Washington News

On May 29, 2025, the Internal Revenue Service (IRS) issued the Data Book for fiscal 2024. The Data Book is an annual report on tax revenue and IRS activities for the prior year.

According to the Data Book, the IRS reported it collected $5.1 trillion in tax revenue and issued over 120 million refunds. This was a substantial increase over the $4.7 trillion of tax collected in the prior year. The largest portion of the $5.1 trillion was from individual income taxes, which amounted to $2.8 trillion in 2024.

This is the 30th year that the IRS has published the Data Book. The report also highlights the major changes in IRS leadership. During 2025, there have been four acting commissioners of the IRS.

The IRS had 90,516 full-time equivalent positions in 2024. The largest budget expense was for enforcement funding. The staff level is expected to change. During 2025, over 11,000 IRS employees have retired or selected an early-out option, including 3,623 revenue agents who no longer will be conducting audits.

The IRS conducted 505,514 audits in 2024. This is approximately 13% fewer audits than fiscal 2023. The IRS audits will raise an estimated $36.8 billion in 2024, down from the projected $39.6 billion in the prior fiscal year.

The IRS provided a higher level of taxpayer service this year. Its online services were very popular, especially the "Where’s My Refund?" tool.

In 2024, the IRS launched a "Digital First" initiative. This initiative has resulted in the IRS providing additional features to online accounts for taxpayers, tax professionals and businesses.

The IRS reports that it served over 62 million taxpayers in 2024. This service includes letters of correspondence, phone conversations and visits to taxpayer assistance centers. There were increases in 2024 in all these categories compared to the prior year. The IRS also served 11% more callers and 26% more taxpayers through personal visits.

Editor's Note: This is a time of great change at the IRS. It is helpful for the IRS that the 2025 tax bill is likely to continue many current law provisions. However, there will be substantial changes for tips and overtime and an increased standard exemption for seniors. The Senate is preparing its version of the tax bill. The White House hopes the House and Senate can pass the bill in July.

Proposed $5,000 K-12 Scholarship Credit

The "One Big Beautiful Bill Act” (H.R.1) included a new federal school scholarship program. The scholarship granting organization (SGO) could provide donors with a federal tax credit and grant scholarships to eligible students.

The bill was initially introduced as the Educational Choice for Children Act of 2025. It was incorporated into H.R.1 and passed by the House on May 22, 2025. The scholarship program is intended to run from 2026 through 2029. It will provide scholarships for elementary and secondary school students.

There are extensive provisions that govern the SGO, explain the qualified education expenses, define the requirements to receive a scholarship and outline limits for the federal tax credit.

1. Scholarship Granting Organization (SGO) — An SGO must provide scholarships to two or more students for "qualified elementary or secondary education expenses." The students may receive priority if they were a prior recipient or sibling who received a scholarship. There may not be funds set aside or contributed to benefit a particular student. All SGOs must verify annual household income before granting scholarships. An independent certified public accountant must complete an annual compliance audit.
2. Elementary or Secondary Education Expense — The expenses at public, private or religious schools may include tuition, books, online education, tutoring by a licensed teacher who has taught at an educational institution or is an expert in the field. They may also include fees for achievement tests and educational therapy if a student has a disability.
3. Qualified Scholarship Recipients — SGOs have flexibility in determining the students to receive scholarships. They may choose to award a scholarship based on financial need or on academic merit. The scholarships are not permitted for households with an income in excess of 300% of the median gross income in their region.
4. Federal Tax Credit — The credit cannot exceed the greater of 10% of the taxpayer’s adjusted gross income or $5,000. The U.S. limit on these credits is $5 billion per calendar year. Donors who give after the limit is reached may carry forward the credit and apply it to taxes the next calendar year. The IRS website is expected to report available credit amounts on a daily basis. Taxpayers also may not receive double benefits, as such, the credit is reduced by any similar credit on a state tax return. The taxpayer is not allowed both a tax credit and a section 170 charitable deduction.

Editor's Note: This tax credit method is currently available in 20 states. The gifts may be either cash or marketable securities. An appreciated gift has an additional benefit of a bypass of capital gain for the donor. The scholarship program has substantial support in the Senate and is likely to be included in the final bill. The scholarships are planned to be available commencing in 2026.

Rules Needed for No Tax on Tips or Overtime

The "One Big Beautiful Bill Act” (H.R.1) included two new provisions to eliminate tax on tips and overtime. The "no tax on tips" provision is expected to cost approximately $4 billion per year for ten years. The "no tax on overtime" provision will cost an estimated $31 billion per year and applies from 2025 through 2028.

Both provisions have an income limit. The provisions are not available for individuals with incomes of $160,000 in 2025, which will be adjusted for inflation in future years. It also excludes "highly compensated employees" who are above the income threshold or own 5% of a business entity.

The Department of the Treasury will be tasked to provide specific rules on the definitions of tip income. The general rule is that tips will qualify for exclusion if received by "an individual in an occupation which traditionally and customarily received tips on or before December 31, 2024." However, it is clear that the Treasury will need to create very specific rules. There is an obvious incentive for individuals and business owners to create payment structures that maximize nontaxable tips.

Some of the rules may require the tip amounts to be received voluntarily. A required fee, such as a mandatory gratuity for large groups in some restaurants may not apply. The tip may also not be received from a Section 199A trade or business.

The overtime definition is expected to be similar to definitions already existing in state and federal law. Many states have specific rules and guidelines that define overtime for most workers. The Fair Labor Standards Act has extensive definitions on overtime.

However, several commentators have noted that the bill does not provide specific rules on overtime. Treasury will need to write specific rules.

An obvious challenge for the "no tax on overtime" provision is that it is retroactive to January 1, 2025. Treasury will need to act promptly to provide rules for employers so they can be accurate in their reporting of taxable income.

Editor's Note: It will be challenging for Treasury to quickly provide guidance on these provisions. If the bill moves forward with the retroactive application of the overtime exclusion, it is going to be very challenging for businesses to implement.

Applicable Federal Rate of 5.0% for June: Rev. Rul. 2025-12; 2025-23 IRB 1 (15 May 2025)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2025. The AFR under Sec. 7520 for the month of June is 5.0%. The rates for May of 5.0% or April of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”