Alongside updates on government funding, notable Internal Revenue Service (IRS) developments, and new economic data, this month’s Tax Policy Review debuts our latest resource: the 2026 Midterm Election and Implications for Tax Policy page. This new tool provides details and analysis on the upcoming election cycle and what it may mean for future tax policy developments.
Government Funding
The vast majority of the federal government is now funded through September 30, the end of the fiscal year (FY26). Earlier this month, Congress passed, and the president, signed 11 of the 12 annual appropriations bills, providing full-year funding for most federal agencies; however, funding for the Department of Homeland Security (DHS) was only provided through February 13, which has now lapsed, leading to a partial government shutdown.
The government could remain in a partial shutdown until lawmakers can find common ground on U.S. Immigrations and Customs Enforcement (ICE) reforms or make enough progress in negotiations to justify another short-term continuing resolution. DHS oversees more than just the ICE department; its funding also supports Customs & Border Patrol (CBP), Transportation Security Administration (TSA), Federal Emergency Management Agency (FEMA) and the Coast Guard. How long the current funding gap will persist remains uncertain.
Implementing Tax Reform
In the last month, Treasury has issued several new pieces of guidance relating to P.L. 119-21, commonly referred to as the “One Big Beautiful Bill Act” (OBBBA):
- Qualified Overtime Compensation: The IRS issued Fact Sheet 2026-01 in late January, providing answers to frequently asked questions about the deduction. This guidance follows two previous notices outlined in our December 2025 Tax Policy Review.
- Section 45Z Clean Fuel Production Credit: Earlier this month, Treasury and the IRS released Proposed Regulations for Sec. 45Z, the clean fuel production credit. The guidance incorporates modifications made by P.L. 119-21 to the incentive first established under the Inflation Reduction Act (IRA).
- Prohibited Foreign Entities & Certain Energy Credits: Notice 2026-15 provides taxpayers with guidance on restrictions to certain energy credits that include foreign components.
Two pieces of guidance related to “Trump accounts” are under review by the White House Office of Information and Regulatory Affairs (OIRA). The proposed rules, which are likely to be released shortly, relate to the new savings accounts for children and the contribution pilot program. Proposed rules on the new 1% remittance tax, due on certain funds transfers made after December 31, 2025, are also under OIRA review.
IRS Updates
IRS Funding
The IRS is working with a much smaller budget this year, as funding was reduced by 9% — from $12.3 billion in FY25 to $11.2 billion in FY26 — in the Financial Services and General Government (FSGG) appropriations bill. While the cuts weren’t as drastic as those proposed by the White House or House of Representatives, they represent a significant reduction in the agency’s resources.
In addition, Congress rescinded another $11.66 billion of IRS funding previously provided under the IRA. According to the Congressional Budget Office (CBO), this latest rollback is expected to reduce federal revenues by $38.6 billion over the next decade, due to a decrease in enforcement actions. In total, $53.5 billion of the $79.4 billion in supplemental IRS funding authorized by the IRA has now been rescinded.
Filing Season
The IRS began accepting returns on January 26, kicking off the first filing season in which many of the sweeping changes from P.L. 119-21 will be implemented. This filing season will be closely monitored, as Republicans are counting on taxpayers receiving larger refunds based on the new law, a theme they intend to make a central element of their midterm messaging.
The IRS expects approximately 164 million individual tax returns will be filed by April 15. During filing season, the IRS typically publishes weekly statistics. The latest report — based on a relatively small sample size of just over 22 million returns — shows returns received and returns processed are down by 5.1% and 12.3%, respectively, while average refunds are up 10.9% (approximately $225 per taxpayer).
Both the Treasury Inspector General for Tax Administration (TIGTA) and the Taxpayer Advocate Service (TAS) have raised concerns in recent weeks over the IRS’s readiness for this year’s tax season. The TAS Report notes, “the IRS is simultaneously confronting a reduction of 27% of its workforce, leadership turnover, and the implementation of extensive and complex tax law changes mandated by the OBBB Act, many of which apply retroactively and require significant IRS programming, guidance, changes to tax forms and instructions, and taxpayer education.”
The TIGTA report notes that the IRS backlog has increased significantly. Both organizations believe recent changes to the service could result in delays in taxpayers receiving refunds.
Electronic Payments
The IRS released Fact Sheet 2026-02, providing additional guidance on the transition to fully electronic payments. The notice outlines new policies on both payments and receipts. The IRS has generally stopped issuing paper checks for refunds, with limited exceptions, but continues to accept mailed payments for the time being.
If you have questions about how this will impact your payments or refund, reach out to your Cherry Bekaert tax advisor.
Economic Outlook
CBO’s 10-year Outlook
Last week, the CBO released The Budget and Economic Outlook: 2026 to 2036, its baseline projection for the federal budget and U.S. economy over the next decade.
The report, which bases its projections on the assumption that existing law remains unchanged, outlines potential negative outcomes:
- Annual deficits are projected to rise from an estimated $1.9 trillion in FY26 to more than $3.1 trillion in FY36. These amounts represent 5.8% and 6.7% of gross domestic product (GDP), respectively, which are substantial increases when compared to our average of 3.8% of GDP over the last 50 years.
- Gross federal debt is expected to rise by over $24 trillion to a total of nearly $64 trillion by the end of FY36.
- Federal debt held by the public is expected to rise from 101% this year to 120% over the next decade, far surpassing our previous high of 106% in 1946, just after World War II.
- Annual interest costs are expected to increase from almost 14% of total outlays to nearly 19% by the end of FY36, almost surpassing total discretionary funding.
Although there is broad consensus that the United States is on an unsustainable fiscal path, Republicans and Democrats are divided on how to best manage annual budgets and federal deficits. The rising debt burden, however, is likely to exert increasing pressure on future tax policy decisions.
Chair of the Federal Reserve
In late January, President Trump announced he will nominate Kevin Warsh to replace Jerome Powell as chair of the Federal Reserve. Warsh is widely seen as a qualified candidate; he previously served as an economic advisor to President George W. Bush and was a member of the Federal Reserve Board from 2006 to 2011.
Powell’s term as chair concludes in May, but there is no guarantee Warsh will be confirmed by then. Sen. Thom Tillis (R-NC), a member of the Senate Banking Committee, has vowed not to advance any Federal Reserve nominees while the current Department of Justice’s investigation into Powell remains open, citing concerns over the independence of the Federal Reserve.
Economic Data
January economic data reported by the Bureau of Labor and Statistics (BLS) was generally positive:
- Inflation: Annual inflation, measured by the Consumer Price Index for All Urban Consumers (CPI-U), decreased from 2.7% in December to 2.4% in January.
- Employment: Nonfarm payrolls increased by an estimated 130,000 jobs last month and the unemployment rate dropped from 4.4% in December to 4.3% in January.
- However, as part of their annual revision process, the BLS recalculated the 2025 jobs data and found the economy only added 181,000 nonfarm jobs in 2025, an average of just over 15,000 per month.
While BLS’s findings were generally encouraging, the surprisingly strong performance has dampened hopes for imminent rate cuts from the Federal Open Market Committee (FOMC). The FOMC’s federal funds rate target range is currently 3.50% – 3.75%.
Trade Policy
A Supreme Court decision on whether President Trump exceeded his authority by imposing sweeping reciprocal tariffs under the International Emergency and Economic Powers Act (IEEPA) is expected soon. The Court’s ruling could immediately and drastically alter the trade and tariff environment.
In the meantime, the House failed to reinstate a rule last week that would have prevented members from calling votes to repeal President Trump’s tariffs. The following day, the House voted to block the administration’s tariffs on Canada, with six Republicans joining almost all Democrats. Although the resolution may also clear the Senate, Trump is almost certain to veto it, and Congress is unlikely to secure the two-thirds majority needed to override a veto. This is the first of several resolutions disapproving of reciprocal tariffs that Democrats plan to bring to the floor; however, given the current dynamics, the votes are likely to be largely symbolic.
Control of Congress: 2026 Midterms
Election outcomes have a significant impact on tax policy. To help you stay informed, our Tax Policy team has created a 2026 Midterm Election Resource that provides an analysis of the election cycle and insights into how various outcomes could shape future tax policy.
Check back regularly, as our team will update this page with new developments and further insights as Election Day approaches.
Your Guide Forward
Cherry Bekaert’s Tax Policy group is committed to bringing you information on the latest tax policy developments and opportunities.
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