As the federal government shutdown nears record-breaking length, important tax policy developments have continued to pour in from Washington during the month of October. Namely, Congress has cleared a bipartisan measure aimed at clarifying IRS notices that inform taxpayers of mistakes on their tax filings, while Treasury and the IRS have maintained a steady stream of guidance despite operating at limited capacity.
Capitol Hill conundrum
The government shutdown has now hit 30 days – the second longest in U.S. history – with a 35-day record shutdown during 2018 and 2019. And with no bipartisan agreement in sight and the president out of the country focused on foreign affairs, this shutdown is well on its way to surpassing that mark on Nov. 4, 2025.
As discussed in our September 2025 Policy Pulse, the House cleared a Republican-led, so-called “clean” continuing resolution (CR) by a 217-212 vote on Sept. 19, 2025, to maintain government funding at current levels through Nov. 20, 2025, aiming to avoid a government shutdown on Oct. 1, 2025, and temporarily punt negotiations on fiscal year 2026 appropriations. We know how that went, however, as the measure has since failed 13 times in the Senate where bipartisan support is required to reach the 60-vote threshold under regular order.
Democratic lawmakers are demanding, among other healthcare-related priorities, that the CR include the extension of enhanced premium tax credits for Affordable Care Act premiums, which expires at year’s end. But Republicans have maintained that those demands are too high for a seven-week stopgap measure, which now only kicks the shutdown can down the road for another 22 days until Nov. 21, 2025.
IRS notice simplification. Meanwhile, on Oct. 20, 2025, the Senate passed by unanimous consent the bipartisan IRS Math and Taxpayer Help Act (H.R. 998), which would simplify IRS notices that inform taxpayers of mistakes on their tax filings. The House cleared the measure on March 31, 2025. President Trump is expected to sign the legislation into law.
Under H.R. 998, the IRS would be required to provide specific information on a notice related to a math or clerical error, send a notice related to an abatement of taxes assessed due to a math or clerical error, provide procedures for requesting such an abatement and implement a pilot program for sending notices of a math or clerical error.
November negotiations. Looking ahead, November will prove a pivotal month for prospects of reopening the federal government with a few key benefits deadlines ahead for spurring potential negotiations. Lawmakers are also weighing standalone measures for certain funding priorities as the stalemate continues. As for now, however, as we approach Halloween, the outlook for soon turning the lights back on appears coincidingly grim.
Disruptive but temporary. It’s important to remember that while the effects of a government shutdown are certainly disruptive to various markets, they are temporary. Historically, these disruptions are short-lived without long-term impact to revenue and growth.
Opportunity. That said, opportunity exists during a government shutdown as tax services are expanded to help clients model short-term cash flow impacts and create contingency plans, while identifying opportunities to strengthen business value and financial resiliency during economic uncertainty.
This isn’t the first government shutdown, and it won’t be the last. Proactive preparedness for this known risk is smart tax strategy.
Economic outlook
The Congressional Budget Office’s (CBO) most recent analysis predicts a negative though temporary economic impact, while spotlighting the uncertainty surrounding the effects. CBO Director Phillip L. Swagel wrote in an Oct. 29, 2025, letter to the House Budget Committee that the “shutdown will delay federal spending and have a negative effect on the economy that will mostly, but not entirely, reverse once the shutdown ends.”
Federal Reserve. Additionally, on Oct. 29, 2025, the Federal Reserve, following a Federal Open Market Committee 10-2 vote, again lowered the target range for the federal funds rate by a quarter of a percentage point to 3.75%-4%. The Fed’s move was largely expected, following concerns of a weakening labor market and limited insight into the economy amidst the ongoing government shutdown. The next FOMC meeting to consider another potential rate reduction is scheduled for Dec. 9-10, 2025.
Treasury and the IRS
On Oct. 8, 2025, the IRS released its updated Fiscal Year 2026 Lapsed Appropriations Contingency Plan, confirming nearly half of its workforce will be furloughed during the federal government shutdown as originally projected in our Oct. 7, 2025 tax alert. Although IRS employees critical to tax reform implementation, the 2026 tax filing season and IT-related services will remain active, refund delays as well as limited taxpayer services are expected, as noted in an Oct. 21, 2025, IRS statement.
Reduction in force. Further, on the heels of the IRS’s announcement of widespread furloughs, over 1,400 Treasury and IRS employees began receiving reduction in force (RIF) notices on Oct. 10, 2025, eliminating their positions effective Dec. 9, 2025. Several unions representing federal employees, including the IRS, have challenged these RIFs, seeing a win on Oct. 28, 2025, when U.S. District Judge Susan Illston granted a preliminary injunction blocking the shutdown-related RIFs. The Trump administration is expected to appeal the ruling to the 9th Circuit Court of Appeals.
Guidance. Treasury and the IRS have continued to issue important guidance this month while operating with a significantly reduced workforce. To that end, on Sept. 30, 2025, Treasury and the IRS released the 2025-2026 Priority Guidance Plan (PGP), which contains 105 guidance projects that are priorities for allocating Treasury and IRS resources during the 12-month “plan year” period from July 1, 2025, through June 30, 2026.
Notably, the 2025-2026 PGP reflects Treasury and the IRS’s planned focus on five key areas: implementation of the tax reform and spending law known as the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21); deregulation and burden reduction; and guidance addressing Tribal tax issues, digital assets and the SECURE 2.0 Act. The PGP is expected to be periodically updated throughout the plan year.
Opportunity Zones. On Sept. 30, 2025, the IRS issued guidance on Qualified Opportunity Zone (QOZ) investments in rural areas as provided for under the OBBBA. Notice 2025-50 provides clarification on the definition of “rural area” and the application of the substantial improvement threshold for certain improvements to property located in a QOZ that is comprised entirely of a rural area. Read more on OZs in our recent article here.
CAMT. On Sept. 30, 2025, Treasury and the IRS issued Notice 2025-46 and Notice 2025-49 on the corporate alternative minimum book tax (CAMT). These notices indicate the IRS intends to partially withdraw and revise the previously proposed regulations.
Interest capitalization rules. On Oct. 2, 2025, Treasury and the IRS released final regulations on the interest capitalization rules. The regulations remove and modify requirements and definitions for improvements that constitute designated property.
Tax year 2026 inflation adjustments. On Oct. 9, 2025, the IRS released the tax year 2026 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. See Rev. Proc. 2025-32 for more information.
Car loan interest. On Oct. 21, 2025, Treasury and the IRS provided transitional guidance for businesses required to report car loan interest under the OBBBA. Notice 2025-57 provides penalty relief and guidance to certain lenders for new information reporting requirements for car loan interest received in 2025 under the OBBBA.
Employee Retention Credit (ERC). On Oct. 22, 2025, the IRS issued FS-2025-07, a set of eight frequently asked questions (FAQs) about the limitation on credits and refunds for ERCs claimed for the third and fourth quarters of 2021 filed after Jan. 31, 2024. Notably, notwithstanding the non-precedential nature of FAQs, a taxpayer’s reasonable reliance on an FAQ (even one that is subsequently updated or modified) is relevant and will be considered in determining whether certain penalties apply. Additionally, FAQs that are published in a Fact Sheet that is linked to an IRS news release are considered authority for purposes of the exception to accuracy-related penalties that apply when there is substantial authority for the treatment of an item on a return. See Treas. Reg. § 1.6662-4(d) for more information.
Look-through treatment. On Oct. 20, 2025, Treasury and the IRS issued proposed regulations (REG-109742-25) that back track from final regulations (TD 9992) issued in April 2024. Under the final regulations (applicable to transactions occurring on or after April 25, 2024) certain nonpublic domestic C corporations receive special look-through treatment if 50% or more of such corporations are owned by foreign persons for purposes of determining if a qualified investment entity (QIE) is considered domestically controlled for qualifying under a special FIRPTA exclusion. The proposed regulations remove the special look-through treatment and treat domestic C corporations (other than RICs, REITs and S corporations) as non-look-through persons consistent with other provisions in the Internal Revenue Code.
Form 1099-K. On Oct. 23, 2025, the IRS released FS-2025-08, which updates FAQs about Form 1099-K, Payment Card and Third Party Network Transactions. The OBBBA retroactively reinstated the reporting threshold in effect prior to the passage of the American Rescue Plan Act of 2021 (ARPA) (P.L. 117-2) so that a third party settlement organization (TPSO) is not required to file a Form 1099-K unless the gross amount of reportable payment transactions to a payee exceeds $20,000 and the number of transactions exceeds 200.
Previously, under the controversial ARPA reporting threshold, TPSOs were required to file Form 1099-K for any payee that received more than $600 in total payments for the sales of goods or services, regardless of the number of transactions. As noted above, FAQs that are published in a Fact Sheet that is linked to an IRS news release are considered authority for purposes of the exception to accuracy-related penalties that applies when there is substantial authority for the treatment of an item on a return.
Baker Tilly’s national tax professionals continue to monitor regulatory guidance and legislative updates in Washington. Subscribe to our tax communications to receive timely updates and the latest insights to help you stay ahead.
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