There are 20 days until Election Day, and attention is firmly focused on the midterms. The outcome of the election will change the composition of Congress, including the tax-writing committees, and is likely to set the tone of the lame-duck session. Against that backdrop, federal agencies continued to implement recently enacted legislation, alongside several notable regulatory, litigation and trade developments.
Government Funding
The 2027 federal fiscal year (FY27) began on October 1, 2026, with the government operating under a continuing resolution (CR) enacted earlier in September. The CR generally continues FY26 funding levels through December 11, 2026, and pushes FY27 appropriations decisions to the post-election lame-duck session.
Government funding is expected to be among the top priorities on the year-end legislative agenda.
New Legislation
Before returning home to focus on the midterm elections, lawmakers cleared several pieces of tax legislation:
- Russia Sanctions Bill: The Lindsey O. Graham Sanctioning Russia and Iran Act of 2026 (P.L. 119-111) primarily authorizes sanctions, which we discuss in more detail below. The legislation also included an unrelated tax provision expanding the above-the-line deduction for unreimbursed classroom expenses to include early childhood educators, beginning in 2026.
- National Taxpayer Advocate Bill: The National Taxpayer Advocate Enhancement Act (H.R. 997) cleared the Senate on September 28, 2026, nearly 18 months after passing the House of Representatives (House), and is now headed to the president for signature. The legislation strengthens the independence of the National Taxpayer Advocate by granting the office authority to hire its own legal counsel.
- Hostage Penalty Relief Bill: The End Tax Penalties on American Hostages Act (H.R. 9496) passed both chambers and is headed to the president for signature. The legislation would postpone federal tax deadlines and waive related penalties and interest for Americans wrongfully detained or held hostage abroad, as well as their spouses.
Potential Legislation
Legislative tax proposals drawing attention this month relate to tax administration, digital assets, and the motion picture industry.
Tax Administration Bill Clears Senate
Before adjourning for recess, the Senate unanimously passed the Taxpayer Assistance and Service Act (TAS Act, H.R. 5349), a bipartisan package of 65 provisions aimed at modernizing the Internal Revenue Service (IRS) and strengthening taxpayer rights. The TAS Act is the result of a months-long collaboration between Senate Finance Chair Mike Crapo (R – ID) and Ranking Member Ron Wyden (D – OR).
The bill now heads to the House, which has taken a different approach to tax administration, with the Ways and Means Committee advancing individual bills over the last several months and the full House passing several of them. The House is not expected to return until November, and it remains unclear whether it will take up the Senate’s package, continue advancing its own bills, or seek a compromise.
Digital Asset Tax Proposals
The House Ways and Means Committee advanced the Digital Asset Tax Certainty Act (H.R. 10357) by a vote of 38-5 on September 16, 2026. The legislation would establish tax rules for digital assets including a de minims exemption for small transaction fees, an elective mark-to-market regime, application of Sec. 1091 wash sale and Sec. 1259 constructive sale treatment, and no appraisal requirement for donations of certain widely traded digital assets. The bill addresses the character of mining and staking income, classifying it as ordinary, but does not address the contested questions around timing. Finally, the bill also includes the provisions in H.R. 6985, the FULL HOUSE Act, which would repeal the new 90% limitation on wagering loss deductions.
The House bill is not the only proposal on the table. Senator Steve Daines (R – MT), who is retiring, recently released his own crypto tax proposal, which so far has only Republican support. It joins a growing number of proposals for taxing digital assets, some of which overlap with the House bill while others take a different approach. It is unclear which of these proposals, if any, will gain traction before the 119th Congress adjourns.
Federal Film Tax Credit Proposal
A bipartisan, bicameral group of lawmakers introduced the Motion Picture, Television, and Entertainment Revitalization Act (H.R. 10582) on September 24, 2026. The bill would create a national film tax credit for “qualified film or television productions,” defined as those that cost more than $1 million and shoot at least 75% of their principal photography days in the United States.
Eligible productions would receive a credit worth 20% of qualified U.S. labor costs, with bonuses available for certain productions, such as independent films or those shot in rural or disaster areas, which could increase the credit up to 30%.
Economic Outlook
Uncertainty continues to surround the economic outlook as recent data offers an inconsistent picture. Meanwhile, borrowing costs remain elevated as the Federal Reserve maintains a restrictive monetary policy and long-term interest rates hover near multi-decade highs.
Mixed Economic Data Continues
Data this month shows that economic growth has remained resilient, inflationary pressures persist, and labor market conditions continue to fluctuate
- Inflation: Annual inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), rose in September, coming in at 3.7%.
- Employment: The U.S. economy added approximately 29,000 jobs in September, while the unemployment rate rose to 4.2%. Employment gains for both July and August were also revised downward.
- Gross Domestic Product (GDP): The third and final estimate of Q2 GDP was revised up to 2.2%, slightly above Q1’s 2.1% growth rate.
Federal Open Market Committee (FOMC) Expectations
The FOMC raised interest rates 25 basis points (0.25%) during its September meeting. The federal funds rate now ranges from 3.75% to 4.00%.
Updated projections released after the meeting provide additional insight into how FOMC members view the outlook for the broader economy and monetary policy. Of the 18 governors who participated, 16 project interest rates will rise again (between 25 and 50 basis points) before the end of 2026, and 14 governors project the rate will end 2027 above its current range.
The FOMC has two meetings remaining in 2026, October 27-28 and December 8-9. The December meeting will include an updated Summary of Economic Projections.
Bond Market Developments
Longer-term Treasury yields have continued to climb over the last month, driving up the cost of borrowing across the economy.
In recent weeks, the 10-year Treasury yield has climbed above 5.35% and the 30-year Treasury yield above 5.72%, both hitting their highest levels in roughly 24 years. Because these yields serve as benchmarks for mortgages, corporate bonds, and other long-term loans, borrowing costs for households and businesses have risen alongside them.
Trade Policy
Executive branch trade activity remained relatively quiet in the lead-up to the upcoming elections. The primary development this month was a limited trade agreement announced by the United States and China following Xi Jinping's September visit to Washington. The agreement was largely limited to targeted tariff relief for certain non-sensitive goods and the establishment of a bilateral trade council.
Meanwhile, International Emergency Economic Powers Act (IEEPA) tariff refunds continue to be processed, as discussed in our IEEPA tariff refund update. At the same time, challenges to tariffs imposed under Sections 122 and 301 remain in litigation, leaving several aspects of the administration's trade agenda under continued judicial review.
Russia Sanctions Bill
On September 18, 2026, the Lindsey O. Graham Sanctioning Russia and Iran Act of 2026 (P.L. 119-111) was signed into law. The bill mandates a 500% tariff on Russian imports and authorizes tariffs of up to 100% on imports from the top five countries importing Russian crude oil or natural gas or the top five facilitators of Russian sanctions evasion. The bill also extended the Iran Sanctions Act of 1996. For a more detailed look at the legislation visit our Iran and Russia Sanctions Update.
Implementing Tax Reform
The U.S. Department of the Treasury (Treasury) and the IRS have released several pieces of guidance on implementing the “One Big Beautiful Bill Act” (OBBBA, P.L. 119-21):
- Trump Accounts: Treasury and the IRS issued temporary (TD 10056) and proposed regulations (CC-00226466-26) regarding the general requirements for, the establishment of, and qualified general contributions to Trump accounts. The guidance establishes the process for automatically enrolling eligible children who don't already have an account. The guidance also withdraws prior proposed regulations (REG-117270-25).
- On October 1, 2026, Treasury announced the completion of the automatic enrollment process, which established over 60 million new Trump accounts, and provided information on how parents can claim their children’s accounts.
- Scholarship Granting Organizations (SGOs): Treasury and the IRS also issued a set of temporary (TD 10057) and proposed regulations (REG-117199-25) on the new Sec. 25F Education Freedom Tax Credit, which launches on January 1, 2027. The credit allows individual taxpayers to claim up to $1,700 per year, or $3,400 for married couples filing jointly, for contributions to SGOs, which provide scholarships to students attending private K-12 schools.
- Congressional Democrats are challenging Treasury's interpretation that lets married couples filing jointly claim double the credit, which they estimate could add $150 billion in cost over the next decade.
- Capital Gains Tax on Sales of Farmland: Proposed regulations outline (REG-117095-25) outline the new Sec. 1062 election, which allows taxpayers who sell farmland to a qualified farmer to pay the tax on that gain in four equal annual installments.
New Regulatory Guidance
In addition to OBBBA guidance, Treasury and the IRS have released guidance on several tax matters, including:
- Investment Fund Strategies: Treasury and the IRS released Notice 2026-62, identifying investment fund strategies involving financial products that the government views as potentially abusive. The notice focuses on certain exchange-traded fund (ETF) transactions and tax-aware fund approaches that use financial products to generate favorable tax outcomes. It outlines potential future guidance, including possible designation of certain transactions as reportable, and potential enforcement actions; additionally, the notice states any guidance could apply retroactively. Concurrently, Treasury and the IRS released Rev. Rul. 2026-20, which analyzes a specific transaction and concludes the tax treatment is not supported by existing law. Treasury and the IRS are accepting comments on the notice through October 28, 2026.
- Guidance Revoked: Notice 2026-58 revoked 71 pieces of published guidance, consistent with the Trump administration’s broader deregulatory agenda. The now-obsolete guidance included revenue rulings, revenue procedures, notices, and announcements that were issued between 1954 and 2024.
Tax Litigation
On September 17, 2026, the U.S. Court of Appeals for the Second Circuit (Second Circuit) affirmed the Tax Court’s decision in Soroban Capital Partners LP v. Commissioner. The court held that the application of the limited partner exception under Sec. 1402(a)(13) requires an analysis of the partner’s role within the business and is not available to partners “controlling, managing, or running the business.”
The decision is significant given the Fifth Circuit’s revised K Alain decision discussed last month. Like K Alain, the Second Circuit focused on the role the partners play within the business, rather than their status under state law. While the courts articulated the test somewhat differently, both decisions suggest that limited partner status under state law alone is not enough to qualify for the exception.
However, questions remain. Neither court provided detailed guidance on how to distinguish between permissible partner activities and management or control of the business. With Soroban and K Alain now decided, attention turns to Denham Capital Management LP v. Commissioner, which is pending before the First Circuit.
Priority Guidance Plan
On September 29, 2026, the Treasury Department’s Office of Tax Policy and the IRS released the 2026-2027 Priority Guidance Plan (PGP), identifying 121 guidance projects that the government will prioritize over the coming year. This year the plan included 54 deregulation, 40 OBBBA implementation, five tax-exempt organizations, four digital assets, one tribal tax, and 17 other priorities.
The PGP is issued annually and directs Treasury and IRS efforts on guidance projects for the year. Guidance can range from formal regulations to sub-regulatory guidance such as revenue rulings, revenue procedures, and notices.
Historically, the plan year has run July 1 to June 30, but this year there is an adjustment to the annual guidance cycle, which will now follow the federal fiscal year, October 1 to September 30.
IRS Updates
The Senate Finance Committee advanced Jim Gadwood’s nomination to serve as IRS chief counsel on September 24, 2026, by a vote of 14-13 (along party lines). The IRS chief counsel serves as the agency’s top legal official and plays a key role in developing tax guidance. The role is currently held on an acting basis by Kevin Salinger, who is also serving as the acting Treasury assistant secretary for tax policy. Gadwood’s nomination now awaits action by the full Senate.
Separately, a September U.S. Government Accountability Office (GAO) Report estimates that tax fraud costs the government between $116 billion and $304 billion annually, or approximately 2% to 6% of total federal tax liability. The GAO found that the IRS lacks an antifraud strategy and has not designated an office to serve as an antifraud entity; it recommended the agency address both.
Control of Congress: 2026 Midterms
With fewer than three weeks until Election Day, the midterm elections have become the top story in tax policy. The results will determine the composition of the 120th Congress, including the tax-writing committees, and are likely to shape both the agenda for the next two years and the direction of the upcoming lame-duck session.
Congress will return on November 9, 2026, for the lame-duck session; the House and Senate are scheduled for 20 and 22 legislative days, respectively, to complete unfinished business before the end of the 119th Congress. With government funding set to expire on December 11 and several other issues deferred until after the election, the lame-duck session could be particularly consequential. The election results are also likely to influence negotiations around year-end priorities and whether lawmakers pursue additional legislative action before the new Congress convenes.
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