The federal tax landscape continues to evolve, with meaningful shifts in the IRS enforcement posture, procedural rules, and taxpayer litigation that can affect how taxpayers invest and resolve disputes. Many of the changes begun in 2025 will continue to affect the federal tax landscape in 2026. We have distilled current trends with practical implications for taxpayers.
Will leadership changes and staff reductions change the IRS enforcement focus?
President Trump’s inauguration at the beginning of 2025 brought major organizational changes to the IRS. In the last year, the IRS has had seven different commissioners, and to date, the majority of leadership positions remain vacant. Acting leadership is now split between an Acting Commissioner and, for the first time, an IRS Chief Executive Officer charged with day‑to‑day operations. Further, the IRS lost roughly a quarter of its workforce overall, with larger impacts in key operating divisions.
While the IRS leadership vacuum and staff reductions are expected to continue to affect the efficacy of the IRS in the new year, there does not appear to be a change in the pace of examinations. The IRS remains committed to the goal of increasing examinations of complex taxpayers while modernizing its capabilities through investment in new technology. Investments made with funds earmarked for the IRS through the Inflation Reduction Act (“IRA”), including specialized units focused on large or complex passthrough entities and high‑net‑worth non‑filers, as well as AI and advanced analytics that can be used to identify risk patterns, have allowed the IRS to maintain a steady pace of examinations despite current resource constraints.
Previously, the IRS announced initiatives to raise audit coverage for large corporations and partnerships with assets over $10 million, as well as high‑income individuals, while maintaining a commitment not to raise audit rates for small businesses or taxpayers with income under $400,000. We expect the IRS to continue to target high profile taxpayers with audits focusing on listed and reportable transactions, losses in passthroughs and Schedule C, passive losses, cross‑border reporting, charitable valuation and substantiation, and business‑versus‑personal expense characterization. Given these priorities, taxpayers should ensure robust substantiation for charitable valuations, travel and entertainment, and fringe benefits. Further, high-net-worth individuals should revisit material participation documentation for entities that report losses on Schedule E; and confirm that foreign information reporting is accurate and complete.
Does §280E Still Apply to State-Legal Cannabis Businesses?
Taxpayers are taking positions that challenging the application of § 280E, which prohibits operating expense deductions for taxpayers trafficking in controlled substances within the meaning of Schedules I and II of the Controlled Substances Act (“CSA”), to state-legal cannabis operations. Cannabis is currently listed on Schedule I. These challenges follow the 2023 report issued by the Department of Health and Human Services (“HHS”), which made the medical and scientific findings required to list cannabis on Schedule III of the CSA. Recently, President Trump issued an Executive Order directing the U.S. Attorney General to reschedule cannabis “in the most expeditious manner in accordance with federal law.”1
The first public challenge was brought as an affirmative defense by New Mexico Top Organics d/b/a Ultra Health (“Ultra Health”), a New Mexico medical cannabis company, that filed a U.S. Tax Court petition challenging an IRS notice of deficiency for fiscal years ending June 30, 2018, 2019, and 2020, and seeking an overpayment determination.2 While there were originally multiple issues in dispute, the parties have now agreed that only one question of law remains: whether § 280E applies to Ultra Health’s medical cannabis operations. Currently, the Court has ordered seriatim briefing. Ultra Health filed its opening brief on October 17th. Multiple amicus briefs from industry stakeholders have been filed; and the IRS’s reply brief is currently expected in the spring. This case is expected to test whether, amid federal government admissions that cannabis should be on CSA Schedule III, the IRS can continue to deny operating expense deductions to state-legal cannabis businesses.
Companies with state-legal cannabis business investments should consult with their cannabis and tax counsel regarding their § 280E position and scenario‑plan for pricing, cash tax forecasting, and capital structure adjustments that would follow removal of § 280E, while monitoring state‑law conformity.
Is the IRS Still Concerned About the Employee Retention Credit?
Ongoing litigation is testing the government’s reliance on notices and informal guidance, with courts increasingly evaluating Employee Retention Credit (“ERC”) eligibility post‑Loper Bright.3 Further, in 2025, courts addressed industry‑specific issues, including the inapplicability of the ERC to cannabis businesses under current law.4 ERC litigation highlights a growing preference of courts to use their own interpretation regarding eligibility based on the statute itself rather than nonbinding notices, a trend consistent with post‑Loper doctrine that may spill into other tax areas. Together, these cases increase the importance of raising statutory arguments early, preserving Administrative Procedure Act (“APA”) challenges, and selecting forums strategically based on penalty posture and remedy.
At the same time, as a result of changes from the One Big Beautiful Bill Act (“OBBBA”), the IRS will automatically deny ERC claims for the third and fourth quarters of 2021 if filed after January 31, 2024 and pending after OBBBA’s enactment, and it has extended the assessment period for those quarters to six years. Moreover, § 6676 erroneous refund penalties will apply to employment tax claims made after July 4, 2025, and there are heightened penalties for promoter conduct after July 4, 2025.
ERC audit activity is expected to continue. Against this backdrop, employers should map their claim status, protest and refund‑suit deadlines, and documentation packages. Where claims have been disallowed or delayed, consider Appeals protests within two years of the disallowance and, if needed, timely refund litigation while building the record around statutory qualifications rather than informal guidance.
How do Loper Bright and Jarkesy change administrative law for tax cases?
The Supreme Court’s decision in Loper Bright overruled Chevron5 deference and instructs courts to decide all relevant questions of law under the Administrative Procedure Act (“APA”). Loper Bright invites more judicial scrutiny of Treasury and IRS rules and heightened statutory interpretation in tax disputes. Another important case, Corner Post6 clarifies the statute of limitations for certain APA challenges. Loper Bright and Corner Post are anticipated to continue to shape taxpayer challenges in 2026.
Further, taxpayers continue challenging the IRS’s authority to impose certain civil penalties administratively in light of the Seventh Amendment guarantee to a jury trial following the U.S. Supreme Court’s decision in Jarkesy.7Currently, district courts are split regarding whether the Supreme Court’s precedent requires access to a jury trial prior to the imposition of penalties. In Sagoo,8 the court sided with a taxpayer challenging the imposition of FBAR penalties; whereas in HDH Group Inc.,9 the court agreed with the IRS that civil fraud penalties were constitutional regardless of the taxpayer’s access to a jury. Sagoo has been appealed to the Fifth Circuit. Taxpayers can expect continuing Seventh Amendment challenges and other constitutional challenges to federal agency authority.
How can taxpayers quickly resolve disputes with the IRS?
Tax controversy pathways are evolving. Participation in IRS Alternative Dispute Resolution (“ADR”) is rising, supported by program updates designed to make settlement conference options more accessible, including changes to Post-Appeals Mediation (“PAM”) and fast track settlement (“Fast Track”). PAM is a non-binding process that uses the services of a mediator to help IRS Appeals and the taxpayer negotiate a settlement. Fast Track uses ADR techniques to resolve disputes during an examination or while the taxpayer is in collections. PAM has been revamped to permit a new mediator for a final settlement attempt. Fast Track is now offered on an issue‑by‑issue basis, even when some issues are ineligible for further mediation. The IRS has also introduced a new “last chance” Fast Track option for certain taxpayers after the issuance of a 30-day-letter or the filing of a protest with IRS Appeals. Further, neither PAM nor Fast Track can be denied absent first‑line executive approval, offering another opportunity to close stubborn issues. Taxpayers should evaluate ADR suitability early, build principled settlement ranges, and prepare concise position papers to maximize the benefit of these programs.
For large corporate cases, Large Business & International has announced the elimination of the Acknowledgment of Facts Information Document Request process by the end of 2025, while maintaining transparency around proposed adjustments and expanding tools like Accelerated Issue Resolution for recurring issues in Large Corporate compliance cases.
Appeals transparency has also improved: taxpayers may request Appeals Case Memoranda (“ACM”) without a formal Freedom of Information Act request, though redactions may apply. In practice, requesting the ACM can clarify Appeals’ view of hazards of litigation and factual disputes, inform settlement strategy, and support consistent resolutions across related years and entities.
Two regulatory developments from 2025 affect procedure. First, final regulations under § 6751(b) adopt a bright‑line rule permitting supervisory penalty approval any time before assessment, an approach that may face post‑Loper Bright challenges. Second, Treas. Reg. § 301.7803‑2 defines when Appeals is available and carves out exceptions, including cases designated for litigation and certain constitutional and regulatory validity challenges. These rules make it essential to frame issues and claims carefully at exam to preserve Appeals access and to anticipate situations, such as regulatory‑validity challenges, where an alternative forum strategy may be necessary. Further, these changes are expected to streamline Appeals operations by eliminating certain issues from consideration, allowing the IRS to resolve disputes more efficiently.
What practical federal tax planning steps should businesses take for 2026?
Tax controversy is here to stay – at least through 2026. To prepare for continued IRS examination activity, taxpayers can create contemporaneous memos documenting key transactions. Those in exam can consider increasingly attractive ADR pathways proactively to shorten controversy cycles. In parallel, taxpayers can calibrate administrative‑law strategies in light of Loper Bright and Corner Post, preserving APA challenges where appropriate and sequencing forums to align with objectives and timing.
1Executive Order, The White House, Increasing Medical Marijuana and Cannabidiol Research (Dec. 18, 2025), available at https://www.whitehouse.gov/presidential-actions/2025/12/increasing-medical-marijuana-and-cannabidiol-research/.
2See New Mexico Top Organics Inc. d/b/a Ultra Health v. Comm’r, No. 19661-24 (T.C. 2025).
3Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024).
4See, e.g., In re JSmith Civil, LLC v. United States, No. 23-02734-5-JNC, 2025 WL 2264774 (Bank. E.D.N.C. Aug. 7, 2025) (interpreting partial shutdown test based on the statute alone, without reference to IRS guidance); Receivership Est. of Solstice Group, Inc. v. United States, No. 2:24-cv-01522-JHC, 2025 WL 2988841 (W.D. Wash. May 9, 2025)(holding that the ERC is not applicable to cannabis companies based on statutory interpretation).
5Chevron U.S.A. Inc. v. Nat. Resources Def. Council, Inc., 467 U.S. 837 (1984).
6Corner Post, Inc. v. Federal Reserve Bd., 144 S. Ct. 2440 (2024) (finding that the statute of limitations does not run until the taxpayer suffers an injury).
7S.E.C. v. Jarkesy, 603 U.S. 109 (2023).
8United States v. Sagoo, No. 4:24-CV-01159-O, 2025 WL 2689912 (N.D. Tex. Sept. 19, 2025).
9HDH Grp., Inc. v. United States, No. 2:24-CV-988, 2025 WL 2711877 (W.D. Pa. Sept. 23, 2025)
