct.”
On further review, they determined that the securities sold were the result of a previous stock split, the original stock had been purchased decades earlier, and the allocated tax basis to the news shares was minimal.
“This explained the very low tax basis assigned to the security sales but did not explain the short-term category of the gains,” Guarino said. “We believed the gain should have been long-term gains, not short-term. If left uncorrected, the client’s short-term capital gain would have been taxed at a 37% tax rate compared to a 15% rate. The difference in federal tax liability would have amounted to more than $15,000.”
“We’ll never know if this reporting error would have been caught by our client if they had prepared their own return, or by a less-experienced tax preparer,” he concluded. “Would most taxpayers have simply input the $70,000 short-term capital gain into their software and not questioned the appropriateness of the 1099 reporting? It was gratifying that our firm’s review process and sense of professional curiosity resulted in our client saving that amount.”
Risks on the rise
The big news from this tax season is that liability claims for tax services are really up, according to John Raspante, senior vice president and director of risk management at McGowanPro. Until this past tax season, Raspante kept a small CPA practice in addition to his work as an insurance executive.
Part of the reason for the rise is that a lot of firms stopped doing audit work. “Audit engagements just weren’t profitable, especially in government engagements,” he said. “There is not much in the way of fees, and it’s not worth the time needed to satisfy professional standards.”
“Moreover, taxes are not getting any easier,” he observed. “Staffing has caused problems, and although outsourcing has helped, there are still issues. Without outsourcing it could be a perfect storm — lack of staff combined with increased oversight by authorities, including audits and exams. Tax claims continue to be the most common, but they’re the smallest in dollar amount.”
More broadly, Raspante foresees more changes in ownership of accounting firms coming through private equity, as has been the case in other professions, such as dental practices.
“I get calls about this almost daily,” he said. “It’s a switch in traditional succession planning. Different states have different rules, but as long as the firm is 51% owned by CPAs, it’s good. The problem from a liability standpoint is the fact that down the road, clients may use this as a factor once their liability goes before a jury. Where non-CPAs are involved could be an element of concern.”
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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