Category: Tax and Financial News

Picture two things happening at the same time. The agency responsible for reviewing your tax return is understaffed and buried under a backlog, and the software that the agency uses to catch filing errors just keeps getting better.

That combination should give any taxpayer pause this season. Not because an audit is necessarily coming, but because if something does go wrong, the window for getting it resolved quickly has shrunk considerably.

The IRS Is Running Lean, But It’s Technology Isn’t

The agency lost more than a quarter of its workforce in 2025. The National Taxpayer Advocate’s most recent annual report to Congress documented the drop: from roughly 102,000 employees to about 74,000. Those departures, through a mix of voluntary exits and layoffs, spread across nearly every division.

Funding took a hit at the same time. Congress reversed a significant portion of the IRS budget boost approved through the Inflation Reduction Act, pulling back billions earmarked for enforcement and technology investment. A government shutdown that stretched across October and November of last year piled further delays onto an already strained system. The Treasury Inspector General for Tax Administration confirmed in a January report what tax practitioners were already seeing firsthand: a serious backlog in the processing of amended returns and taxpayer correspondence.

Here’s the part that catches people off guard. None of that has slowed the IRS’s ability to spot problems on your return. The agency’s systems cross-reference what you report against data received independently from employers, brokers, and financial institutions. Artificial intelligence and expanded automation have made error detection faster and more precise, staffing levels notwithstanding.

Fewer people are available to handle problems once they surface. But the technology responsible for finding those problems is running better than ever.

What This Looks Like in Practice

Tax professionals working with real clients are the best window into what this means day to day. Advisors report receiving IRS notices today that are resolving matters dating back to 2023, showing a multi-year lag on what should be routine correspondence. The practical response among preparers has been to tighten processes and leave less to chance.

Some advisors have added specific safeguards, such as obtaining power of attorney to monitor clients’ IRS online accounts directly rather than waiting for slow paper notices. Others describe the current environment plainly: the cost of needing to amend a return has gone up, not necessarily in dollars, but in time and uncertainty.

A poll of tax and financial advisors conducted during a recent industry webinar found that every respondent is maintaining at least the same level of care they applied when IRS staffing was at full strength. Nearly half said they are actively raising the bar this season.

What You Should Do Differently

Here are a few practical steps worth taking seriously this year:

• Give your preparer complete and accurate information. Incomplete or inconsistent reporting is where most errors begin, and those errors are exactly what the IRS’ matching systems are built to catch.
• If you are claiming something new on your return, ask your preparer to walk you through the basis for it. Understanding what you are filing and why is reasonable.
• Set up an IRS online account at IRS.gov if you haven’t already. You can monitor your filing status, review transcripts, and spot potential issues before they become formal notices.
• And if something does go sideways, respond early. Letting a notice sit without a response doesn’t slow the IRS down. It just costs you time you don’t have.

Conclusion

The agency may be a smaller operation than it was a few years ago. But the part of it designed to find mistakes on your return is still very much running.

American parents now have access to a completely new savings tool designed to give children a financial foundation for the future. Established through The One Big Beautiful Bill Act, these accounts carry the name of the current president and come with a unique set of rules that the IRS has just begun to clarify.

Who Can Open One?

Any minor holding a Social Security number who has not yet turned 18 by Dec. 31 of the current year meets the eligibility criteria. Getting started requires an authorized adult, typically a parent or legal guardian, to submit an application to the Treasury Department. Once processed, the government establishes the child’s account.

Free Money for Newborns

Families welcoming babies during a specific four-year window stand to benefit the most. American citizens born anytime from the start of 2025 through the end of 2028 qualify for a $1,000 federal deposit through a pilot initiative. This starter contribution sits outside all annual limits, meaning it will not reduce how much others can add later.

Billionaire Backing Adds More

Tech titan Michael Dell and his wife, Susan, have pledged $6.25 billion to boost these accounts further. Their generosity will provide an extra $250 to the first 25 million children meeting specific requirements. Kids must be no older than 10 and reside in areas where the median household income is under $150,000. Dell, who runs Dell Technologies as chairman and CEO, ranks 10th among America’s wealthiest individuals with a fortune estimated at $148.9 billion.

How Much Can Be Contributed Each Year?

The law caps annual contributions at $5,000, though this figure will rise with inflation over time. Grandparents, aunts, uncles, family friends, and parents can all put money in, but every dollar from these sources counts toward that yearly ceiling. Exceed the limit, and you will need to pull the excess back out.

Workplace benefits offer another channel. Companies can deposit as much as $2,500 annually into accounts belonging to workers or their children. While this money does apply toward the $5,000 threshold, employees will not owe taxes on these contributions.

Charitable organizations and government bodies at various levels have permission to fund these accounts through something called qualified general contributions. Unlike personal or employer deposits, this category of funding exists completely outside the annual cap.

Keep in mind that money coming from family members or friends provides no tax break. These contributions use after-tax dollars. Also worth noting: the earliest anyone can start funding these accounts is Independence Day 2026.

Strict Rules Govern Investments

Congress placed tight restrictions on where this money can go. Only mutual funds and ETFs tracking American stock market indexes qualify. These funds cannot employ any leverage strategies, and their annual expense ratios must not exceed one-tenth of one percent.

Accessing the Funds

Until reaching adulthood, account holders face severe limits on touching their money. The rules permit withdrawals only in narrow circumstances: transferring everything to a different Trump Account, correcting over-contributions, or closing the account following the child’s death.

Everything changes at 18. From that birthday forward, the account essentially transforms into something resembling a traditional IRA with comparable guidelines around distributions and taxation.

Filing Requirements

Establishing one of these accounts means completing Form 4547, which the IRS titled Trump Account Election. This document accompanies your annual 1040 filing and handles both account setup and pilot program enrollment. The form number itself contains a nod to history, combining 45 and 47 to reflect Trump’s elections as both the 45th and 47th commander in chief.

Conclusion and Official Resources

This new savings tool gives families an innovative avenue to save. Taxpayers seeking detailed information can review Notice 2025-68, which the IRS published to address questions about account creation, investment options, contribution types, distribution rules, and reporting obligations. Full regulations remain in development, with proposed rules expected before final versions emerge following public input. The government maintains a dedicated portal at trumpaccounts.gov for ongoing updates.

America’s housing crisis has reached a breaking point. With median home prices soaring past $400,000, the National Association of Home Builders reports that 60 percent of U.S. households can’t even afford a $300,000 home. The math has become impossible for most American families.

While we often blame high mortgage rates, restrictive zoning laws and rising construction costs for the housing shortage, there’s another culprit hiding in plain sight: a decades-old tax rule that’s trapping millions of homeowners in houses they’d rather leave.

The $500,000 Problem

When Congress overhauled capital gains taxes on home sales in 1997, they created what seemed like a generous benefit: homeowners could exclude up to $250,000 in profits from taxes ($500,000 for married couples) when selling their primary residence. This replaced a complex system of rollovers and age-based exemptions with something simpler and cleaner.

But Congress made one critical mistake – they never adjusted these limits for inflation or housing price growth.

Nearly three decades later, these same dollar amounts remain frozen in time, even as home values have skyrocketed. According to new research from Moody’s Analytics, if the exclusion had kept pace with home prices, it would now stand at $885,000 for singles and $1,775,000 for couples. Even adjusting for general inflation alone would double today’s limits.

The Senior Squeeze

This outdated tax rule hits empty-nesters particularly hard. Consider this: nearly 6 million households headed by seniors live in homes larger than 2,500 square feet. Many would gladly downsize to something more manageable, but selling could trigger six-figure tax bills on homes they’ve owned for decades.

The result? They stay put, waiting until death when their heirs can inherit the property with a stepped-up basis that erases all capital gains. Meanwhile, these oversized homes remain off the market, unavailable to growing families who desperately need the space.

Moody’s Analytics estimates these “overhoused” seniors spend $3,000 to $5,000 more annually on maintenance, utilities and property taxes than they would in smaller homes – adding up to $20 billion to 30 billion in unnecessary costs nationwide each year.

An Unexpected Burden on the Middle Class

Surprisingly, this tax burden doesn’t primarily affect the wealthy. Middle-class homeowners in expensive markets like California and Massachusetts face steep tax bills despite modest incomes. Widows face their own challenges, having just two years after a spouse’s death to sell while maintaining the full $500,000 exclusion (though they do receive a partial step-up in basis on their late spouse’s share).

An IRS study revealed a startling fact: 20 percent to 25 percent of capital gains taxes collected under current rules come from filers earning less than $20,000 annually. Meanwhile, wealthier homeowners often have the resources and flexibility to structure sales strategically, minimizing their tax exposure.

The Housing Market Ripple Effect

This tax trap creates a cascade of problems. Young families remain stuck in starter homes. First-time buyers face even fiercer competition for limited inventory. Labor mobility suffers as workers can’t relocate to areas with better job opportunities. The entire housing ecosystem becomes frozen.

The shortage is stark: monthly active listings only climbed back above 1 million in May, according to realtor.com. Before the pandemic, that number hadn’t dropped below that threshold since at least 2016.

Solutions on the Table

Congress is considering two approaches to break this logjam. One would be to double the current exclusions and index them to inflation going forward. The more radical proposal would eliminate the cap entirely.

The Double-Edged Sword

Any change comes with risks. Moody’s Analytics warns that while updating these limits could unlock hundreds of thousands of homes and boost inventory, it might also intensify competition at the lower end of the market as downsizing seniors compete with first-time buyers for the same properties. It could also make housing an even more attractive tax shelter, which would ultimately drive prices higher.

The Path Forward

The paradox is clear: raising or eliminating the capital gains exclusion could provide immediate relief to millions of homeowners trapped by tax considerations. It could inject a much-needed supply into a starved market. But without careful implementation, it could just as easily fuel another round of price increases, leaving affordability as elusive as ever.

Running a small business often means working with a mix of people: some full-time staff, part-time helpers, seasonal workers or project-based contractors. While this flexibility helps manage costs and workload, it creates a crucial decision point that many business owners underestimate: properly classifying each worker.

The stakes couldn’t be higher. Companies like FedEx have paid nearly half a billion dollars for getting this wrong, and even tech giants like Microsoft and Lyft have faced costly legal battles over worker misclassification.

Why Classification Matters More Than You Think

The difference between an employee and an independent contractor goes far beyond semantics; it fundamentally changes your legal and financial obligations.

When someone is your employee, you must:

• Withhold income taxes, Social Security, and Medicare taxes
• Pay the employer portion of Social Security and Medicare taxes
• Potentially provide benefits like health insurance and retirement plans
• Consider offering stock options or other incentive programs
• Pay severance or unemployment compensation when appropriate
• Comply with wage and overtime requirements

When someone is an independent contractor, you:

• Simply pay them for their work
• Issue a 1099-NEC form at year-end
• Have no tax withholding obligations
• Owe no employment benefits
• Face no severance obligations

The Control Test: Your North Star for Classification

The Internal Revenue Service uses one primary principle: control. The more control you exercise over how, when, and where work gets done, the more likely that person is your employee.

Think of it this way: if you’re micromanaging the work process, you’re probably dealing with an employee. If you’re only concerned with the end result, you’re likely working with a contractor. The 20 factors identified by the IRS in Revenue Ruling 87-41 can be found in full here.

The IRS Three-Factor Framework

Rather than getting lost in complicated checklists, focus on these three core areas:

1. Behavioral Control – Do you dictate not just what work gets done, but how it’s performed? Employees typically receive training, follow company procedures, and work within established systems. Contractors bring their own methods and expertise.

2. Financial Control – Who controls the business aspects of the work? Independent contractors typically:

• Invest in their own tools and equipment
• Handle their own business expenses
• Have multiple clients or income sources
• Set their own rates and payment terms

3. Relationship Type – What does your working relationship look like? Employee relationships typically feature:

• Written employment contracts
• Ongoing work arrangements
• Benefits packages
• Work that’s central to your business operations

Beyond Taxes: The Broader Impact

Worker classification affects more than your tax bill. The Department of Labor’s 2024 updates to the Fair Labor Standards Act mean misclassification can trigger wage and overtime violations. State labor departments are also cracking down, with some states presuming workers are employees unless proven otherwise.

When Things Go Wrong: Your Options

If you realize you’ve made a mistake, don’t panic. You have several paths forward:

• Get an Official Determination: File Form SS-8 with the IRS for an official ruling on a worker’s status. While it takes at least six months, you’ll have certainty going forward.
• Claim Safe Harbor Protection: If you had a reasonable basis for your classification and treated similar workers consistently, you may qualify for tax relief under Section 530.
• Use the Voluntary Settlement Program: The IRS Voluntary Classification Settlement Program lets you reclassify workers prospectively while receiving some tax relief.

The Bottom Line

Your worker classification isn’t just an administrative detail – it’s a fundamental business decision with major financial implications. When in doubt, err on the side of caution or consult with employment law and tax professionals.

The cost of getting expert advice upfront is minimal compared to the potential cost of getting it wrong.

The rise of artificial intelligence tools like ChatGPT and Grok has transformed how Americans seek information. From meal planning to complex financial questions, these platforms offer instant answers to virtually any query. But when it comes to U.S. tax advice – especially international tax matters – relying on AI can lead to serious and costly mistakes.

The Allure and Limitations of AI Tax Help

The appeal of AI for tax questions is understandable. However, AI’s limitations become glaringly apparent in international tax matters. This specialized field combines extraordinary complexity with constant change, creating a perfect storm that exposes AI’s weaknesses. The landscape shifts regularly through regulatory updates, IRS interpretations, and court decisions – changes that AI systems struggle to incorporate in real-time.

Consider the IRS Practice Units, internal training materials for tax examiners that became public in 2020. From January through early May 2025 alone, the IRS released 35 new Practice Units, with 22 addressing intricate international tax topics such as foreign tax credit computations, base erosion anti-abuse tax, and treaty provisions. These rapidly evolving resources represent just one stream of constantly changing tax guidance that AI models could fail to capture, leading to outdated or incomplete advice.

How AI Gets Tax Advice Wrong

AI’s accuracy problems stem from its fundamental design. Large language models like those powering ChatGPT and Grok train on vast amounts of text from diverse sources – online forums, books, articles, websites, and public records. This training produces responses that sound authoritative and conversational, but this polish masks significant limitations.

The core issue is what experts call “simplexity” – AI’s tendency to oversimplify complex tax law. When AI presents intricate regulations as straightforward concepts, it fundamentally misrepresents the law itself. This problem has already surfaced with the IRS’s own Interactive Tax Assistant chatbot.

AI systems also suffer from interpretation errors, reliance on outdated information, and conflation of similar but distinct tax concepts. For instance, an AI might confuse the Foreign Tax Credit with the Foreign Earned Income Exclusion – similar-sounding but entirely different provisions with vastly different implications.

The Real-World Cost of AI Errors

Mistakes in international tax compliance carry severe consequences. The IRS considers international tax enforcement a top priority, and errors in reporting foreign income or assets trigger substantial penalties. A late FBAR or foreign information return like Form 8938 or 5471 carries a $10,000 penalty. Errors involving foreign assets can result in a 40 percent accuracy-related penalty on unpaid taxes.

Importantly, relying on AI advice won’t qualify as “reasonable cause” to avoid these penalties. Last year, the U.S. Taxpayer Advocate Service highlighted a Washington Post analysis showing that AI chatbots from major tax preparation companies provided incorrect advice up to 50 percent of the time on complex questions. Beyond financial penalties, taxpayers face the stress of audits and the time-consuming burden of correcting mistakes.

Why Human Expertise Remains Essential

While AI continues to advance, it currently falls far short of replacing human expertise in international tax matters. Experienced tax professionals bring irreplaceable skills that algorithms cannot match. They stay current on evolving IRS guidance, monitor treaty updates, and analyze new case law. Most importantly, they apply professional judgment to each unique situation.

International tax planning rarely follows a one-size-fits-all approach. Professionals provide strategic thinking and contextual analysis that optimize outcomes for specific circumstances. They understand when exceptions apply, how different rules interact, and what documentation requirements must be met. These nuanced judgments remain beyond AI’s current capabilities.

Conclusion

This doesn’t mean AI has no role in tax planning. It can serve as a useful starting point for understanding basic concepts or generating initial questions to discuss with a professional. However, treating AI as a substitute for qualified tax advice is a risky gamble.

The appeal of instant, free tax guidance is strong, but the cost of getting it wrong can be devastating. Until AI can match the precision, current knowledge, and professional judgment of experienced tax professionals, taxpayers would be wise to view it as a supplement to – not a replacement for – human expertise.