An enrolled agent (EA) needs 72 hours of CE per enrollment cycle, including at least 16 hours each year with two hours of ethics. Circular 230 §10.6(e)(2). Certified public accountants (CPAs) have varying requirements, and PTIN holders can elect to participate in the Annual Filing Season Program (AFSP) if they earn sufficient CE, among other requirements.

What Quality CE Looks Like

Quality CE leaves the practitioner able to do something they could not do before. A few features usually separate it from filler:

1. A knowledgeable instructor. The instructor knows the content and how to apply it in the real world, and can answer participant questions. The instructor should also be honest about the boundaries of their knowledge and acknowledge that a quick answer may not be appropriate due to complexities.

2. Written materials with citations. A manual or outline that cites the Code, regulations, and IRS guidance lets the practitioner check the instructor’s conclusions and use the materials as a reference long after the session ends. If the only handout is a PowerPoint deck with no citations, avoid the course.

3. Worked examples. Rules make more sense when they are applied to realistic facts with the numbers shown.

4. Updated content. The tax law changes every year, and a course using slides from five years ago likely misses what has changed.

5. Content that stands on its own. A participant can apply what they learned without buying a product.

Most of these features are instructor-dependent. Education marketing should clearly disclose the instructor so the practitioner can make an informed choice when deciding whether or not to attend.

Excellent Education Is Worth Paying For

Good education costs money because it costs the instructor time, and they likely spent decades building the expertise behind it. A quality course requires current research, written materials, worked examples, and the depth to field questions.

Price alone is not a definite measure of quality, however. An expensive course can be thin on technical content, and a modestly priced one can be excellent. Practitioners should judge a course by the instructor’s record and the depth of the materials.

The Dangers of Free CE

Most free CE is a sales funnel. For example, I publish free content and have free webinars available, and they build my list and bring people to my paid offerings. Software and other industry vendors pay to offer free CE for the same reason.

A sales funnel is fine when the free content stands on its own with respect to quality. The test is simple: take the vendor out and ask whether anything useful is left. The line is crossed when the information cannot be applied without the product. Examples include a “workflow optimization” webinar that is really a software demonstration or a “tax planning” seminar where every strategy needs the presenter’s proprietary tool. These courses are sales calls with a CE certificate attached. IRS standards treat sales-oriented presentations and non-tax software training as unacceptable for enrolled agent CE, so a vendor demonstration with an IRS program number may not hold up as qualifying hours.

Free CE has a second but quieter cost. It rarely goes deep enough to truly impact how a practitioner handles a difficult scenario or a representation case. Free content is likely not always updated as quickly as paid content. A practitioner who only collects free hours may be doing themselves a disservice.

In-Person vs. Webinar CE

Webinars are very efficient: there is no travel, they cost less, and they easily fit in a practitioner’s work schedule. That convenience is also the weakness: a webinar running in one window while email and client files sit open in another counts for CE credit but rarely produces much learning. Practitioners frequently multitask and then remember little of what was said during the course.

In-person education gets the practitioner’s full attention along with:

1. Direct access to the instructor, including the follow-up question after the session that turns a general rule into a specific answer for a client situation.

2. Conversations with peers working through the same problems and facing the same challenges, which often teach as much as the session itself.

3. Relationships with colleagues that turn into referrals, collaboration, and informal mentorship over time.

Plan for Competence, Not Hours

Circular 230 §10.35(a) requires "...the competence a matter requires. Competent practice 'requires the appropriate level of knowledge, skill, thoroughness, and preparation.'" The number of CE hours earned does not measure competence: a year of low-quality CE meets the letter of a practitioner’s license requirements yet leaves them where they started personally and professionally.

Here are my recommendations for an annual CE strategy:

1. The one course every tax professional needs is an annual federal tax update from a trusted source that provides substantive written materials (this does not have to be a 500-page book, but it could be). It should narrowly cover changes to the tax law in the last one to two years, and should not exceed six to eight hours in length.

2. Attend at least one in-person event per year, whether it is a local one-day seminar or a multi-day large conference, to connect and collaborate with colleagues and build peer relationships.

3. Pick at least one area to grow into each year and pursue serious education in it from different sources, or find a quality instructor and take the classes they offer.

4. Use free CE sessions to supplement learning and stay aware of developments and products, but do not rely on them as a primary learning vehicle.

5. After taking a CE class, identify clients or processes that can benefit from the knowledge gained, and set a future task to implement the information.

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The most often overlooked material participation test is the significant participation activity (SPA) test under Treas. Reg. §1.469-5T(a)(4). It carries two rules of its own:

1. An aggregation test that can make the activity nonpassive, and

2. A recharacterization rule that makes income nonpassive while losses remain passive.

If ignored, the recharacterization rule can blow up carefully laid passive loss planning or subject income to the net investment income tax (NIIT) that is not owed.

SPA Defined

An SPA is a trade or business activity in which the individual participates for more than 100 hours during the year and in which the individual would not materially participate under any of the other six tests in Treas. Reg. §1.469-5T(a). See Treas. Reg. §1.469-5T(c).

The activity must be a trade or business activity as defined under Treas. Reg. §1.469-4(b)(1), which explicitly excludes rental activities; a rental activity can never be an SPA. Remember that most short-term rentals are not §469 rental activities because the average length of customer use is seven days or less under Temp. Reg. §1.469-1T(e)(3)(ii)(A).

When determining hours spent in the activity, work done in the taxpayer’s capacity as an investor (reviewing financial statements, monitoring operations in a non-managerial capacity) is excluded unless the taxpayer is directly involved in day-to-day management. See Treas. Reg. §1.469-5T(f)(2)(ii). In addition, a spouse’s hours count as the taxpayer’s hours, whether or not a joint return is filed under §469(h)(5) and Treas. Reg. §1.469-5T(f)(3).

SPA Aggregation Rule

If the taxpayer’s aggregate participation in all SPAs for the year exceeds 500 hours, the taxpayer materially participates in each of them. Treas. Reg. §1.469-5T(a)(4).

An activity that independently satisfies another test, such as more than 500 hours of participation, is not an SPA and is not included in the aggregation.

There is no election. If the aggregate exceeds 500 hours, losses from those activities are nonpassive, but so is their income.

SPA Recharacterization Rule

If aggregate SPA hours are 500 or less, the activities remain passive, but Treas. Reg. §1.469-2T(f)(2) recharacterizes their net income as nonpassive. When passive activity gross income from all SPAs exceeds passive activity deductions from all SPAs, a ratable portion of the net passive income from each profitable SPA is treated as not from a passive activity. The ratable portion is the group’s overall net income divided by the total net income of the profitable SPAs only.

The rule is asymmetric by design. A net loss from the SPA group stays passive and is limited under §469. Net income from the SPA group becomes nonpassive. The taxpayer gets the worst outcome in both directions.

Example 1 - Eager Eartha

Eartha is a full-time self-employed enrolled agent who works 1,500 hours a year in her business. She has two side hustles in which she is an owner and works part-time: 400 hours in a restaurant and 150 hours in a shoe store. Eartha does not materially participate in the restaurant and shoe store under any other test. The restaurant and shoe store are both SPAs, but the enrolled agent firm is excluded because she materially participates by working more than 500 hours. The combined 550 hours in the SPAs make both activities nonpassive. See Treas. Reg. §1.469-5T(k), Ex. 4.

Example 2 - Rental Ryan

In tax year 2026, Ryan owns four rental properties:

1. A long-term rental (LTR) with a net loss of $12,000 in which Ryan participates 105 hours,

2. A short-term rental (STR 1) with a net income of $4,000 in which Ryan participates 110 hours,

3. A short-term rental (STR 2) with a net loss of $3,000 in which Ryan participates 160 hours, and

4. A short-term rental (STR 3) with a net income of $6,000 in which Ryan participates 125 hours.

Assume Ryan does not meet any material participation test for any short-term rental because contractors put in more hours than he does.

The long-term residential rental is a §469 rental activity, so it is not an SPA and the $12,000 loss is passive. Ryan’s income is too high to use the §469(i) active participation exception.

The three short-term rentals are SPAs. Because Ryan’s combined participation in all SPAs is only 395 hours, he does not materially participate in them; however, the SPA recharacterization rule applies because all SPAs have combined net income of $7,000 (70% of the total net income of $10,000 from the two profitable SPAs).

Ryan has $15,000 of passive losses, $3,000 of passive income, and $7,000 of nonpassive income (70% of $4,000 plus 70% of $6,000), even though all activities are §469 passive activities under the normal rules. After netting, he will recognize $7,000 of nonpassive income for this tax year.

This example is based on Treas. Reg. §1.469-2T(f)(2)(iii).

Net Investment Income Tax Impacts

To the extent income from a trade or business is recharacterized as nonpassive under Treas. Reg. §1.469-2T(f)(2), it is not a passive activity for §1411 purposes with respect to that income. See Treas. Reg. §1.1411-5(b)(2)(i). Therefore, that income is not subject to the net investment income tax (NIIT).

Example 3 - Investor Ivory

Ivory is a full-time single computer engineer earning $300,000 in wages, but she owns 10% of an S corporation restaurant. She works a few hours a week, totaling 150-200 hours per year. Her pass-through income is typically $50,000 annually.

The restaurant activity is an SPA to Ivory, and she does not materially participate in it under any of the seven material participation tests. However, under the SPA recharacterization rule, the income is nonpassive to Ivory and not subject to the NIIT.

A tax professional who is unaware of the rule and indicates her interest as passive will erroneously self-assess $1,900 of NIIT on her individual tax return.

Acknowledgements

I want to thank Paul Channo, EA, USTCP, Ryan Reichert, EA, USTCP, CFP, and Kelly Myers, EA, for their conversations with me on this issue. Only Kelly knew the SPA recharacterization rule existed; it just shows that the more one knows, the more one realizes that they do not know.

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Here is a portion of the press release:

The Biden Administration overcharged Americans through Obamacare plan exchange “user fees” that were passed on to consumers in the form of higher premiums, funding the operations of the federal Obamacare exchange far in excess of what was needed to run the exchange.

Is the $500 payment income to those who receive it?

Not a New Issue

Under the ACA, the medical loss ratio (MLR) rule caps how much premium revenue a health insurer can keep for things other than paying claims. If an insurer's MLR for a market in a state falls below the threshold, it must rebate the shortfall to policyholders by September 30 of the following year.

The $500 payments, if they are rebates of premiums paid, should be treated similarly to the MLR rebates. The IRS issued informal guidance on MLR rebates that applies general tax principles to these payments.

The IRS concluded that the MLR rebate is not included in gross income as a purchase price adjustment; however, under §111, the rebate must be included in income to the extent it was deducted in the prior tax year and that deduction reduced the taxpayer's tax, either as a general medical expense on Schedule A or as §162(l) self-employed health insurance on Schedule 1.

Tax Benefit Rule Not Relevant

Because the rebate relates to premiums paid in 2026 and the $500 rebate was received in 2026, the tax benefit rule under §111 would not apply, as there would be no potential deduction of the $500 amount in a prior tax year.

Instead, a taxpayer would reduce their 2026 premiums paid by $500 when determining any deduction they may be allowed.

Under Treas. Reg. §1.36B-3(d)(1)(i)(A), enrollment premiums are reduced by amounts refunded in the same tax year, so a recipient who claims and/or reconciles the PTC on their 2026 Form 8962, Premium Tax Credit, reduces their premiums paid by $500.

Is the $500 Payment a True Rebate?

While the White House has said the $500 payments are a rebate of 2026 premiums, in some ways they do not align with a traditional rebate:

• They are not tied directly to the premiums individuals actually paid, and

• The insurer, whom the taxpayer actually paid for the coverage and who bore the federal fee expense, did not issue the rebate; the federal government did.

If the payments are a refund of federal fees economically borne by consumers, they are still likely not included in the taxpayer’s income based on the IRS’s position with respect to the 2006 telephone excise tax refund program.

Telephone carriers collected the §4251 excise tax from consumers as a line item on their phone bills. After losing in five circuits on whether time-only long-distance billing was taxable, the IRS conceded the issue in Notice 2006-50 and refunded consumers directly on their 2006 returns, offering a flat standard amount of $30 to $60 instead of the actual tax paid.

The IRS’s position was that an individual claiming the standard amount did not have to include it in gross income, and that an individual claiming the actual amount had to apply the §111 tax benefit rule to any portion previously deducted to determine gross income.

Lack of Form 1099 Does Not Control

The $500 payment is too small to report on a Form 1099 now that the filing threshold is $2,000 for tax year 2026, so the lack of a Form 1099 does not indicate anything.

It is critical to note that whether or not a payment is reported on Form 1099 has no bearing on its tax treatment to the payment recipient. Any payments received by a taxpayer should be analyzed with respect to their situation to determine whether or not they are included in gross income and their overall treatment.

Conclusion

It would be helpful if the IRS issued clear formal or informal guidance on the treatment of the $500 rebates. However, absent any guidance, they are most likely a nontaxable return of amounts previously paid, whether characterized as a premium rebate or a refund of pass-through federal fees, and they reduce the 2026 deductible or creditable premium amount.

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The Above-the-Line Deduction Before the OB3 Act

Through tax year 2025, the educator deduction was a single, above-the-line deduction under §62(a)(2)(D). Congress enacted it as a temporary provision in 2002 and renewed it as an extender until the PATH Act (P.L. 114-113) made it permanent, indexed it for inflation, and added professional development courses.

The maximum deduction was $250 through tax year 2021, $300 for tax years 2022 through 2025, and is $350 for tax year 2026 under Rev. Proc. 2025-32. The cap is per educator, so two eligible educators filing a joint return can each take the full amount, up to $700 for tax year 2026.

An eligible educator for purposes of the above-the-line deduction includes a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who works at least 900 hours in a school during a school year.

Allowed expenses include books, supplies, computer equipment (including software and services), other equipment, and supplementary materials used in the classroom, plus professional development courses related to the curriculum or the students taught. Supplies for health or physical education courses are allowed only if they are athletic supplies.

Pre-2018, expenses exceeding the maximum could be deducted as unreimbursed employee expenses subject to the 2% of adjusted gross income (AGI) floor.

OB3 Act Creates a Second Educator Deduction

Starting in tax year 2026, educator expenses are also an itemized deduction with no floor or dollar limit. §70110 of the OB3 Act made the suspension of miscellaneous itemized deductions subject to the 2% of AGI floor permanent in §67(h), but carved out educator expenses in new §67(b)(13).

New §67(g) defines the scope of the new itemized deduction as being the same expenses eligible for the above-the-line deduction with four modifications:

1. The dollar limit does not apply,

2. Nonathletic health and physical education supplies are allowed,

3. Outside the classroom expenses used as part of instructional activity qualify, and

4. Eligible educators include interscholastic sports administrators or coaches.

For example, a coach who is not also a teacher, counselor, principal, or aide qualifies for the itemized deduction, but not the above-the-line deduction. Supplies used outside the classroom (e.g., on the field, in the gym, or on a trip) qualify for the itemized deduction but not the above-the-line deduction.

Early Childhood Educators Now Eligible

Starting in tax year 2026, early childhood educators are eligible for both deductions. This change was a rider attached to the Lindsey O. Graham Sanctioning Russia and Iran Act of 2026 (H.R. 5334, signed September 18, 2026).

There were two changes to the statute to enable early educator eligibility:

1. An eligible educator includes "an early childhood… teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year” under revised §62(d)(1)(A).

2. The term school now includes “in the case of early childhood education, any school or childcare facility which provides educational or childcare services for more than 2 individuals (other than individuals who reside at the school or facility) who have not attained age 6, and operates at the public expense or receives a fee, payment, or grant for providing such services for any of the individuals (regardless of whether such school or facility is operated for profit)” under revised §62(d)(1)(B)(i).

Tom’s Tax Toolbox Addition

I created an Educator Expenses Worksheet to gather all the right information you need from the client to determine which expenses qualify for which deduction.

Tom’s Thoughts (For Paid Subscribers Only)

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I was surprised when every single tax professional who asked about referrals demanded to know what referral fee they would earn for sending a client to me to handle a matter that the tax professional admitted they did not have the knowledge, experience, or license to handle themselves.

While I appreciate every referral I receive from a colleague, I refuse to pay referral fees because I believe there are ethical issues inherent in doing so.

Ethical Standards

Circular 230 does not address referral fees at all. §10.27 prohibits unconscionable fees and restricts contingent fees; nothing in prohibits referral fees or requires disclosure of referral fees.

The AICPA Code of Professional Conduct addresses referral fees directly. The Commissions and Referral Fees Rule (ET §1.520.001) prohibits commissions only for attest clients; referral fees between professionals are governed by paragraph .04:

Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.

The rule permits a CPA to pay or accept a referral fee, but the obligation runs in both directions: the CPA who pays to obtain the client must disclose the payment, and the CPA who accepts a fee for the recommendation must disclose it as well. Neither side of the transaction can be kept from the client.

The NAEA Code of Ethics and Rules of Professional Conduct takes the same approach for enrolled agents. Rule 12 states in part:

No Member or Associate will accept or pay a commission for the sale or referral of products or services to a client unless they are properly licensed and all facts are fully disclosed in writing to the client.

The U.S. Tax Court goes further. Tax Court Rule 201(a) requires practitioners before the Court to practice “in accordance with the letter and spirit of the Model Rules of Professional Conduct of the American Bar Association.” ABA Model Rule 7.2(b) provides that a lawyer “shall not compensate, give or promise anything of value to a person for recommending the lawyer’s services,” subject to narrow exceptions. A USTCP cannot pay a tax professional for a U.S. Tax Court engagement referral.

The standards that permit referral fees require written disclosure to the client, and the standard governing U.S. Tax Court practice prohibits them. Not one practitioner who asked me about a referral fee offered mentioned disclosing it to the client in writing.

Referrals and Competence

Circular 230 §10.35 requires a practitioner to “possess the necessary competence to engage in practice before the Internal Revenue Service.” A practitioner who lacks the knowledge, experience, or license for a federal tax matter has two options:

1. Gain competence through education and/or consultation, or

2. Decline the matter and refer the client to someone competent.

A referral often is the referring practitioner meeting their own ethical obligation. Demanding payment to meet an ethical obligation turns the relationship backward.

Taxpayer’s Best Interest Comes First

A referral fee changes the question the referring practitioner asks. Without one, the question is “who is best for this client?” With one, it is “who will pay me the most for this client?” They are not always the same person, and the client cannot tell which question was asked unless the fee is properly disclosed.

Here’s the truth: the client ultimately pays the referral fee because a practitioner who passes a portion of the engagement fee to the referring practitioner is pricing the referral fee into the engagement fee.

Eliminating the Scarcity Mindset

The referral fee demand comes from a scarcity mindset: a belief that any client walking out the door, even for a matter that cannot be handled by the practitioner, is lost revenue that must be recovered somehow. It is not.

A client referred to a competent professional for representation or advisory matters returns to the referring practitioner for tax return preparation, usually with a stronger relationship, because the practitioner solved a problem.

Referrals run in both directions. A practitioner who refers out matters beyond their expertise without expecting anything in return builds relationships with the professionals who receive those referrals, and those professionals send work back because the relationship rests on trust and competence, not on a ledger.

A referral made for the client's benefit is the best business development a tax professional can do, and it costs nothing.

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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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