Congress remains in recess this week as the six-day-and-counting shutdown of the Department of Homeland Security (DHS) persists. The rest of the federal government is funded through Sept. 30, 2026.
On Feb. 3, 2026, the House narrowly passed a Senate-amended, bipartisan fiscal year (FY) 2026 appropriations package along with a stopgap continuing resolution (CR) for DHS, effectively ending the brief, partial government shutdown that began on Jan. 31, 2026. The president has signed the approximately $1.2 trillion FY 2026 appropriations package into law, providing funding for key federal agencies including Treasury and the IRS through the end of the fiscal year.
Congress was unable to reach bipartisan, bicameral consensus on an amended DHS funding bill by the CR’s Feb. 13, 2026, deadline. It remains unclear how long the funding impasse will continue but a quick remedy does not appear likely at this time. Congress has passed 11 of 12 annual FY 2026 appropriations bills.
Legislative landscape
Despite a major legislative win for Republicans in passing last year’s tax reform legislation commonly known as the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21), which they are now referring to as the “Working Families Tax Cuts,” the legislative landscape on Capitol Hill has remained persistently rocky for the 119 Congress. And with Republicans recently shrinking majority and intraparty discord, and increasing political divide with colleagues across the aisle, the possibility of significant tax legislation appears more unlikely by the day – particularly ahead of the 2026 midterm elections in November.
“Congress is officially in campaign mode through Election Day. Members have come to grips with the fact that even with the best intentions, the desire (and ability) to pass meaningful legislation is now paused as many shift their focus to the campaign trail,” a senior Senate aide told Baker Tilly National Tax on Feb. 17, 2026.
Moreover, the president has not indicated interest in another partisan reconciliation measure, saying recently, “we’ve gotten everything passed that we need…now we just need to manage it,” according to several media reports. The president is likely alluding to smaller tax-related bills hitching a ride with another legislative vehicle and even OBBBA-related technical corrections. “Do we have other things in mind? We do — we have things in mind,” he said. “And we have, perfecting a little bit about what we did.”
However, several top House Republicans continue to express the importance of taking another bite at the broader-scale reconciliation apple. And although the House’s top tax writer, Ways and Means Chair Jason Smith (R-MO) has said he doesn’t see a path forward on reconciliation, House Speaker Mike Johnson (R-LA) has continued to explore the possibility.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
The Republican Study Committee has released its reconciliation framework, focusing on housing, healthcare, and energy costs. But at this time, there isn’t any unified messaging on policy within the party aside from echoing the president’s pursuit of affordability. And while several bipartisan tax priorities remain in play, such as extending the expired Work Opportunity Tax Credit and the ACA enhanced premium tax credit, there seems to be little momentum for addressing these items. Bipartisan negotiations on the enhanced premium tax credit have gone from boiling down to a simmer.
D.C. decoupling
On Feb. 12, 2026, Congress passed a joint resolution to nullify recent changes to D.C.’s tax code that would decouple D.C. from federal tax law provisions enacted under the OBBBA, including, among other things, the standard deduction, taxation of tipped wages and 100% depreciation of qualified property. Generally, D.C. automatically adopts changes to federal tax law on a rolling conformity basis. On Dec. 20, 2025, the D.C. Council enacted legislation decoupling from certain OBBBA provisions and amending others in the D.C. tax code. The president is expected to sign the resolution.
As noted by the Congressional Research Service, the U.S. Constitution provides Congress with plenary legislative authority over D.C. as the federal capital. With the passage of the District of Columbia Self-Government and Governmental Reorganization Act of 1973 (P.L. 93-198) (Home Rule Act), Congress granted limited home rule authority to D.C., and “reserves the right, at any time, to exercise its constitutional authority as legislature for the District.”
However, this is subject to a 30-day threshold, which D.C. argues Congress missed. Since the enactment of the Home Rule Act in 1973, four resolutions under both Democratic and Republican administrations disapproving of D.C. acts have resulted in the nullification of D.C. laws.
Sections 45Y and 48E Beginning of Construction Notice
Additionally, on Feb. 13, 2026, Sen. Catherine Cortez Masto (D-NV), Senate Democratic Leader Chuck Schumer (D-NY), and Senate Finance Committee Ranking Member Ron Wyden (D-OR) under the Congressional Review Act, introduced a joint resolution providing for congressional disapproval of IRS Notice 2025-42, Beginning of Construction Requirements for Purposes of the Termination of Clean Electricity Production Credits and Clean Electricity Investment Credits for Applicable Wind and Solar Facilities. “For years now, wind and solar companies have been planning their investments into our nation’s energy grid, ready to meet our rising demand for energy, create good-paying jobs, and invest in our future. The Republican tax law and this last-minute guidance from the Administration will raise energy prices and chill investment, and Congress must step in,” Masto said in a Feb. 13, 2026, statement.
Nonprofit oversight
On Feb. 10, 2026, the House Ways and Means Committee held a hearing examining foreign influence on nonprofits. Though Republican and Democratic members were largely focused on different issues, there was some general bipartisan agreement on increased oversight of nonprofits’ activities. The Ways and Means Committee has previously indicated its work in FY 2026 includes examination of the growth within the nonprofit sector over the last several decades.
Congressional Budget Office
On Feb. 11, 2026, the Congressional Budget Office (CBO) released The Budget and Economic Outlook: 2026 to 2036. According to the CBO’s projections, the federal budget deficit in FY 2026 is $1.9 trillion and grows to $3.1 trillion by 2036. Relative to the size of the economy, the deficit is 5.8% of gross domestic product (GDP) in 2026 and grows to 6.7% in 2036, which is greater than the 3.8% deficits averaged over the past 50 years.
Additionally, the CBO estimates the growth of real GDP accelerates this year and will slow thereafter, while projecting inflation softens this year, and the federal funds rate falls. According to the projections, inflation will return to a rate in line with the Federal Reserve’s long-run goal of 2% in 2030 and stabilizes thereafter. Further, employment growth is expected to rebound from its 2025 dip as overall economic activity increases.
2026 filing season
As the IRS launched the 2026 filing season on Jan. 26, 2026, the Treasury Inspector General for Tax Administration (TIGTA) issued a memo warning of potential delays in processing tax returns, issuing refunds, and conducting customer service due to significant staffing cuts, as well as issues with onboarding new employees, and delays in modernization efforts at the IRS. After an addition of about 20,000 employees between October 2021 and October 2024, staffing levels at the agency by October 2025 declined back to their October 2021 levels of approximately 81,000 employees. However, employees in the submission processing function, which is responsible for processing original and amended tax returns and resolving tax return errors, have declined by 11% (1,626 positions) since 2021.
Although the IRS is attempting to ameliorate the situation by hiring 2,200 more employees for submission processing, only 50 new hires were onboarded as of Dec. 30, 2025, due to changes in agency hiring processes and the October-November 2025 government shutdown. Additionally, decreases in IT staffing have delayed IRS initiatives to modernize with many of these initiatives still in the testing phase.
TIGTA’s assessment was bolstered on Jan. 28 with the release of the National Taxpayer Advocate’s (NTA) Office’s 2025 Annual Report to Congress, which identified the same issues. However, unlike TIGTA’s memo, the report focused much more attention on how the implementation of the OBBBA, especially items that retroactively went into effect in 2025, such as deductions for tips and overtime, will impact the ability of the IRS to efficiently process tax returns and deliver refunds. The report does note that any issues will likely only impact those who have their returns stopped by IRS processing filters, and thus “the success of the filing season will be defined by how well the IRS is able to assist the millions of taxpayers who experience problems.”
As of Feb. 6, 2026, the IRS has processed 23,515,000 individual income tax returns compared to 20,623,000 at that time in 2025. Additionally, the IRS has issued 7,403,000 tax refunds in 2026, according to the latest data, compared to 8,054,000 for the same period last year.
Overall, refunds are up as expected. The average tax refund is $2,290 as of Feb. 6, 2026, a 10.9% increase from the same period last year. And that figure is expected to continue to increase as the filing season progresses.
Notably, bipartisan FY 2026 appropriations cut the IRS’s base funding to $11.2 billion, down from $12.3 billion for FY 2025. Additionally, the IRS will see an approximately $11.7 billion rescission for operations support from supplemental funding originally provided under the Inflation Reduction Act.
Recent IRS guidance
Treasury and the IRS continue to roll out OBBBA-related guidance and other regulatory projects. Important recent developments are below:
Clean Fuel Production Credit
Treasury and the IRS released proposed regulations implementing amendments made to the clean fuel production credit under section 45Z by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The proposed regulations create rules for determining the amount of the credit, including credit eligibility rules for domestic producers of clean transportation fuels, emissions rates and certification and registration requirements. Additionally, the proposal would amend three sets of previously finalized regulations: the elective payment election regulations and the credit transfer election regulations, to clarify language relating to ownership of clean fuel production facilities, and the federal excise tax registration regulations, to make them clearer and more consistent with credit registration requirements in these newly proposed regulations.
Deadline extended for amendments to IRAs to comply with SECURE 2.0
Treasury and the IRS issued Notice 2026-09 to extend the deadline for amendments to be made to individual retirement arrangements (IRAs), Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees (SIMPLE) IRAs to comply with the SECURE 2.0 Act (P.L. 117-328). Specifically, as the IRS develops model language for plan amendments, the deadline to make plan amendments is extended from the first plan year after Jan. 1, 2025, to Dec. 31, 2027.
IRS publishes FAQs on new deduction for qualified overtime compensation
Treasury and the IRS published Fact Sheet 2026-01 addressing a number of issues related to the new deduction for qualified overtime compensation enacted as part of the OBBBA. Issued in the form of frequently asked questions (FAQs), the fact sheet clarifies that the deduction only applies to the “half” portion of “time-and-a-half” of overtime, indicates the employee must be subject to the Fair Labor Standards Act (FLSA) in regards to overtime pay, and provides useful information regarding the differences in reporting requirements for the tax year 2025 versus the 2026 through 2028 tax years.
IRS publishes FAQs on executive order phasing out non- electronic payments
The IRS published Fact Sheet 2026-02 presenting a set of FAQs regarding the implementation by the agency of Executive Order 14247, Modernizing Payments to and From America’s Bank Account, which began on Sept. 30, 2025, with the phasing out of paper checks for tax refunds to individuals. The guidance provided includes, but is not limited to, alternative electronic payment methods for individual taxpayers without bank accounts, the steps the IRS will take if individual taxpayers fail to include direct deposit information on their returns, that the transition to electronic payments does not currently apply to payments made to the IRS, provides information on the different ways electronic payments can be made to the IRS, and that the transition will eventually but does not currently apply to business taxpayers.
Energy tax credit ineligibility due to material assistance received from prohibited foreign entities
Treasury and the IRS issued guidance in Notice 2026-15 to implement restrictions on eligibility for section 45Y’s Clean Electricity Production Credit, section 45E’s Clean Electricity Investment Credit, and 45X’s Advanced Manufacturing Production Credit based on material assistance provided by a prohibited foreign entity (PFE) put into place by the OBBBA. The guidance provides information on how to utilize the interim safe harbors authorized by the OBBBA under sections 45X, 45Y, and 48E for determining if qualified facilities, energy storage technologies or eligible components are receiving material assistance from a PFE based on a material assistance cost ratio (MACR) that would cause a taxpayer to be ineligible for the credits. The Notice also provides a glossary of defined terms, guidance on substantiation and a timeframe on which taxpayers may rely on the interim safe harbors, as well as other guidance in the Notice.
The Notice announces the intent of the Treasury and IRS to issue more comprehensive proposed regulations and other guidance with respect to the definition of a PFE and material assistance from such entities. Additionally, section 3 and section 5 of the Notice describe rules addressing material assistance from a PFE and certain PFE restrictions, respectively, that are intended to be included in the forthcoming proposed regulations.
Mitigating accuracy-related penalties with adequate disclosure
The IRS issued Revenue Procedure (Rev. Proc.) 2026-12 outlining circumstances under which an adequate disclosure on a taxpayer’s income tax return with respect to an item or position will result in reducing the accuracy-related penalty for substantial understatement of income tax under section 6662(d) and the tax return preparer penalty for understatements of tax due to unrealistic positions under section 6694(a). This procedure applies to all income tax returns filed on 2025 tax forms for a taxable year beginning in 2025, and for all income tax returns filed in 2026 on 2025 tax forms for short taxable years beginning in 2026.
Discount factors for unpaid losses by insurance companies
The IRS issued Rev. Proc. 2026-13 to update the discount factors for use by insurance companies in calculating discounted unpaid losses under section 846 and discounted estimated salvage recoverable under section 832 for the 2025 accident year. For convenience, the procedure also provides discount factors for losses incurred in the 2024 accident year and earlier accident years. Additionally, it provides discount factors for insurance companies electing to use the composite method under Notice 88-100. Comments are also requested regarding applicability of the composite method following a 2024 change to Schedule P (Analysis of Losses and Expenses) of the annual statement required by the National Association of Insurance Commissioners (NAIC), which now requires 10 years of data to be reported for all lines of business versus the previous standard of two years.
Enhancement of Tax Pro Accounts
On Feb. 9, the IRS issued a news release announcing an expansion of the Tax Pro Account to assist tax professionals working in tax preparation companies, accounting firms, and certain other organizations by providing enhanced digital tools to give them greater visibility and control over their Centralized Authorization File (CAF) relationships. Specifically, a designated business representative may now use an account to manage business CAF access (including designating which employees can act under the CAF), link business CAF numbers to the company’s Employer Identification Number (EIN), view taxpayer information associated with the business CAF within the scope of active authorizations, and to view and withdraw active authorizations on behalf of the tax professional business.
If you have questions on how the above information may impact your tax situation, please reach out to your Baker Tilly tax advisor.
The national tax specialists at Baker Tilly continue to monitor the situation in Washington.
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