According to the Internal Revenue Service (IRS), the 2022 tax year saw Americans failing to pay $696 billion—highlighting the need for new mechanisms to close the tax gap.
As the 2025 tax season fast approaches, CPAs need to be well-prepared to navigate the changes introduced by the IRS to curb this failure to pay taxes. With the IRS implementing new regulations and focusing on compliance, understanding these changes is crucial for providing top-notch service to clients.
Why do people avoid taxes?
Unpaid taxes occur for several reasons, including:
- Avoidance: Fear of owing significant tax debt
- Underreporting: Incorrectly reporting lower income
- Underpayment: Not paying taxes on time
Understanding these reasons helps CPAs advise their clients better and ensure they remain compliant with tax regulations.
The 2025 tax season
The 2025 tax season will bring several significant changes driven by the IRS’s ongoing efforts to close the tax gap.
With billions of dollars still owed from previous years, the IRS is moving forward with Direct File, its IRS-provided free electronic filing service, new tax brackets, and widespread tax inflation adjustments.
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Direct File
The IRS is expanding Direct File to 24 states for the 2025 tax season, doubling from last year’s pilot. This expansion will cover a wider range of tax situations, allowing more taxpayers to benefit from the free e-filing service.
Over 30 million taxpayers in these states will be eligible to use Direct File. The IRS has also introduced new features to enhance user experience, including a chatbot for eligibility guidance, live chat support in English and Spanish, and enhanced authentication options. The service aims to improve the accuracy and ease of filing, seamlessly integrating state tax systems.
Changes to Direct File include:
- Expansion – 24 states will have access to Direct File in 2025, up from 12 states in the pilot.
- Eligibility – Over 30 million taxpayers will be eligible to use Direct File.
- Enhanced coverage – Support for more tax situations such as 1099 income and additional credits like the Premium Tax Credit.
- New features – Chatbot integration provides eligibility guidance and improved live chat support.
- User experience – Focus on accuracy and ease of filing, integrating state tax systems seamlessly.
New tax brackets
The IRS announced new tax brackets for 2025 with a 2.8% increase in income thresholds, marking the smallest increase in several years due to cooling inflation rates.
- Bracket adjustment – Income thresholds to rise by 2.8%, the smallest increase in several years
- Standard deduction – Increased to $30,000 for married couples filing jointly and $15,000 for single filers
- Marginal rates – Top rate of 37% for incomes over $626,350 for individuals and $751,600 for married couples
- Capital gains – Adjusted thresholds for 0%, 15%, and 20% tax rates based on income levels
- Estate and gift taxes – Increased exclusion amounts for estates and tax-free gifts
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Tax inflation adjustments
The IRS released detailed inflation adjustments for over 60 tax provisions for 2025. Key changes include increases in standard deductions, Earned Income Tax Credit (EITC), and various fringe benefits.
The maximum EITC for families with three or more children will increase to $8,046. Additionally, the monthly limit for qualified transportation fringe benefits will rise to $325, and the contribution limit for health flexible spending arrangements will increase to $3,300. Some provisions, such as the SALT deduction cap and the Child Tax Credit, remain unchanged.
Changes include:
- EITC – Maximum credit rises to $8,046 for families with three or more children.
- Fringe Benefits – The monthly limit for qualified transportation rises to $325.
- Health FSAs – Contribution limit increases to $3,300 with a carryover limit of $660.
- Foreign Income Exclusion – Increases to $130,000.
- Unchanged Provisions – The SALT deduction cap remains at $10,000, and the Child Tax Credit stays at $2,000.
Preparing for potential challenges
To best provide guidance and prevent mistakes, CPAs should anticipate and prepare for potential challenges in the 2025 tax season. Here are some areas to focus on:
- Stay informed on Direct File. Understand eligibility and help clients navigate the IRS’s Direct File system, which expands in 2025.
- Review tax adjustments. Adjust for new tax brackets, standard deductions, credits, and deductions that may affect clients’ filings.
- Enhance client support. Prepare to assist with e-filing, especially for clients using Direct File or those unfamiliar with online tax systems.
Rely on insurance for protection against a changing landscape
CPAs face an increasingly complex environment as the IRS continues to ramp up its coverage. Rely on Accountants Professional Liability Insurance (Errors & Omissions) from McGowan Program Administrators for the protection you need in these challenging times.
Experts at McGowan understand the unique hurdles CPAs encounter while navigating evolving tax regulations and guiding clients through intricate processes. Explore tailored insurance solutions that can safeguard practices and provide peace of mind.
