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The IRS has begun to furlough nearly half of its staff amid an ongoing government shutdown, but will retain staff working on the implementation of a multi-trillion dollar tax law. Prior to the shutdown, the Treasury and IRS issued a 2025-2026 Priority Guidance Plan and tax guidance. Other key topics include the Senate Finance Committee’s hearing on digital asset taxation, suggestions made by industry representatives, and opinions on the taxation of staking rewards and reporting requirements for digital asset transactions valued above $10,000.
Federal Government Shutdown and IRS Furloughs
The Federal government remains in a stalemate with no resolution to the shutdown in sight. The root causes for this deadlock center around the inclusion of increased tax credits for Affordable Care Act health insurance premiums, enacted during the Covid pandemic, in the funding bill. Other points of contention include the reversal of health policy changes instituted in the OBBBA and preventing President Trump from exercising his authority to rescind spending agreed to under previous bipartisan expenditure deals.
As of October 8, the Internal Revenue Service (IRS) has begun an agency-wide furlough that excludes previously identified exempted and excepted employees. According to a report by Bloomberg Tax, the IRS plans to furlough nearly half of its workforce starting October 8, 2025. It has been noted that the IRS will retain staff working on the multi-trillion dollar tax law implementation, filing season, and IT.
Treasury and IRS Priority Guidance Plan for 2025-2026
Before the shutdown began, the Treasury and IRS issued the 2025-2026 Priority Guidance Plan, alongside several other pieces of tax guidance. Released on September 30, 2025, the 2025-2026 Priority Guidance Plan was jointly developed by Ken Kies, in his roles as Assistant Secretary for Tax Policy and Acting IRS Chief Counsel, and Scott Bessent, Acting Commissioner of the IRS.
The new plan consists of 105 items, a significant reduction from the 231 items contained in the prior plan. Deputy Assistant Secretary Kevn Salinger had previously previewed that the list would be streamlined to include only those items expected to be released this year, as opposed to the previous trend of including more aspirational items.
Organized around the priorities of the Trump administration, the plan includes categories such as “OBBBA Implementation,” “Deregulation and Burden Reduction,” “Section 501(c)(3) Issues,” “Tribal Tax Issues,” “Digital Assets,” and “Secure 2.0 Act and Other Guidance.” This is a departure from the Priority Guidance Plans under the Biden administration, which were organized by subject area.
Recent Taxation Guidance
Additional guidance has been released on several topics, including tips and overtime, corporate spin-offs and reorganizations, the corporate alternative minimum book tax (CAMT), and interest capitalization rules.
Tips and Overtime
The IRS has announced that employers making a good faith effort to report tips and overtime pay for 2025 will not face penalties even if the reporting is imperfect, according to Paul Ferrell, Senior Adviser to the IRS Director of National Public Liaison. He made this announcement during a monthly call with the payroll industry on October 2, 2025. This information was noted in this S&C memo. The government had previously released proposed regulations listing occupations that qualify for the OBBBA provision on qualified tips. The IRS had also announced that it would not update the W-2 form for the tax year 2025 to accommodate OBBBA changes. However, draft forms for the tax year 2026 have included changes reflecting the OBBBA. These two OBBBA provisions are included in the 2025-2026 Priority Guidance Plan released on September 30, 2025.
Spin-offs and Reorganizations
On September 29, 2025, the Treasury and IRS withdrew prior guidance on particular aspects of corporate spin-offs and other reorganizations. This withdrawal removed two sets of proposed regulations published on January 16, 2025. On the same day, the government also released a new Revenue Procedure, which supersedes, modifies, and revokes prior procedures and notices. More details on this guidance are provided in Sullivan & Cromwell’s memo entitled “IRS Withdraws Proposed Regulations on Spin-Off Transactions and Reorganizations.”
CAMT Guidance
The Treasury and IRS issued Notice 2025-46 and Notice 2025-49 on September 30, 2025. These notices provide guidance on the corporate alternative minimum book tax (CAMT) enacted as Section 10101 of the Inflation Reduction Act. More details on this guidance are provided in Sullivan & Cromwell’s memo entitled “IRS Issues Interim Guidance on Corporate Alternative Minimum Tax.”
Final Regulations on Interest Capitalization Rules
The Treasury and the IRS released final regulations on the interest capitalization rules on October 2, 2025. These regulations remove the associated property rule and make changes to the definition of “improvement”. These regulations are effective from October 2, 2025.
Digital Assets Taxation and Policy Personnel
The Senate Finance Committee held a hearing on digital asset taxation on October 1, 2025. The hearing highlighted the need for more clarity on the tax treatment of digital assets and focused on a few key issues, including the consideration of a de minimis exception for gain or loss recognition, the tax treatment of staking rewards, and reporting requirements for digital asset transactions exceeding $10,000 in value.
There was a general bipartisan consensus during the hearing on the need to develop appropriate legislation for the taxation of digital assets. However, the nature of this legislation was a source of disagreement. While Republican Senators believe that new taxpayer-friendly tax legislation would lead to increased innovation, Democratic Senators criticized such proposals as offering advantageous tax treatment and skirting rules intended to detect money laundering.
In related news, the Senate Finance Committee held a hearing on Wednesday during which it voted to advance three Treasury nominees: Sullivan & Cromwell’s Don Korb to be Chief Counsel of the IRS, Derek Therurer to be a Deputy Undersecretary and Assistant Secretary for Legislative Affairs, and Jonathan Greenstein to be a Deputy Undersecretary of Treasury for International Finance.
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