If finalized, there will be a third test drawn from immigration law: the taxpayer must be a U.S. citizen, a U.S. national, or a qualified alien under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA).

For example, an H-1B engineer who has passed the substantial presence test for years, files as a resident, and has a valid SSN would fail that test, as would a Deferred Action for Childhood Arrivals (DACA) recipient with work authorization.

If final regulations are issued, they will apply to tax years ending on or after the publication date; if they are issued by December 31, 2026, the new restrictions will apply to tax year 2026. Since the Treasury has already issued draft forms related to this change, it appears they intend for it to apply to tax year 2026.

Federal Public Benefit

PRWORA bars aliens who are not qualified aliens from receiving any Federal public benefit under 8 U.S.C. §1611(a). Treasury’s position in the proposed regulations is that the refunded portion of a refundable credit is a payment to an individual from appropriated funds and, therefore, a federal public benefit.

The refunded amount is the credit amount that exceeds the subtitle A income tax after applying certain nonrefundable credits. Subtitle A, which includes §1 through §1564 of the Code, includes income tax, self-employment tax, and the net investment income tax. Any refundable credit amount used to reduce the taxpayer’s tax liability is not affected by these proposed regulations.

Four credits are currently covered by the proposed regulations: the §23 adoption credit, the §24 child tax credit (including the additional child tax credit), the §25A American opportunity tax credit, and the §32 earned income tax credit.

Treasury also concluded that the refunded portions of the §36B premium tax credit and the new §6433 saver’s match are also Federal public benefits. Treasury will not apply PRWORA to the premium tax credit because the OB3 Act's narrower eligibility rules, effective for tax years beginning after December 31, 2026, supersede it. The Treasury will separately issue proposed regulations for the new §6433 saver’s match.

Who Can Receive the Refunded Portion?

U.S. citizens, U.S. nationals, and qualified aliens can receive the refunded portion of a refundable tax credit. Under 8 U.S.C. §1101(a)(22), a U.S. national is a non-citizen who owes permanent allegiance to the United States; in practice, a person born in American Samoa or Swains Island.

A qualified alien is defined in 8 U.S.C. §1641:

• Lawful permanent residents,

• Asylees granted asylum under INA §208,

• Refugees admitted under INA §207,

• Parolees under INA §212(d)(5) for a period of at least one year,

• Aliens whose removal is being withheld under INA §243(h) or §241(b)(3),

• Conditional entrants under INA §203(a)(7) as in effect before April 1, 1980,

• Cuban and Haitian entrants under §501(e) of the Refugee Education Assistance Act of 1980,

• Citizens of Micronesia, the Marshall Islands, and Palau lawfully residing in the U.S. under a Compact of Free Association,

• Battered spouses, children, and their parents or children with an approved or pending petition and a substantial connection between the abuse and the need for the benefit, and

• T nonimmigrant status holders and applicants with a prima facie case.

Who Cannot Receive the Refunded Portion?

Any alien not included in the above list is ineligible to receive the refunded portions of refundable tax credits, even with a valid SSN and resident alien status. This includes, but is not limited to:

• Individuals without lawful status, including those in removal proceedings,

• Nonimmigrants on temporary visas (H-1B, L-1, F-1, J-1, O-1, TN, E-2, etc.),

• DACA recipients,

• Temporary Protected Status holders,

• Parolees admitted for less than one year,

• Asylum applicants and withholding applicants whose cases are pending,

• U nonimmigrant status holders, and

• Adjustment of status applicants who have not yet been granted permanent residence.

Additional Considerations

On a married filing joint return, under Prop. Reg. §1.32-4(b)(4), if either spouse is a U.S. citizen, U.S. national, or qualified alien, the other spouse is treated as a qualified alien for the return. This rule applies to all of the refundable credits.

Status is determined on the filing date of the return that first claims the credit. If the original return claimed the credit when the taxpayer was ineligible, a later status change does not allow an amended return to recover the refunded portion. However, if the credit was not claimed on the original return, an amended return that first claims it after the taxpayer becomes a qualified alien is tested on the amended return's filing date. See Examples 4 and 5 across all four proposed regulations.

Each taxpayer claiming an affected credit must declare eligibility under penalty of perjury on the return; this declaration, along with the calculation of the refunded portion of all refundable credits, will be on new Schedule 3-A, Federal Public Benefit. The current draft allows filers to elect to forgo any refunded portions, which can help simplify return filings for certain religious groups that do not wish to receive these amounts.

The proposed regulations impose no PRWORA requirement on the qualifying child themselves; only the taxpayer (or one spouse) claiming the benefit on a tax return is tested.

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H.R. 5366, the Doug LaMalfa Federal Disaster Tax Relief Certainty Act, passed the House of Representatives and the Senate and is expected to be signed into law by President Trump. The law codifies and extends these disaster-related tax provisions.

Qualified Disaster Losses - Prior Law

§304(b) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, as extended by §2 of the Federal Disaster Tax Relief Act of 2024 and §70438 of the One Big Beautiful Bill Act, gave special treatment to qualified disaster losses.

For a qualified disaster loss, the deductible amount is calculated without regard to the 10% of adjusted gross income (AGI) limitation, applies a $500 per casualty floor, and gives non-itemizers the net loss as an addition to the standard deduction.

This special rule applied only to a qualified disaster, which is a major disaster declared between January 1, 2020, and September 2, 2025. Also, this disaster must have an incident period that began on or after December 28, 2019, and on or before July 4, 2025, and must have ended no later than August 3, 2025.

Qualified Disaster Losses - New Law

New §165(h)(6) now refers to it as a qualified net disaster loss and applies the same deduction calculation rules, but simplifies the definition of a qualified disaster area. A disaster is now a qualified disaster area

...if the incident period of the disaster with respect to which such declaration is made begins on or after December 28, 2019, and before January 1, 2027.

The declaration date and the incident period end date are no longer relevant; the only question is when the incident period began.

New §63(b)(8) also changes how a non-itemizer claims the loss. Prior law increased the standard deduction by the qualified disaster loss and required a special rule to preserve it against the alternative minimum tax (AMT), but now the qualified net disaster loss is a separate below-the-line deduction from AGI. Because §56(b)(1)(D) disallows only the standard deduction under §63(c), the deduction now survives for AMT purposes without a special rule.

The new provisions are effective for tax years beginning after December 31, 2024, and supersede prior versions for those tax years, so tax year 2025 is governed entirely by new §165(h)(6) and new §63(b)(8).

Two categories of loss that failed the prior definition now pass it: disasters whose incident period began after July 4, 2025, and disasters whose incident period ran past August 3, 2025. Both are within the new window; once the law is enacted, a taxpayer may, in some cases, consider filing an amended return for tax year 2025.

Qualified Wildfire Relief Payment Exclusion - Prior Law

§3 of the Federal Disaster Tax Relief Act of 2024 excluded qualified wildfire relief payments from gross income, but only for qualified wildfire relief payments received in tax years beginning after December 31, 2019, and before January 1, 2026, as a result of a qualified wildfire disaster.

A qualified wildfire disaster was any federally declared disaster declared after December 31, 2014, as a result of any forest or range fire.

A qualified wildfire relief payment is

…any amount received by or on behalf of an individual as compensation for losses, expenses, or damages (including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages), personal injury, death, or emotional distress) incurred as a result of a qualified wildfire disaster, but only to the extent the losses, expenses, or damages compensated by such payment are not compensated for by insurance or otherwise.

The exclusion does not apply to payments received for losses, expenses, or damages already compensated from another source, such as insurance or §139 qualified disaster relief payments.

Qualified Wildfire Relief Payment Exclusion - New Law

New §139M uses the same rules as above, except that it applies its time limit solely to the disaster declaration date, not to the year of receipt of payment. It now defines a qualified wildfire disaster as any federally declared disaster declared after December 31, 2014, and before January 1, 2027, as a result of any forest or range fire.

For example, a settlement payment received in tax year 2029 with respect to a wildfire declared in 2024 can still be excluded under §139M(a). However, a wildfire disaster declared in 2027 does not qualify for the exclusion.

The new provision is effective for payments received after December 31, 2025.

Example

Below is a recently declared federal major disaster due to fires in Nebraska.

Since the incident period began on March 12, 2026, which is on or after December 28, 2019, and before January 1, 2027, it is a qualified disaster area, and any losses are qualified net disaster losses.

Since it was declared after December 31, 2014, and before January 1, 2027, it is a qualified wildfire disaster, and any qualified wildfire disaster relief payment issued with respect to that disaster, regardless of the year of receipt, is excluded from income.

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My journey as an EA started in 2008. I was 29 years old, living in Philadelphia, PA, near my hometown of Cherry Hill, NJ, working in student services at the University of Pennsylvania. I was a student leader in college, both during my undergraduate and graduate studies at the University of Delaware, so I went into higher education administration, which I had been doing for five years by then.

I always had a passion for numbers and personal finance, and I looked forward to doing my own taxes, which is not normal. I enrolled in the H&R Block course for non-practitioners to learn how to prepare taxes. It all clicked for me immediately, and by the end of the class, I was helping the other students — possibly an early indicator that I would become a tax educator. My instructor, Patricia Barrett, EA, encouraged me to become an EA after my first tax season.

Told I Would Fail

I worked for H&R Block for one season and decided to sit for the Special Enrollment Examination that summer. I told my district manager my goal at the end of the season, and he dismissed the idea, saying I would not pass because I did not have enough experience: “Don’t waste your time and our money,” I believe was the exact quote. Three months later, I passed all three parts; four months later, I became an EA; five months later, I joined the National Association of Enrolled Agents (NAEA).

Career Change

After my second tax season at H&R Block, I decided to transition to the tax field full-time. I moved to Baltimore, MD, and took a position at a new tax resolution firm, which was my first exposure to the representation side of being an EA. I also enrolled in the Master of Science in Taxation (MST) online program at Golden Gate University.

By mid-2011, I earned my MST and left that job because the business had slowed considerably. However, I leveraged my MST and tax resolution experience to secure a paralegal position at a small tax controversy law firm, where I performed much of the same tax work as the attorneys.

Life Shock

Working at a tax law firm was a tremendous learning experience, but also stressful, and it was where I began to hate the billable-hour model. In 2012, life veered in a different direction when I found out I had a very treatable form of leukemia. I still have it, and I will be treated for it for the rest of my life.

I chose to leave my full-time job and run my own business to gain the flexibility I needed to manage my health while staying in control of my destiny. I continued to work a part-time position at another tax controversy law firm for several years until my business and other ventures grew enough to support me fully.

Game Changer

I decided to take the U.S. Tax Court non-attorney admissions exam in 2014 and enrolled in the Tax Court preparation program taught by Sherrill Trovato, EA, USTCP. On the first day of class, I randomly picked a seat because I did not know anyone, and I happened to sit next to my future Tax Court exam study partner, colleague, and friend, Mary Beth Lougen, EA, USTCP.

I passed the 2014 Tax Court exam, and having the USTCP credential unlocked the next phase of my career. In 2016, I tiptoed into tax education, thanks to Kevin Huston, EA, USTCP, who invited me to teach some live classes with him. I spoke at two conferences, and I assisted with Sherrill Trovato’s Tax Court exam class.

Preparing for the Tax Court exam also allowed me to build relationships with Sherrill Trovato and Geri Bowman, CPA, EA, USTCP, and we launched Compass Tax Educators in 2017 with Kevin Huston to provide high-level webinar tax education.

Congress passed the Tax Cuts and Jobs Act at the end of 2017, and Compass then became known for providing accurate content on new tax laws. I won the 2019 NAEA Excellence in Education Award for my efforts to provide practitioner education on the new §199A deduction, which became a specialization of mine.

In 2018, I flirted with becoming a CPA. I took and passed Regulation, but as I began studying the rest of the material, I realized I would never use the content or the license. I was chasing letters I did not need, and I dropped the effort to focus on expanding my educational portfolio.

The Pandemic Pivot

Compass Tax Educators boomed during the pandemic because everyone had to move to online education, and the new tax laws gave us plenty of content to cover.

I started Tom Talks Taxes on a whim in December 2020, and I had no idea what it would become. It has now grown to almost 7,500 subscribers and is my flagship offering. When I semi-retire, I will continue to do Tom Talks Taxes.

I also launched the Inner Circle in 2021, a small-group program in which credentialed practitioners bring me their real client cases during recurring calls, and I challenge them to build successful businesses that prioritize work-life balance. It is the most direct teaching I do, and it keeps me close to the problems practitioners are actually hitting rather than the ones I think they are.

Collaborations and Mentorship

I have also developed partnerships with other EAs and organizations in the last few years:

• Providing tax planning education through the American Institute of Certified Tax Planners with Dominique Molina, CPA, CTS.

• Executing advanced in-person seminars with Brass Tax Presentations, owned by Ryan Reichert, EA, CFP, and Shannon Hall, EA.

• Providing in-person education for state and local professional associations.

• Building the InCite community focused on technical knowledge and business practices with Natalie Kolodij, EA, Brad Messner, EA, PhD, and Matt Metras, EA.

• Offering an innovative approach to the use of artificial intelligence in tax research by launching AskTomG.ai with Josh Youngblood, EA.

After a several-year pause from working with national organizations, I will be doing some exciting future collaborations with the National Association of Tax Professionals (NATP). I left NAEA, which is unfortunate, as I spent many years as a member, volunteer, and instructor. There need to be some cultural shifts for me to consider rejoining NAEA, such as respecting member feedback and disagreement.

I never had a traditional work-to-death tax practice. Today, I focus mostly on IRS and U.S. Tax Court representation, and I prepare some tax returns to stay current. My business is profitable but intentionally very small since I do a lot of other things.

Last year, I started a yearlong program for early-career EAs called EA Launchpad to equip them with the knowledge and skills to build a business and shape the industry. I am excited about how it turned out and have plans to offer another cohort next year, starting in July. The program is 100% free to give back to the EA community, and I plan to launch an ongoing initiative for EA Launchpad alums.

If I went back to 29-year-old Tom and told him where I would be today, simply from enrolling in the H&R Block tax course, he would not believe it. I cannot tell you where I will be professionally in five to ten years. I am going to keep going forward and let my instincts and the universe guide me in those choices. They have not led me astray yet.

Lessons Learned

Life and health always come before work. You never know when your last day could be. You will regret missing out on experiences with family and friends. You will not regret doing too few tax returns.

Take the road less traveled. For me, it did make all the difference. You need to take calculated risks for the best career rewards.

Invest in yourself by getting the best education available to you. If you settle for the cheapest, low-quality education to get it done, you are doing both you and your clients a huge disservice.

Pick your people and your organizations deliberately. I do not partner with people I do not know or trust, fake “influencers,” or self-appointed social media “thought leaders.” I do not partner with organizations if I cannot get behind their actions.

Relationships compound. Every meaningful step in my career came from a positive professional relationship: the instructor who pushed me toward becoming an EA, a classmate I sat next to at random, and colleagues who became business partners.

Teach what you know before you feel ready. I started teaching in 2016 with doubts about whether I could do this. Teaching is the fastest way to find the gaps in your own understanding, and there is a shortage of people who can do it well.

Own your platform. Newsletters, communities, and courses that you control are the difference between a career that depends on others and one that does not. Start smaller than you think is worthwhile and keep going longer than feels reasonable.

Experience is not a prerequisite for competence, and having experience does not automatically make someone competent (e.g., “I have been doing it this way for 40 years…” when it is completely wrong).

Professional jealousy is endemic. People attempt to take out others they perceive as successful. There is plenty of opportunity for everyone, and we should actively support the success of others who are competent and act in good faith.

What My Father Showed Me

My father was a cop to pay the bills, but his life was music. He performed and worked with musicians for 60 years, well past his retirement from the force. He stopped trying to make music a full-time job in his 20s, and police work is what made the next six decades of music possible.

I went the other way. I found what I loved at 29 and rebuilt my career around it. Even though I have a career I love, there are parts of it that I do not love. More and more, I want to stop doing those things and focus on the rest, regardless of the revenue I give up. That is my work for the next few years, as I approach 50 and my goal of early semi-retirement. And giving back to the EA community that got me here.

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Not well versed on Trump accounts? Read “An Overview of §530A Trump Accounts.”

Below are the key points that practitioners need to know to advise clients on whether or not to consider offering this benefit.

Overview of Provision

An employee can exclude up to $2,500 (indexed to inflation after 2027) from income per year for contributions paid by the employer to the Trump account of the employee or the employee’s dependent via a §128(c) Trump account contribution program.

These amounts count toward the $5,000 per year overall annual limit (indexed to inflation after 2027).

Pre-Tax Employee Salary Reduction

An employee can elect to contribute to a Trump account via a §125 cafeteria plan and the salary reduction is excluded from the employee’s income. As the preamble states: “In the long run, the most important aspect of section 128 is likely to be the ability of employers to facilitate pre-tax contributions by their employees.” See Prop. Reg. §1.128-2(a).

The §125 salary reduction is only available for a contribution to a dependent’s Trump account; it is not available for an employee’s own Trump account. See Prop. Reg. §1.128-2(d)(7).

Not a Payroll Tax Exclusion

Any Trump account contributions excluded from income under §128(a) remain wages subject to Social Security, Medicare, and unemployment taxes; however, they are not subject to federal income tax withholding. See the preamble to the proposed regulations and Notice 2001-14.

No Benefit for Self-Employed Individuals

Partners, sole proprietors, directors serving solely as directors, and 2-percent S corporation shareholders, as defined in §1372(b), cannot participate in a §128(c) Trump account contribution program. However, these individuals may maintain a program covering the employees of the trade or business even though they cannot participate. See Prop. Reg. §1.128-1(b) and the preamble to the proposed regulations.

Though the proposed regulations do not address §318 attribution, individuals who are 2-percent shareholders by attribution also cannot participate in a §128(c) Trump account contribution program, since §1372(b) directly references §318 attribution.

A shareholder-employee of a C corporation is a common-law employee and can participate in a §128(c) Trump account contribution program.

The $2,500 Limit Is Per Employee

The $2,500 annual limitation applies per employee across all dependents and employers. The employee must include any amount contributed in excess of $2,500 in gross income; this must be identified by the employee or their tax professional. See Prop. Reg. §1.128-2(d)(5)(ii).

Example. In tax year 2027, Hector is unmarried and has two dependents. He works for two employers and each offers a §128(c) Trump account contribution program. The maximum amount that can be contributed tax-free across all of Hector’s employers and dependent Trump accounts is $2,500. If more than $2,500 is contributed, Hector must include the difference in gross income on his individual tax return. See Prop. Reg. §1.128-2(d)(5)(vi), Ex. 1 and 4.

An employee's receipt of excess Trump account contribution program contributions due to participation in programs sponsored by more than one employer will not cause those programs to fail to be Trump account contribution programs provided that each program prohibits the payment of contributions with respect to an employee in excess of the annual limitation. See Prop. Reg. §1.128-2(d)(5)(iii).

Two Spouses Can Contribute $2,500 Each

A dependent is defined as an individual the employee anticipates will be a §152 dependent, and spouses filing a joint return are each treated as having the child as a dependent. For divorced or separated parents, or spouses filing married filing separately, only one parent can claim the child, so only one can direct a Trump account contribution. See Prop. Reg. §1.128-1(a).

Each spouse may direct a full $2,500 to the same child’s account, whether they work for the same employer or different ones; however, that will exhaust the annual $5,000 overall contribution limit. See Prop. Reg. §1.128-2(d)(5)(vi), Ex. 2 and 3.

Nondiscrimination Rules

The contributions or benefits provided under the Trump account contribution program must not discriminate in favor of highly compensated employees (HCEs) or their dependents. A Trump account contribution program that provides benefits on the same terms for all eligible employees satisfies this requirement. See Prop. Reg. §1.128-3(a).

A Trump account contribution program that fails the nondiscrimination requirements remains a Trump account contribution program with respect to non-HCEs; only the HCEs lose the exclusion. See Prop. Reg. §1.128-3(g).

Matching Program for $1,000 Pilot Payment

Several large employers announced they would match the $1,000 the government contributes under the §6434 pilot program for children born in 2025 through 2028. Any matching amounts would be under a §128(c) Trump account contribution program, and the proposed regulations provide a safe harbor to exempt these contributions from some nondiscrimination requirements if made under a pilot match contribution arrangement as described in the proposed regulations. See Prop. Reg. §1.128-3(d).

Example. Mary’s employer offers a §128(c) Trump account contribution program. Her employer contributes $1,000 to Mary’s dependent’s Trump account as a $1,000 pilot program match, and Mary contributes $2,500 through a §125 cafeteria plan salary deferral. Since the total employer contributions exceed $2,500, Mary’s employer must designate $2,500 as a §128(c) contribution and $1,000, the excess amount, as a non-§128(c) contribution, and include $1,000 in Mary’s gross income and wages.

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These changes typically result in a basis disconnect, since the partnership’s inside basis in its assets remains unchanged when these events occur. The §754 election exists to align the inside and outside basis amounts in these circumstances.

Consequences of the §754 Election

A §754 election triggers two basis adjustment regimes:

1. §743(b) applies to transfers of a partnership interest by sale or exchange or upon the death of a partner. This adjustment is partner-specific: it adjusts the basis of partnership property only with respect to the transferee partner, so the buyer or estate benefits (or is burdened) without affecting the other partners.

2. §734(b) applies to all remaining partnership property following certain distributions to a partner. Unlike §743(b), this adjustment changes the common basis of partnership property for all partners. A distribution triggers a §734(b) adjustment only if a partner recognizes gain or loss under §731(a) (e.g., a cash distribution in excess of outside basis) or if distributed property takes a basis in the partner's hands different from the partnership's basis in that property.

Typically, the goal of a §754 election is to increase the partnership’s inside basis in its assets to their FMV; however, the partnership’s inside basis in those assets can also decrease as a result of the election.

There is an often-overlooked opportunity here: the election can create amortizable basis in the partnership's §197 intangibles, including self-created goodwill in which the partnership has no basis. Under Treas. Reg. §1.755-1(a)(5), if the partnership's gross value exceeds the aggregate value of its assets other than §197 intangibles, the excess is treated as the value of the §197 intangibles, which is assigned first to identifiable intangibles (capped at their FMV) with any remainder assigned to goodwill and going concern value, and the basis adjustment is allocated accordingly.

A §743(b) adjustment allocated to §197 intangibles is amortizable over 15 years, subject to the anti-churning rules of §197(f)(9); those rules generally do not apply where the transferee is unrelated to the transferor.

§754 Election Example

David buys Alice’s one-third interest in partnership ABC for $500,000 when the partnership’s total basis in its assets is $900,000. Immediately after the sale, David’s outside basis in his partnership interest is $500,000, but his proportionate share of the partnership's inside basis in its assets is only $300,000.

If a §754 election is made or is in effect, the partnership makes a $200,000 positive §743(b) basis adjustment with respect to David. To the extent the adjustment is allocated to depreciable or amortizable property, the increased basis is treated as newly purchased recovery property placed in service on the date of the transfer. David recovers it over a new recovery period rather than the partnership's remaining period, and the adjustment can qualify for §168(k) bonus depreciation. See Treas. Reg. §1.743-1(j)(4)(i)(B)(1).

If a §754 election is not in effect, David will typically recover that $200,000 difference only through outside basis when he disposes of the partnership interest.

Making and Revoking the §754 Election

To make the §754 election, the partnership attaches a written statement to a timely filed return, including extensions, for the tax year in which the transfer or distribution occurs. Treas. Reg. §1.754-1(b)(1) requires the statement to contain the partnership’s name, address, and a declaration that the partnership elects to apply §734(b) and §743(b) under §754. For tax years ending on or after August 5, 2022, no partner signature is required; Treasury Decision 9963 removed the signature requirement.

If a partnership does not make a timely §754 election, Treas. Reg. §301.9100-2(a)(2)(vi) provides for an automatic 12-month extension from either the original or extended due date (if an extension was filed). The partnership must put “FILED PURSUANT TO §301.9100-2” at the top of the corrective filing: an original return if not yet filed, or an amended return or AAR (Form 1065-X for paper filers; Form 8082 for electronically filed returns).

After that window, relief requires a private letter ruling under Treas. Reg. §301.9100-3. Private Letter Ruling 202531008 is an example of this relief.

Once made, the §754 election applies to all transfers and distributions in the election year and every subsequent year. The partnership can revoke a §754 election under Treas. Reg. §1.754-1(c) if it receives IRS permission using Form 15254, Request for Section 754 Revocation. The IRS has a frequently asked questions (FAQ) page on §754 that covers the mechanics of §754 revocation.

Treas. Reg. §1.754-1(c) states that the IRS will not approve a §754 election revocation when its purpose is primarily to avoid stepping down the basis of partnership assets upon a transfer or distribution.

Adjustments Without a §754 Election

Even with no §754 election in effect, a §743(b) adjustment is required on a transfer if the partnership has a substantial built-in loss — where inside basis exceeds fair market value by more than $250,000, or, for transfers after December 31, 2017, where the transferee would be allocated a net loss of more than $250,000 on a hypothetical sale of all assets at fair market value.

Similarly, a downward §734(b) adjustment is required when a distribution produces a substantial basis reduction exceeding $250,000.

If no §754 election was in effect for the transfer year, §732(d) provides a partner-level fallback: a partner who receives a distribution of partnership property within two years of acquiring their partnership interest by transfer can elect to treat the distributed property as though the §743(b) adjustment had been in effect. This election applies only to the distributed property, and does not affect the partnership’s property.

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The new Automatic Exemption from Penalty (AEP) is a much-needed simplification of the FTA process, and helps taxpayers who lack professional tax assistance.

AEP rules are located on an IRS webpage; the FTA rules are in Internal Revenue Manual (IRM) 20.1.1.3.3.2.1 (3-29-2023).

AEP vs. FTA Timing

AEP applies to all eligible 2025 tax year returns and 2026 quarterly returns, and to all future tax years and quarters. FTA applies to all eligible 2025 tax year returns and 2026 quarterly returns to which AEP was not applied, plus all prior years and periods.

FTA will no longer apply to eligible returns with original due dates on or after January 1, 2027; however, it can still be used for prior tax periods if applicable.

AEP Overview

The following penalties are eligible for both AEP and FTA:

• Failure to file under §6651(a)(1), §6698(a)(1) [partnerships], or §6699(a)(1) [S corporations],

• Failure to pay under §6651(a)(2) or §6651(a)(3), and

• Failure to deposit under §6656.

A taxpayer qualifies for AEP if they file an eligible, original return late, or pay the tax late, and IRS records show a history of timely compliance over the prior three years (or 12 consecutive quarters). This lookback period is the same one used for FTA.

AEP is essentially the same as FTA, with the main difference that AEP is applied automatically, whereas the taxpayer or their representative must request FTA.

No “First Time” Issue

With respect to FTA, the IRM implied that it was available only once per taxpayer (i.e., “first time”). IRM 20.1.1.3.3.2.1(2) (3-29-2023) states:

…is available for penalty relief the first time a taxpayer is subject to one or more of the referenced penalties…

However, the criteria did not require IRS employees to conduct compliance reviews beyond the prior three tax years; the language was overall unclear.

AEP is clear: it is available multiple times per taxpayer if they meet the criteria.

Tax Practitioner Role in AEP

It is guaranteed that the IRS will mistakenly assess AEP-eligible penalties. Tax practitioners will still need to verify that AEP was properly applied, and request it on behalf of taxpayers if penalties are erroneously assessed.

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The IRS recently provided new guidance on how to file Kwong claims, and which claims should be filed now versus which ones should wait.

Form 843 Guidance

The IRS stated the following in a post-release change to the Form 843 instructions:

• Individual taxpayers who have an IRS Online Account may submit a Kwong refund claim electronically. Tax professionals cannot access their client’s online accounts to do this for them, and there is no electronic form in the Tax Pro Account.

• Write “Kwong vs. United States” across the top of Form 843.

• Mail all Kwong refund claims to Internal Revenue Service, 1973 N Rulon White Blvd., Ogden, UT 84201.

Do not worry about any prior Kwong refund claims filed under the previous instructions; complete and mail all current and future ones using these instructions.

Do Not Submit Non-Refund Kwong Claims

Inside the Individual Online Account, the IRS stated the following regarding claims to abate unpaid penalties and interest:

If you file Form 843 with respect to unpaid penalties and interest, you will receive Letter 916C, Claim Incomplete for Processing; No Consideration, and your claim will not be held as a protective claim.

If the taxpayer’s claim for abatement will not result in a refund (because there is an unpaid balance on the tax period), there is no statute of limitation provision limiting relief, and the taxpayer does not need to file it now. This is why it is not a “protective claim” — a protective refund claim’s purpose is to put the proverbial “foot in the door” and stake a claim on an uncertain issue prior to the expiration of the refund statute of limitations.

Example 1. John just filed his 2021 tax return, and has an unpaid balance of $55,432 on July 2, 2026. He has made no payment on the tax year. While he has penalty and interest accruals eligible for a Kwong claim, he does not need to file it now. If he does file it now, the IRS will not give consideration to the claim and will not hold it.

Example 2. Fast forward to September 9, 2026. John pays his 2021 balance due in full. He has until September 9, 2028 (two years from the payment date) to file a timely refund claim for the Kwong-eligible penalties and interest. John may consider waiting to file it to see how further litigation proceeds with respect to the Kwong case.

July 10, 2026 Deadline Review

Practitioners must file any Kwong claims by July 10, 2026 that are a refund of amounts paid during the Kwong postponement period of January 20, 2020 through July 10, 2023. For amounts paid after that period, the practitioner must determine the refund statute of limitations end date for each tax period, and file a protective claim or actual claim (if Kwong is determined to be correct) by that date.

To reiterate: there is no limitations period or July 10, 2026 deadline to file a Kwong claim that is not a refund. The IRS will neither process it nor hold it.

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Gift of Future Interest

The annual gift exclusion under §2503(b) applies only to a gift of present interest, which is an unrestricted right to the immediate use, possession, or enjoyment of property. See Treas. Reg. §25.2503-3(b).

Because the Trump account beneficiary generally cannot access the funds during the growth period, any contribution to a Trump account is likely a gift of future interest that does not qualify for the annual gift tax exclusion, regardless of the contribution amount. See §2503(b)(1) and Treas. Reg. §25.2503-3(a).

To avoid the filing of millions of additional Form 709s, the IRS provided filing relief in Rev. Proc. 2026-25 — but the details matter, because Trump account contributions will have to be reported on Form 709 if the IRS’s safe harbor is not met.

Form 709 Filing Relief Requirements

If the safe harbor applies for a calendar year, each Trump account contribution is treated as a completed gift of present interest to the account beneficiary and is eligible for the annual exclusion. The taxpayer must meet five requirements:

1. The donor is an individual,

2. The only taxable gifts the donor makes during the year are cash contributions to one or more Trump accounts, each made before the year the beneficiary turns 18,

3. The donor’s total gifts to each account beneficiary, including the Trump account contribution, do not exceed the annual gift tax exclusion amount,

4. The contributions generate no gift or generation-skipping transfer (GST) tax after applying the donor’s remaining applicable credit amount and GST exemption, and

5. Disregarding the Trump account contributions, no gift tax return is required, and no gift tax return is otherwise filed by or on behalf of the taxpayer for the tax year.

If the safe harbor is not met, any contribution to a Trump account is treated as a gift of future interest and must be reported on Form 709.

Example 1: No Gift Tax Return Required

In tax year 2026, Gail has two grandchildren, Henry and Audrey. She contributes $5,000 to each of their Trump accounts and makes an additional $8,000 cash gift to Henry. Her total 2026 gifts are $13,000 to Henry and $5,000 to Audrey, each being under the $19,000 exclusion amount for tax year 2026.

Gail makes no other gifts and files no Form 709 for any other purpose. Because Gail meets the safe harbor, her contributions to the Trump accounts are treated as gifts of present interest and do not have to be reported on Form 709.

Example 2: Gift Tax Return Required

In tax year 2026, Lysa has two grandchildren, Quinn and Nancy. She contributes $5,000 to each of their Trump accounts and makes an additional $8,000 cash gift to Nancy. In addition, she makes a $30,000 cash gift to her adult son, Noah. Her total 2026 gifts are $13,000 to Nancy, $5,000 to Quinn, and $30,000 to Noah.

Lysa must file Form 709 to report Noah’s gift since it exceeds the $19,000 exclusion amount for tax year 2026. Therefore, Lysa does not meet the safe harbor, and the $5,000 contributions to the Trump accounts for Quinn and Nancy are treated as gifts of future interest and must be reported on Form 709.

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Here’s the truth: OPR’s application of Circular 230 to AI tools makes absolute sense; however, my impression from talking to and seeing what practitioners claim is that they are not consistently following these guidelines with respect to client tax output.

Six Tax Provisions and Their Impact on AI

§10.22 – Due Diligence. A practitioner cannot rely on AI to do their job; they must review every AI-generated document before it reaches a client or the IRS, verifying facts, citations, and calculations. If the output looks plausible and verification is skipped, the practitioner has failed their due diligence obligations.

§10.27(a) – Fees. If an AI tool cuts research or drafting time in half but the practitioner bills as though they did the work without AI assistance, it can amount to an unconscionable fee. OPR expects the practitioner to disclose AI use and pass on cost savings to clients openly.

As AI tools make work much more efficient, it makes a compelling argument for switching from input-based billing methods, such as hourly billing, to fixed-fee value-based engagements in which the price is not dependent on practitioner inputs. This switch allows the practitioner to earn similar amounts with less work, enabling them to meet their §10.22 due diligence requirements better.

§10.35 – Competence. OPR has long insisted that technological competence is essential for tax practitioners, and now they are expanding this to understanding how AI works: its mechanics, limitations, and failure modes. If a practitioner cannot explain how a generative system produces content, recognize bias in its output, or judge whether a result is suitable for an IRS matter, the practitioner lacks the competence Circular 230 requires, and cannot deploy AI tools in their practice.

§10.36 – Firm Procedures. If a practitioner owns a firm, they are responsible for adequate procedures: staff training on AI risks, secure data-handling protocols, accuracy monitoring, vetting of third-party tools, and documentation showing that these requirements were met. “We didn’t know our staff was using ChatGPT for client advice” is not an excuse — have a standard operating procedure on AI use in place!

§10.37 – Written Advice. Every factual assertion and legal citation in AI-assisted written advice must be independently verified. You cannot rely on AI output mindlessly, especially when the underlying logic is opaque or when it involves a highly complex tax matter with detailed fact patterns. Treat any AI tax research tool as a starting point for the research process, not the end of it.

IRC §§6713 & 7216(a) – Data Protection. Civil and criminal penalties apply for unauthorized disclosure of tax return information. Uploading sensitive client data to unsecured or public AI platforms violates the law. Use only secure, enterprise-approved systems with real confidentiality safeguards. Or, better yet, avoid the issue altogether and do not upload sensitive tax return information into an AI tool.

Disclosure under §7216 is an essential issue, and OPR’s guidance is vague at best. More specific guidance is needed on how the §7216 exceptions that allow disclosure without consent apply to AI tools. See this previous article on this topic.

Responsible Adoption of AI in Tax Practice

AI is genuinely useful. It accelerates research, speeds drafting documents, and can surface relevant authorities. It can also help, or even take over, some firm administrative tasks. Firms that integrate it thoughtfully and ethically will outpace firms that do not.

The firms getting this right are:

• Selective about delegation. Not everything can be replaced with an AI tool; the human touch matters. Be extremely wary of AI tools touching sensitive client data, and a practitioner cannot outsource their tax judgment to an AI tool.

• Transparent with clients. Disclose that AI may be used in engagement letters. If §7216 protected information is disclosed to an AI tool, a practitioner must obtain specific, signed consent absent other IRS guidance.

• Disciplined about data disclosure. Sensitive information must stay in secure systems; public platforms are off-limits.

• Training and superving. Staff must understand the law, the ethical obligations, the technology, and the firm’s procedures, and supervisors spot-check usage.

• Documenting. Procedures, training, and verification are documented in standard operating procedures. In addition, the firm's written information security plan (WISP) is up to date regarding AI usage and the related data security safeguards.

This guidance tells practitioners that the use of AI in tax practice is on OPR’s radar. It is time to comply with best practices, even if it is not the most efficient use of AI tools.

A Circular 230 Compliant Tax Research Tool Exists

Josh Youngblood, EA, CRETS and I have been worried about the impact of AI on tax research — quick answers, typically unverified, that do not meet Circular 230 requirements or ensure taxpayers get a quality research process.

We built the first AI tax research tool — AskTomG.ai — with safeguards built in to ensure compliance with Circular 230 requirements and a thorough tax research process. It uses the same tax research process that I teach and have used for years.

AskTomG.ai finds the authority, but you make the call. It surfaces relevant authorities, tags them by weight under Treas. Reg. § 1.6662-4(d)(3)(iii), and hands you a vetted foundation for your own analysis. The judgment stays with you—where Circular 230 says it belongs, and OPR has confirmed.

AskTomG.ai was launched last week. Become a Founding Member by June 26, 2026, for a two-year price guarantee and special benefits!

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Marital status determines the filing status options available. Taxpayers determine their marital status on the last day of the tax year, unless their spouse died during the tax year, when they use their status on the date of the spouse’s death.

For unmarried taxpayers, the three options are:

1. Single,

2. Head of household (HOH), or

3. Surviving spouse.

For married taxpayers, the three options are:

1. Married filing jointly (MFJ),

2. Married filing separately (MFS), or

3. Head of household (if considered unmarried under §7703(b) or married to a nonresident alien under §2(b)(2)(B)).

The surviving spouse filing status is relatively uncommon. The IRS used to use the term qualifying widow(er), but now uses the term qualifying surviving spouse (QSS).

Surviving Spouse Benefits

The surviving spouse filing status key benefits include the use of the MFJ tax brackets (§1(j)(2)(A)) and the MFJ standard deduction amount (§63(c)(2)(A)(ii)). Whether a surviving spouse gets MFJ benefits under any other provision depends on the structure of that specific Code provision.

For example, with respect to the §24 child tax credit modified adjusted gross income (MAGI) phase-out, §24(h)(3) states: “…the threshold amount shall be $400,000 in the case of a joint return ($200,000 in any other case).” The surviving spouse child tax credit begins to phase out at $200,000 of MAGI.

On the other hand, with respect to the 3.8% net investment income tax, §1411(b)(1) states that the MAGI threshold amount “in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000.” The surviving spouse uses the MFJ threshold in this case.

Surviving Spouse Requirements

A surviving spouse must meet three requirements under Treas. Reg. §1.2-2(a)(1):

1. Their spouse died during either of the two tax years immediately preceding the tax year, and they were eligible to file a joint return in the year of death,

2. They maintain a home as a household that, for the tax year, is the principal place of residence for a son, stepson, daughter, or stepdaughter, and

3. They claim the son, stepson, daughter, or stepdaughter as a §151 dependent.

Example

Travis’s first wife died in 2016 while married to him. Travis married his second wife in 2018, who then died in 2019. Travis remained unmarried after that time. Over the years, Travis had a young son whom he maintained in his household and claimed as a dependent.

In 2016, Travis could file MFS or MFJ, but in 2017, he is eligible for QSS.

In 2018 and 2019, Travis could file MFJ or MFS, but in 2020 and 2021, he is eligible for QSS.

In the tax years Travis qualifies for QSS, he also qualifies for HOH; however, it is almost certain that QSS would result in the lowest tax liability.

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…must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

The client, not the practitioner, must decide whether to correct the error:

• It is inappropriate to prepare an amended return, send it to the client, and let them decide what to do with it. Our ethical obligation is to provide advice.

• The advice provided to the client should be documented in the client's file. Tom’s Tax Toolbox has a new template available for this documentation.

• The practitioner must decide whether to engage a client who will not address tax return errors; there may be risks in future engagements.

Errors that Generate a Refund

An amended return with a refund must be filed within the refund statute of limitations in order for the amount to be refunded. Learn more about the refund statute of limitations in this article.

Errors that Generate a Balance Due

An amended return with an increase in tax must be filed within the assessment statute of limitations; otherwise, the IRS is barred from processing it. Learn more about the assessment statute of limitations in this article.

If the client decides to correct the error, they can submit a qualified amended return and avoid §6662 accuracy-related penalties on the additional tax, provided that the amount is not related to a fraudulent position on the original return.

Under Treas. Reg. §1.6664-2(c)(3), a qualified amended return is an amended return filed after the due date of the return (including extensions) and before the earliest of the following events:

1. The date the taxpayer is first contacted by the IRS concerning any examination (including a criminal investigation) with respect to the return,

2. The date any taxpayer is first contacted by the IRS concerning an examination of that taxpayer for claiming an abusive tax shelter benefit,

3. The date a pass-through entity is first contacted by the IRS in connection with an examination of the return to which the pass-through item relates,

4. The date on which the IRS serves a §7609(f) John Doe summons relating to the tax liability of a person, group, or class that includes the taxpayer with respect to an activity for which the taxpayer claimed any tax benefit on the return, and

5. The date on which the IRS announces guidance published in the Internal Revenue Bulletin a settlement initiative to compromise or waive penalties, in whole or in part, with respect to a listed transaction if the taxpayer who participated in the listed transaction and for the taxable year(s) in which the taxpayer claimed any direct or indirect tax benefits from the listed transaction.

In most circumstances, a qualified amended return is one filed prior to the date that the IRS contacts a taxpayer regarding an examination of that tax year.

A return filed on or before the due date of the return (unextended or extended) is not a qualified amended return but instead is a superseding return. I wrote about superseding returns in this article..

Qualified Amended Return Example

A client’s 2023 tax return has an erroneous $25,000 Schedule C deduction that created a $22,000 loss. It is not a trade or business activity, so the $3,000 of income should be reported as other income on Form 1040, and no deductions are allowed. Assume that the taxpayer is in the 24% tax bracket.

If the taxpayer uses a qualified amended return to proactively fix the tax return issue, and the taxpayer files and pays the balance due on May 1, 2025, then the correction costs the client $6,500: $6,000 in additional tax, $500 in interest on the additional tax, and no §6662 accuracy-related penalties.

If the IRS finds the error in a correspondence examination and makes the assessment on May 1, 2026, then the changes will total $8,165:

• $6,000 in additional tax,

• $965 in interest on the additional tax, and

• $1,200 in §6662(b)(2) accuracy-related penalties.

Interest will continue to accrue on the tax balance until the taxpayer pays the additional tax or posts a §6603 deposit.

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Value Pricing Defined

Value pricing anchors the fee to the anticipated value the engagement delivers to the client. While value is primarily economic, it can also include intangible benefits. Examples of value include anticipated tax savings, avoided penalty and interest exposure, reduced risk, access to expertise, and peace of mind.

Any pricing method can use value pricing principles. Hourly, fixed-fee, or subscription pricing can all incorporate a value framework.

Value pricing is impossible without a real pre-engagement discovery process. A practitioner cannot price an engagement they do not understand. The practitioner should inquire about answers to the following questions:

• What is the problem the client is actually trying to solve?

• What does an ideal outcome look like for them?

• What is the cost of doing nothing, or of getting this wrong?

• What risks are they carrying that they may not know about?

• What have they tried before, and how did it turn out?

• Is there a timeline driving the engagement?

Why Value Pricing Works

Value pricing severs the link between time and price. High-impact work, such as advisory services or IRS representation services, is priced commensurate with its actual value to the client, and the practitioner is rewarded for expertise rather than for the time or effort required to complete it. A practitioner who can resolve a complex penalty matter in two hours of focused thought, drawing on twenty years of experience, is not punished for their knowledge, skill, and efficiency in a value pricing model, since the practitioner's inputs do not drive the fee.

A practitioner who embraces value pricing must naturally position themselves as a strategic advisor, not a transactional service provider. This distinction matters increasingly as basic compliance work gets completed by AI and automation.

Meeting revenue goals with fewer clients leaves room to do each engagement thoroughly and properly, directly supporting the Circular 230 §10.22 due diligence obligation, a duty that does not adjust based on the practitioner’s fee.

Where Value Pricing May Not Fit

Value pricing does not work if the practitioner cannot clearly articulate the engagement’s economic value; for example, Form 1040 preparation, payroll services, and bookkeeping services may not be ideal for value pricing. The better option is to bundle compliance services into a broader, value-priced engagement.

Value pricing demands skills that not every practitioner has or wants to develop. A value-pricing conversation requires real discovery, a willingness to articulate value in dollar terms without flinching, and the discipline to hold the price when a client pushes back rather than dropping the fee to save the engagement. Practitioners trained to justify fees by time spent may find this conversation uncomfortable, and clients sense that discomfort.

Value Pricing is Not a Contingent Fee

Under Circular 230 §10.27(b), a practitioner generally may not charge a contingent fee in connection with IRS matters. The exceptions are examinations of an original return (or a timely-filed amended return or refund claim), penalty and interest abatement claims, and judicial proceedings under the Internal Revenue Code.

§10.27(c)(1) defines contingent fees broadly. It captures any fee based on whether a position is sustained, the refund or tax saved, or a specific result attained. It also includes arrangements that are contingent in substance, such as rebates, indemnity guarantees, rescission rights, and similar provisions.

Value pricing avoids this characterization because the fee is determined by the anticipated value rather than the realized outcome. A value-priced engagement includes anticipated savings as one input into setting the fee, but once set, the fee does not change based on the engagement outcome.

Example. A taxpayer was assessed a $42,000 §6662 accuracy-related penalty and has a very strong case for penalty abatement due to reasonable cause. An example of a contingent fee is 20% of the penalty reduction received, and an example of a value-priced fixed fee is $7,000 for the engagement, regardless of the outcome.

Tom’s Three-Factor Value Pricing Model (For Paid Subscribers Only)

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The transit of the activity from the decedent to the estate to the beneficiary has three distinct considerations with how to handle PALs and current losses from the activity.

Issue #1: Death

Under §469(g)(2), when a taxpayer dies holding a passive activity with suspended losses, those losses are not fully released to the final Form 1040. Only the PALs that exceed the §1014 step-up in basis attributable to the activity are deductible on the decedent’s final return. The remaining losses (the portion covered by the step-up) are permanently disallowed. They do not transfer to the estate or to the beneficiaries.

Final Form 1040 Deductible PAL = Total Suspended PALs − §1014 Basis Step-Up

The logic is not hard to follow: the §1014 step-up eliminates the built-in gain those losses would have offset on a future sale. Allowing both the step-up and the loss deduction would be a double benefit, and Congress said no.

Example: An S corporation shareholder dies with $50,000 of PALs that originated from the S corporation stock. Upon death, the S corporation stock received a step-up in basis to FMV, which increases the stock basis by $30,000. On the decedent’s final Form 1040, $20,000 of the losses are deductible, and the remaining $30,000 are lost.

Issue #2: Estate Administration

The estate takes the passive activity interest with the stepped-up basis. From that point forward, the estate accumulates its own suspended PALs based on whether the executor materially participates in the activity. See S. Rep’t No. 313, 99th Cong., 2d Sess. 735 (1986), 1986-3 C.B. 735.

In practice, executors rarely satisfy the material participation tests; the activity almost always defaults to passive at the estate level. The losses incurred during estate administration are likely to be suspended until either the estate disposes of the activity or the estate terminates.

Issue #3: Estate Termination

When the estate terminates and distributes a passive activity interest to a beneficiary, §469(j)(12) governs. The estate’s suspended PALs allocable to the distributed interest increase the beneficiary’s basis in that interest. The losses are not deducted by the estate or passed through to the beneficiary.

One more point worth making explicit: the beneficiary’s future material participation in the activity is irrelevant to the §469(j)(12) analysis. The beneficiary’s future participation status governs the treatment of future losses from the activity.

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The Kwong holding logically extends to most other filing and payment deadlines that began on January 20, 2020, and ended on July 10, 2023, opening the door to a refund or an abatement of any penalties or interest that accrued during that period.

While there is no statute of limitations on an abatement request for an unpaid amount (assuming the collection statute of limitations has not expired), the refund statute of limitations does apply to a Kwong claim. Read more about it in this prior article:

Recent Law Change Opens the Door to Refund Claims

New §7508A(f), which was added to the Code in the Disaster Related Extension of Deadlines Act (P.L. 119-64), provides that for purposes of the §6511(b)(2)(A) three-year lookback period, any period disregarded under §7508A shall be treated as an extension of time for filing the return. The COVID postponement period is now added to the three-year lookback window, ensuring that timely refund claims result in actual refunds. Two important notes about this rule:

1. It only applies to refund claims filed after December 26, 2025, and

2. It does not apply to refund claims in which the refund amount is limited to the amount paid in the two years immediately preceding the claim.

Practical Kwong Example

Daisy filed her 2021 Form 1040 on August 8, 2022. As a result of filing late, she was assessed $22,502 in §6651(a)(1) late-filing penalties, §6651(a)(2) late-payment penalties, and interest, which Daisy fully paid on September 12, 2022.

Under the Kwong holding, §7508A postponed the deadlines for the 2021 Form 1040 filing and the payment of any balance due to July 10, 2023; therefore, the penalty and interest assessments were erroneous, and the taxpayer is entitled to a refund.

Assume that Daisy files a refund claim on June 3, 2026 for $22,502.

Step 1 — §6511(a): Is the Refund Claim Timely? Without Kwong, the three-year period runs to August 8, 2025, and the two-year period runs to September 12, 2024. The later of the two dates is August 8, 2025, and a refund claim filed June 3, 2026, is not timely; no refund is allowed.

Applying the Kwong analysis, §7508A disregards the COVID-19 postponement period in computing the §6511(a) window, so the three-year period begins July 10, 2023, and runs through July 10, 2026. The refund claim filed on June 3, 2026 is timely.

Step 2 — §6511(b)(2)(A): What is the Refundable Amount? Without §7508A(f), the three-year lookback starting June 3, 2026 runs back only to June 3, 2023. The $22,502 was paid on September 12, 2022, and falls entirely outside the three-year lookback window. The claim is timely, but there are no refundable payments.

Applying §7508A(f), the COVID-19 postponement period is treated as an extension for three-year lookback period purposes:

1. The taxpayer filed the claim on June 3, 2026, so the normal three-year period runs back to June 3, 2023.

2. The period from August 8, 2022, to July 10, 2023, is 336 days, which extends the three years.

3. The extended three-year period runs to July 2, 2022.

Since the September 12, 2022 payment date falls within that expanded window, the refund claim filed on June 3, 2026 for $22,502 is entirely recoverable.

Next Steps

The IRS is likely to appeal Kwong to the Federal Circuit Court of Appeals; as such, a taxpayer with a Kwong claim should file a protective claim using Form 843, Claim for Refund and Request for Abatement. Internal Revenue Manual (IRM) 4.10.11.2.1.3(4) (09-04-2020) provides an excellent explanation of protective refund claims and their essential elements:

In some instances, a claim may be filed by the taxpayer in anticipation of an expected change in the tax law, other legislation, regulations, case law, or other contingency. A “protective claim” is a claim for credit or refund filed by the taxpayer to preserve the right to pursue a refund based on the resolution of an issue contingent on future events that may not be determinable until after the refund statute has expired. Taxpayers file protective claims to ensure they meet the timeliness requirement. With regard to the requirements of form and content, a protective claim must be in writing, include the taxpayer’s name, address, TIN and signature, identify the contingency affecting the claim, be sufficiently clear and definite to alert the IRS as to the essential nature of the claim, and identify the specific year(s) for which the refund is sought. The exact amount of refund requested may not be known at the time the claim is filed…

IRM 25.6.1.10.3.2.5 (07-05-2024) states the IRS has discretion in how to process protective refund claims:

…A valid protective claim need not state a particular dollar amount or demand an immediate refund; however, the claim must identify and describe the contingencies affecting the claim; must be sufficiently clear and definite to alert the IRS as to the essential nature of the claim; and must identify a specific year or years for which a refund is sought.

The IRS has discretion in deciding how to process protective claims. In general, it is in the best interests of the IRS and taxpayers to delay action on protective claims until the pending litigation or other contingency is resolved. Once the contingency is resolved, the IRS may obtain additional information necessary to process the claim and then allow or disallow the claim.

Be sure to address the following in the Form 843 explanation:

• It is a protective claim due to Kwong v. United States, 179 Fed. Cl. 382 (2025),

• Why §7508A applies to the situation to warrant penalty and/or interest removal,

• The claim amount calculation, if needed (using a tool like TaxInterest), and

• How the claim is timely under the refund statute of limitations.

The work in determining eligibility for these claims is significant, as is the uncertainty of processing. But, on the other hand, they can be extremely lucrative to clients if other courts uphold Kwong. Practitioners may want to consider a hybrid fee model: a flat, upfront fee to file the claim, plus a contingent fee if the IRS issues the refund.

Circular 230 §10.27(b)(3) permits contingent fees “for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.”

Sample Kwong Refund Claim

Tom’s Tax Toolbox contains a sample Form 843, Claim for Refund and Request for Abatement, for a Kwong refund claim for a §6654 estimated tax penalty.

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While politicians refer to this provision as “no tax on Social Security,” the deduction is unrelated to a taxpayer’s receipt of Social Security benefits.

The senior deduction does not reduce AGI but does reduce taxable income; it can be claimed regardless of whether the taxpayer itemizes deductions. The deduction is available for tax years 2025 through 2028 on Schedule 1-A, Additional Deductions.

Age Determination

For purposes of determining a taxpayer’s age, they are considered to have attained their age on the day before their actual birthday. If a taxpayer died in 2025, they must have lived until they attained age 65. See the 2025 Form 1040 Instructions, p. 110.

Example. Abel was born on February 14, 1960, and died on February 13, 2025. He is considered age 65 at the time of death and would qualify for the senior deduction for tax year 2025. However, if Abel died on February 12, 2025, he would not have attained age 65 in tax year 2025 and would not qualify for the senior deduction.

Deduction Phase-Out

The $6,000 deduction is reduced by 6% of modified adjusted gross income (MAGI), to the extent it exceeds $75,000 ($150,000 on a joint return), and is not reduced below $0. On a joint tax return with two individuals aged 65 and older, each $6,000 amount is phased out separately, so the deduction is completely phased out at $250,000 AGI. MAGI is AGI plus amounts excluded under §911, §931, or §933.

Example. In tax year 2025, Gerald is 88, and Samantha is 62, and they filed a joint return with MAGI of $175,000. Their senior deduction is $4,500, which is $6,000 less $1,500 (6% of $25,000, the amount their MAGI exceeds $150,000).

Example. Troy and Harris are married and file a joint return. In tax year 2025, Troy is 68 and receiving Social Security benefits, and Harris is 65 and not receiving Social Security benefits. Their 2025 MAGI is $205,220. They both qualify for the senior deduction at a reduced amount, even though Harris has not yet applied for Social Security benefits. Their combined senior deduction is $5,374 as calculated below:

Additional Deduction Requirements

The taxpayer must include their SSN on their tax return. The SSN must be valid for employment and issued before the due date of the tax return (including extensions). The omission of the SSN is treated as a mathematical or clerical error for which the IRS has the authority to adjust the return without a notice of deficiency being issued.

If married, the taxpayer must file a joint tax return to claim the deduction; it is not available on a married filing separately return.

2026 Tax Planning Considerations

If the taxpayer’s MAGI will limit or eliminate the senior deduction, consider strategies to reduce the 2026 MAGI (e.g., accelerate deductions, defer income, retirement distribution planning). Taxpayers greater than age 70.5 should consider tax-free qualified charitable distributions (QCDs) to meet their charitable goals and/or required minimum distribution (RMD) requirements.

The taxpayer’s AGI in tax year 2026 will affect their Medicare IRMAA surcharges in tax year 2028. While the 2028 IRMAA thresholds are not known, they will most likely overlap with the upper end of the senior deduction phase-out range.

If a taxpayer’s income is insufficient to use all the deductions that they are entitled to (e.g., standard/itemized deductions, senior deduction), they should consider accelerating income to tax year 2026 to utilize these deductions (e.g., Roth conversions, traditional IRA distributions, capital gain harvesting). Be careful to track the effect on AGI to avoid losing any positive tax attributes.

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