Tax season is now officially underway. The IRS opened the 2025 tax year filing season at the end of last month, just a few days before employers were required to issue W-2s. With that, the rubber finally met the road, and carefully planned tax positions have started to manifest in the form of timely, accurate tax returns. Individuals are expecting larger-than-typical refunds this year due to an array of new deductions available to them under the One, Big, Beautiful Bill Act (OBBB). There are even more generous deductions available to businesses, although the paths to claiming some, like bonus depreciation, are easier than others, with considerable uncertainty still surrounding the new deduction for qualified production property. This month, we also highlight key changes to tax forms and instructions and explore the legal proceedings driving such changes. The most significant changes relate to partnerships and involve even more disclosure of specific items to both the IRS and partners. Finally, while 2026 isn’t expected to bring much substantive tax legislation, we highlight a few proposals that could help taxpayers and ease administration.
- Tax filing season is underway
- Interesting changes to forms and instructions
- The cases driving form changes
- Legislative roundup
Tax filing season is underway
In late January, the IRS announced the opening of the 2026 tax filing season. This season follows the enactment of major legislation, which means new tax benefits are balanced with additional complications and at least some uncertainty. The OBBB made a wide array of changes to individual and business-related tax provisions alike, and most of its changes took effect throughout 2025. However, even favorable changes require technical guidance from the IRS, development of tax positions by taxpayers, and efforts to translate such items on to tax returns for filing.
Businesses: A generous deduction menu for 2025
The OBBB permanently extended core depreciation deductions, relieved recent limitations on research expenses and interest deductions, and retained the status quo for tax rates applicable to C corporations and pass-through entities. Going further, it also established a new 100% deduction for new manufacturing facilities.
Taken together, businesses have many options for recognizing the tax benefit of investments in equipment and facilities, as well as deducting business expenditures. There are technical nuances to consider, but the core questions facing businesses this filing season is when and how to claim the available deductions. In some cases, the answers to those questions may lead to slowing down deductions in order to spread their impact over a period of years. In others, accelerating all possible deductions will make more sense.
Individual taxpayers: New deductions drive increased refunds
On the individual side, the OBBB provided stability by permanently extending the vast majority of tax programs originally included in the Tax Cuts and Jobs Act in 2017. Those programs were largely scheduled to expire at the end of 2025, so the OBBB prevented unfavorable changes that would’ve been triggered in 2026. However, new deductions implementing various “no tax” proposals are expected to generate additional 2025 tax refunds for tens of millions of individuals. Those include deductions related to overtime pay, tip income, income received by seniors, and certain automobile interest paid by qualifying taxpayers, which were all made effective for 2025 through 2028.
New deductions raise questions about how to substantiate and claim such amounts. The enhanced deduction for seniors is mathematical, so no meaningful complexity exists beyond establishing income and age. The OBBB took a different approach for the other deductions by requiring employers and vehicle lenders to provide information to individuals to substantiate their qualifying deduction amounts. However, the IRS announced transitional relief for 2025 that relaxes those reporting requirements. Such relief may expand deduction opportunities for 2025 but increases documentation complexity for qualifying taxpayers. The below summary outlines the situation and applicable for this filing season:
- Tips and overtime pay. The IRS has provided several types of guidance clarifying these new deductions for 2025 and beyond. Core interpretive guidance was provided in late November in the form of Notice 2025-69. Transition relief was also announced last November and is memorialized in Notice 2025-62. That relief allows individuals to claim their qualifying deductions for 2025 even without formal reporting by their employers. To this end, the IRS has issued detailed guidance that helps individuals figure their overtime accurately, together with an easy-to-read FAQ. And Treasury and the IRS have issued proposed regulations that identify the occupations that customarily and regularly received tips before 2025 and therefore potentially qualify for the deduction.
- Auto loan interest. The IRS announced guidance for the auto loan deduction, including transition relief for lenders in the form of Notice 2025-57. This allows lenders to satisfy their reporting obligations in multiple ways, including monthly or annual statements, an online account, or other similar means. While some type of reporting is still required, this removes the formality of an IRS form, such as form 1098. Accordingly, taxpayers seeking the auto loan interest deduction should consult their lenders to evaluate whether qualifying interest was paid during 2025.
Interesting changes to forms and instructions
Tax forms continually change each year, and the 2026 filing season is no different. While most forms are subject to at least some changes, the forms and instructions relevant to partnerships (Form 1065 and Schedule K-1) and individuals (Form 1040) are particularly interesting.
Partnerships
Partnership tax reporting has evolved considerably in recent years with a trend toward ever-increasing specificity of disclosure to partners and the IRS. For 2025, a key change involves the disclosure of distributions through a new set of codes in Box 19 of Schedule K-1. There are now six codes for different types of distributions, whereas previously there were only three. The new codes include:
- Code D — This code relates to deemed distributions resulting from a decrease in liabilities. This is a very common fact pattern and should align with any decrease in liabilities shown in Item K1 on the Schedule K-1
- Codes F and G — These relate specifically to service partners. Code F is the equivalent of Code A for a nonservice partners (i.e., reporting distributions of cash or marketable securities). Code G is the equivalent of Codes B and C for nonservice partners (i.e., reporting distributions of property, including mixing bowl property under Section 737).
- Code E — This is reserved for future use, so keep an eye out for continued changes to this reporting in future years.
Notably, the updated instructions require partnerships to differentiate between service partners and nonservice partners. Unfortunately, the definition of a service partner stated in the instructions leaves a lot of room for interpretation. A partner is a service partner for purposes of reporting on 1065s and K-1s under Codes F and G where: (1) the partner performs services for the partnership, (2) the partnership allocates income and distributes property to the partner, and (3) the partnership treats the transaction as a distribution to the partner. Beyond that, any number of questions remain.
What seems clear is that the IRS is interested in gathering information related to service partners. What’s not clear is what the IRS intends to do with that information. But it’s likely a safe bet that it will be comparing service partner distributions to that partner’s self-employment income. The underlying reasons driving this reporting are described in further detail below.
Other partnership-related changes reflect the IRS’ own concerns about taxpayer compliance. Schedule B, line 19 is now expanded to ask whether the partnership received any payments allocable to foreign partners that would require it file Forms 1042, related to tax withholding for certain foreign persons and entities.
Another change relates to the timing for Form 8308. This form is used when a partner sells some or all of their partnership interest and recognizes gain attributable to Section 751 property, such as inventory or unrealized receivables. The partnership is generally required to furnish the transferor partner with the information the partner needs to report their Section 751(a) statement. The change for the 2025 tax year relates to Part IV of Form 8308. This part of the form no longer needs to be furnished by January 31 to the transferor partners and instead must be filed by the return deadline. This change was in response to comments from partnerships that it’s overly burdensome to provide the Part IV information by January 31.
Individuals
If the big story this season for individuals is larger-than-usual refunds because of new tax deductions, then a key part of that story when it comes to guidance is in how those refunds will make their way back to taxpayers.
The IRS is increasingly embracing the digital age and, as noted above, is transitioning away from paper check refunds and paper payments. The IRS in a new FAQ on the subject explains that taxpayers who don’t provide direct deposit information can expect to experience delays and complications. Providing banking information on returns is voluntary and if that information is missing from a given return, the service will still process it. However, the IRS will send letters asking for the information, with a notice to follow. And if the taxpayer doesn’t respond to the letter or notice, then the service will wait six weeks before issuing a paper check to the last known address.
In terms of forms and instructions, the Schedule 1-A to Form 1040 now reflects the suite of new “no tax” deductions, including the deductions for tip income and overtime compensation described above, as well as for auto loan interest and for seniors. The increased standard deduction is also reflected in the 2025 forms.
The cases driving form changes
More interesting than the changes to Box 19 of Schedule K-1 for partnerships are the reasons for these changes. These two areas — basis limitations and self-employment tax — have been hot-button issues in the past couple of years, and it seems the changes to the 2025 forms relate to how these areas have been developing recently in the courts.
Basis shifting
The new codes reveal the IRS’ focus on gain as a result of a decrease in a partner’s share of the partnership’s liabilities. Box 19 of the K-1 instructions references Form 7217. This form was first required for the 2024 tax year as a part of Treasury’s now partially abandoned effort to scrutinize related-party transactions that reallocated basis to avoid gain on the sale of partnership property or take increased depreciation deductions.
While Treasury has taken a significant step back from its basis shifting initiative by withdrawing regulations and a Notice, it continues to require Form 7217. That form is required for partners that receive distributions, and which shows basis and how basis was adjusted. Treasury also has refused to withdraw a Revenue Ruling that announces its litigating position as to basis shifting, and has continued to press that position in ongoing litigation.
By way of prime example, the IRS is still advancing its position in at least one high-stakes Tax Court case, Otay. In Otay, two brothers formed a 50/50 real estate development partnership, but later had a falling out serious enough to result in an arbitration agreement that required the brothers to separate their business interests. The partnership contributed rights to payment to new, lower-tier partnerships, and then distributed the newly formed partnerships to separate entities owned by the brothers. Then through a series of steps, the brothers’ indirect interests were transferred to new partnerships for each brother by way of the nonrecognition rule in Section 721. The steps taken to separate the interests caused a technical termination of the partnership, and also created a very large (roughly $867 million) Section 743(b) adjustment.
The IRS is taking the same position in Otay that it outlined in the guidance it has largely withdrawn: that the steps the brothers took lack economic substance and shouldn’t be respected. In light of the IRS’ actions in Otay, the changes to box 19 appear to represent a continued effort from Treasury to, at minimum, track basis adjustments, potentially with a view toward challenging these adjustments under the still-evolving economic substance doctrine.
Self-employment tax
As to the self-employment tax piece, there are now separate codes in box 19 for service partners and for nonservice partners. The IRS’ position is that a service partner functionally engaged in the business can’t be exempt from self-employment tax, even if the partner is a limited partner at state. That position has been consistently embraced by the Tax Court. But recently, the law has begun to shift after a circuit court saw the issue in the taxpayer’s favor. In Sirius Solutions, the 5th Circuit decided, essentially, that limited partners under state law fall within the “limited partner, as such” exception. This is true, the 5th Circuit said, even where a limited partner is actively involved in the business.
As to both of these issues, the law remains unsettled. But the connections between the form updates and the ways in which the law is breaking underscore the importance of maintaining awareness of the issues underlying compliance changes. Ongoing awareness far more readily translates into preparedness, should any of the compliance issues lead to deeper conversations about taking positions or working through tax controversies.
Legislative roundup
As we described last month, most of the major tax policy developments in 2026 will likely come from the executive branch and the courts. Nonetheless, there will be room for new tax legislation, especially bipartisan legislation directed at addressing procedural and administrative tax issues.
Some of the potential legislation we are watching this year includes a bill that would simplify S corporation elections and would apply the mailbox rule to electronic payments and documents submitted to the IRS. Under current law, if a taxpayer submits payment or a document on a Monday ahead of a Tuesday deadline, but the payment or document isn’t processed until Wednesday, then the IRS considers the payment or document to be late. The proposed legislation would change that.
Another piece of bipartisan legislation that could potentially cross the finish line into enactment is a bill about increased transparency as to taxpayer information in the audit context. Right now, the IRS during examinations invariably requests information from the taxpayer under audit. But where the taxpayer doesn’t respond to IRS requests for information, the IRS can seek the information through third parties by way of an administrative summons. When it does so, the service must give notice to the taxpayer, but is not required to tell the taxpayer what exact information it needs before going to the third party. The proposed legislation would change this, such that the service would have to, in certain situations at least, provide detailed notices to taxpayers that specify what information it intends to source from third parties.
