It seems fitting that it’s pouring rain as I wrap up the news this week—it’s exactly how the week started for me. On Tuesday, I returned to Washington, D.C. (I was just in town the week before for the ABA May Tax Meeting) to speak on a panel at the National Association of Enrolled Agents Fly-In. It was pouring rain, so I was a bit bedraggled, but it was still great to mingle with tax and legal professionals to discuss policy issues. And the timing couldn’t have been better—tax policy issues were front and center as the House of Representatives addressed a massive tax bill.
The draft version of the bill and a chairman’s amendment were released this past week. The “big beautiful bill”—as President Trump has dubbed it–lived up to its moniker. The tax portion of the bill will cost $3.7 trillion over the next decade, according to the Joint Committee on Taxation (JCT).
The draft bill and amendment would make permanent several of the expiring tax cuts from Trump’s signature 2017 tax legislation—the Tax Cuts and Jobs Act (TCJA). It would also enhance some of those cuts. The beneficiaries of the most recent proposal are primarily individuals. That’s because in the TCJA, many of the tax benefits for individuals were set to expire at the end of 2025, while the corporate tax breaks were largely permanent. In the new bill, some of the tax cuts are again set to expire, typically after the current administration leaves office.
While most tax provisions were focused on individuals, businesses were likely cheering modifications to the capitalization requirement for research and experimental (R&E) expenditures. The draft bill states that domestic R&E is fully deductible for expenditures paid or incurred in taxable years beginning after December 31, 2024 (but full expensing is not retroactive to earlier years, as many thought might happen). This change is not permanent and will expire on December 31, 2029.
The substitute amendment also included several provisions specific to the IRS, such as the elimination of Direct File, increased penalties for unauthorized disclosures, and the lifting of a ban on contingency fees. Notably, the bill directs the Treasury to terminate Direct File, the IRS online tax program that allows taxpayers to file for free. The bill would also require the creation of a task force to design a better public-private partnership between the IRS and private sector tax preparation services, replacing both Free File and Direct File. (If you’re scratching your head to figure out why the Treasury would spend billions to replace something that already exists, you’re not alone.)
The bill would also increase and expand the punishment for unauthorized disclosure of tax return information, largely in response to the Charles Littlejohn leaks. In 2024, Littlejohn was sentenced to five years in prison for disclosing thousands of tax returns, including those of Donald Trump and other billionaires, without authorization. He received the maximum penalty of five years in prison, even though he leaked information for multiple taxpayers, as a leak is generally considered a single violation. Under the language in the amendment, when there are multiple disclosures, as in the case of Littlejohn, the disclosure of information for each affected taxpayer would be considered a separate violation.
Language in the amendment would also put the brakes on efforts to “regulate, prohibit, or restrict the use of a contingent fee” in connection with tax returns or claims for refund. Contingent fees typically represent a percentage of an amount received—in the context of lawsuits, you tend to see them as a percentage of the total award. When it comes to tax returns, they may be a percentage of the expected refund or a percentage of tax “savings”—however that is defined.
Here’s why the IRS doesn’t like these fees. A contingent fee based on securing a big refund may encourage evasion or abuse of tax laws by incentivizing practitioners to adopt unduly aggressive tax positions. That gives the practitioner “a direct, financial interest in the tax benefits of a client.” And that, says the IRS, is “incompatible with ethical practice” before the Treasury Department or the IRS under Circular 230.
Taxpayers also had questions about Trump’s campaign pledges. Tops on the list: Did Trump keep his promise to end taxes on tips, overtime, and Social Security? The answer isn’t as simple as you think.
As written, the bill would allow a deduction for tips and overtime (but only for the portion of overtime over the hourly rate). Exemptions would apply—and the deduction would be limited by income. The deductions would also be temporary, ending as Trump exited office. Also notable? Since this would be framed as a deduction, not an exclusion, payroll taxes—meaning your Social Security and Medicare taxes—would still apply to the tips and overtime earnings that qualify for the deduction.
Last year, Trump also promised to exempt Social Security income from tax. The idea was popular, likely because many people do not understand how Social Security income is taxed. The majority of people who receive Social Security do not pay federal income tax on those benefits—according to the Social Security Administration, only about 48% of people pay federal income taxes on their benefits (though some studies suggest that the percentage is higher).
There is no language in the draft bill or the amendment to exempt Social Security from tax. However, the proposal does include a new—also temporary—deduction of $4,000 for the tax years 2025 through 2028. The deduction is not the same as a refundable credit. This means you will not receive a benefit if you have little to no taxable income—the case for most Social Security recipients. The deduction simply disappears. Realistically, the deduction won’t help seniors with little to no other income sources outside of Social Security and will primarily benefit middle income taxpayers who have income in addition to Social Security, since it phases out at higher income levels. (You can read about the phase-out here.)
Another hot topic in the bill was the child tax credit. The child tax credit provides families with a tax break of up to $2,000 per qualifying child. The child tax credit is income-dependent and subject to phase-out. Under the draft bill, the credit would temporarily increase to $2,500 per child, but only for four years (interestingly, that amount is below the inflation-adjusted value of $2,000 from 2018). After that period, the credit would revert to $2,000.
That version was just one of many that had been proposed. A new Tax Policy Center analysis reveals who would benefit from various plans and how much they would cost. It shows that phasing in the CTC more quickly delivers benefits primarily to families with low incomes at a relatively modest cost; resources can be directed to parents of newborns with very low incomes at a modest cost; and broad expansions of the credit amount are relatively expensive and deliver the majority of benefits to middle- and high-income families
Another TPC analysis found that the bill would cut taxes on average by about $2,800 in 2026. That’s compared to what households would pay if individual and some business provisions of the Tax Cuts and Jobs Act expire or become less generous as scheduled at the end of this year. TPC analyzed a preliminary draft of the bill and found that, on average, all income groups would benefit from the tax proposals. However, more than two-thirds of the plan’s tax cuts would go to those making about $217,000 or more, the highest-income 20% of households. The top 1%, those making more than $1.1 million, would get nearly one-quarter of the tax cuts. The lowest-income households would see an average tax cut of about $120, or 0.6% of their after-tax income. This does not include the impact of cuts to benefits like Medicaid and food stamps that are being used to pay for the tax cuts.
The bill is certain to face some opposition in the House, where Republicans hold a slim majority—it hasn’t yet made it to the floor after a recent vote in the House Budget Committee failed to advance the bill. Even if it does get to the floor, the business-friendly Senate may look to add or extend business-related tax breaks, which would add to the cost unless additional cuts are made elsewhere (remember that the House and Senate versions must match exactly). The draft also allows for a $4 trillion debt ceiling hike, which fiscal conservatives may oppose. We’ll update you as work continues.
We also haven’t yet seen a full version of the proposed spending bill from Congress, but it’s clear that IRS money is on the chopping block. Amid the heated rhetoric, it is crucial for taxpayers to know the facts—understanding how much funding the IRS has received and how it has used those resources provides a clear view of the agency’s operations. A closer look may reveal surprising insights into how your tax dollars are being put to work.
Congress wasn’t the only organization taking controversial positions. As bats were swinging, tongues were wagging about Major League Baseball commissioner Rob Manfred’s ruling that bans by the MLB end at death. This change takes Pete Rose and “Shoeless” Joe Jackson, among others, off the permanently ineligible list and could pave the way for their election into the Baseball Hall of Fame. Rose has long been a controversial figure—and not just for betting on baseball. You can read more about him in this throwback article.
I’m hoping to catch a little baseball this weekend (pro tip: If you put the game on the radio, you can do a little multitasking—it’s one of the best ways to garden). I hope you can find some time to do something you enjoy this weekend.
Kelly Phillips Erb (Senior Writer, Tax)
Questions
This week, a taxpayer asked:
This question isn’t about me. I read that Coinbase was hacked for ransom money. If they pay the ransom, can they write it off?
What a great question!
So, the incident you’re referring to is this: Earlier this week, Coinbase received an email from someone claiming to have hacked into the system and obtained information about customer accounts and other information related to the company. Coinbase states that no passwords or private keys were compromised, but there were issues with accessing customer funds. The allegedly stolen data included customer names, addresses, phone numbers, and email addresses, as well as masked Social Security numbers (last 4 digits only), masked bank-account numbers, and some bank account identifiers. The data also included government‑ID images, such as driver’s licenses and passports, Coinbase account data, and limited corporate data.
The hacker demanded that Coinbase pay a ransom in exchange for not publicly disclosing the information. The company says it has not paid the demand and is cooperating with law enforcement.
The IRS has not provided a lot of guidance on the tax treatment of cyberattacks. So, that means we have to go old school and look at what’s in the code.
The first place to look? Section 162. To claim a deduction for business expenses, section 162 requires that the expense be “ordinary and necessary.” According to the IRS, an ordinary expense is common and accepted in your trade or business. The IRS defines a necessary expense as “one that is helpful and appropriate for your trade or business.” For an expense to be deductible, it needs to be both.
With an increasing focus on cyberattacks, the associated costs, including insurance and mitigation, are likely considered ordinary and necessary. Mitigation could include the costs of paying the ransom.
That said, section 162(c)(2) disallows deductions for payments considered to be illegal bribes, illegal kickbacks, or other illegal payments under federal or state law. If the payment is deemed illegal, that could pose problems.
There’s one more option: the company could consider a tax deduction for theft losses to the extent that the taxpayer is not compensated by insurance. While there is a loss, the focus would be on the value of any stolen data and not simply the ransom demand.
Bottom line? If you’re impacted by a cyberattack, there could be tax consequences. Don’t forget to involve your tax professional in those mitigation and strategy discussions.
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Statistics, Charts, And Maps (Oh My!)
On May 16, the House Budget Committee failed to advance the tax bill, meaning that it cannot proceed to the floor for a vote.
Five Republicans joined Democrats in voting against it: Chip Roy (Texas), Ralph Norman (S.C.), Josh Brecheen (Okla.), Andrew Clyde (Georgia), and Lloyd Smucker (PA). The vote tallied 16 in favor and 21 against. Republicans who voted no cited the cost, as the massive tax bill would increase deficits by more than $4 trillion over the next 10 years. There will not be another vote until the week of May 18, 2025.
Here’s the quick difference between deficit and debt: The federal deficit is the excess of expenditures over revenue/receipts in a fiscal year. In simple terms, if we spend more than we take in, we have a deficit. If we spend exactly what we take in, we achieve a balanced budget. If we take in more than we spend, we have a surplus.
The deficit is recalculated annually based on the shortfall or surplus each month. If there is a deficit, the Treasury borrows money to make up the difference. The Treasury accomplishes this by selling securities like T-bills, notes, and savings bonds.
The federal debt is essentially the total of the deficits. So, if we owe $800 million one year and it’s not repaid, and in another year we owe $500 million that is also not repaid, we accumulate a debt of $1.3 billion. Make sense? Since this amount represents borrowed money, we also pay interest on it, causing it to continue growing even if we are not actively adding to it.
A Deeper Dive
Earlier this month, President Donald Trump suggested that Harvard University could lose its tax-exempt status. Harvard’s president, Alan Garber, understands the effect on tax-exempt institutions, telling The Wall Street Journal: “The message that it sends to the educational community would be a very dire one which suggests that political disagreements could be used as a basis to pose what might be an existential threat to so many educational institutions.”
Four decades ago, another case—this one involving Bob Jones University’s tax-exempt status—tackled this same issue. Bob Jones University v. United States, “has the dubious distinction of having achieved a trifecta of wrongness,” writes Marie Sapirie. Sapirie says, “The university was grotesquely wrong, the IRS was procedurally wrong, and the Supreme Court was wrong about nearly everything except the outcome.”
According to Sapirie, it was primarily Congress’s fault that Bob Jones University became a tax case, though President Richard Nixon also bears some responsibility for a poor executive decision. After the Civil Rights Act of 1964 was passed, the Department of Health, Education, and Welfare under President Johnson sent documents to schools requiring them to agree to comply with the act and its regulations, but Bob Jones Jr., then president of the university, refused.
The IRS stepped in, and on July 10, 1970, it issued a news release stating that it could “no longer legally justify allowing tax-exempt status to private schools which practice racial discrimination.” A White House statement issued on the same day as the IRS’s news release said that Nixon “approves of and concurs in the IRS decision regarding tax exemption for discriminatory private schools.”
In 1971, the IRS formalized the policy of denying tax-exempt status to private schools that practiced racial discrimination, setting the stage to send the matter to the Supreme Court. The Court found that the IRS was correct in its decision to revoke tax-exempt status, but the case was not decided until 1983. In upholding the IRS’s interpretations of sections 501(c)(3) and 170 from 1970 and 1971, the Supreme Court granted the Treasury and the IRS extremely broad power.
Since 1984, the IRS has largely refrained from exercising the broad power granted to it by the Supreme Court in Bob Jones University. However, as noted earlier, the agency hasn’t disclaimed that power, and Congress hasn’t acted to restrict it. Today, it may be politically expedient for elected lawmakers to allow the IRS to act as both determiner and enforcer of public policy, but that’s inconsistent with the IRS’s role as an administrative agency. That arrangement also, as Harvard’s Garber said, has a chilling effect on tax-exempt entities.
Tax Filings And Deadlines
📅 June 16, 2025. Due date for individuals living and working abroad to file their 2024 federal income tax return and pay any tax due.
📅 September 30, 2025. Due date for individuals and businesses impacted by recent terrorist attacks in Israel.
📅 October 15, 2025. Due date for individuals and businesses affected by wildfires and straight-line winds in southern California that began on January 7, 2025.
📅 November 3, 2025. Due date for individuals and businesses affected by storms in Arkansas and Tennessee that began on April 2, 2025.
Tax Conferences And Events
📅 June 16-19, 2025. Latino Tax Fest. MGM Grand Hotel & Casino, Las Vegas, Nevada. Registration required.
📅 June 18, 2025. Avalara CRUSH on Tour. Bridgeport Art Center (Skyline Loft), 1200 W. 35th Street, Chicago, IL 60609. Registration required.
📅 June 26, 2025. Avalara CRUSH on Tour. Iron23 (Flatiron District), 29 West 23rd Street, New York, NY 10010. Registration required.
📅 July 18-19, 2025. Tax Retreat “Anti Conference.” Denver, Colorado. Registration required.
📅 July 21-23, 2025. National Association of Tax Professionals Taxposium 2025. Caesars Palace, Las Vegas, Nevada. Registration required.
📅 July 22-24, 2025. Bridging the Gap Conference. Denver Marriott Tech Center, 4900 S. Syracuse Street, Denver, Colorado. Registration required.
📅 July 28-30, 2025. Tax Summit 2025. Grand America Hotel, Salt Lake City. Registration required.
Trivia
When was the last time the U.S. recorded a federal surplus rather than a deficit (meaning that the country collected more money than it spent)?
(A) 1946
(B) 1972
(C) 2001
(D) 2012
Find the answer at the bottom of this newsletter.
Positions And Guidance
The IRS announced that interest rates will remain the same for the calendar quarter beginning July 1, 2025. For individuals, the rate for overpayments and underpayments will be 7% per year, compounded daily. The rate is 6% for corporations with some tweaks: 4.5% for the portion of a corporate overpayment exceeding $10,000, 7% for underpayments (taxes owed but not fully paid) and 9% for large corporate underpayments. Revenue Ruling 2025-11 announcing the rates of interest will appear in Internal Revenue Bulletin 2025-23, dated June 2, 2025.
The IRS has published Internal Revenue Bulletin No. 2025–20.
Noteworthy
Lexy Kessler, CPA, CGMA, Partner, Aprio, is the new chair of the American Institute of CPAs (AICPA). Kessler will also serve as chair of the Association of International Certified Professional Accountants, which combines the strengths of the AICPA and the Chartered Institute of Management Accountants (CIMA).
The boards of directors of the AICPA and National Association of State Boards of Accountancy (NASBA) have approved the expansion of accountancy’s model legislation to include an additional path to CPA licensure. This optional path maintains public protection while providing added flexibility and options for CPA candidates. The changes introduce a pathway to CPA licensure that requires a baccalaureate degree, including an accounting concentration, along with two (2) years of experience and the passage of the Uniform CPA Examination.
Cullen and Dykman LLP announced that Maureen R. Monaghan has joined the firm as a partner in its Corporate Department. Monaghan brings over 25 years of experience advising clients on complex state and federal tax matters, with a focus on mergers and acquisitions, general corporate transactions, and commercial matters.
Holland & Knight announced that Jennifer Karpchuk will join the firm as a partner in Philadelphia. Karpchuk, who was previously a partner with Chamberlain Hrdlicka, will co-chair the State and Local Tax Team.
The 2025–2026 New York State budget introduces the state’s first-ever inflation refund checks. These one-time payments provide relief to New Yorkers who have incurred increased sales tax costs due to inflation. If you qualify for a payment, you do not need to take any action—the state will automatically send you a check. Checks will be mailed over a period of several weeks, starting in mid-October 2025.
California Gov. Gavin Newsom is pushing his proposal to expand the state’s investment in film and television tax credits, incentives created by former Gov. Arnold Schwarzenegger in 2009 to boost California’s entertainment industry. If passed, the state would allocate up to $750 million each year to film production, up from the current $330 million.
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In Case You Missed It
Here’s what readers clicked through most often in the newsletter last week:
You can find the entire newsletter here.
Trivia Answer
The answer is (C) 2001.
The most recent budget surplus in the U.S. was in 2001.
The most recent balanced budget in the U.S., which means a year with no deficit or surplus, occurred in 1998. That was the first balanced budget since 1969.
Feedback
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