Tax Breaks: The Taxpayer Advocate Walks Into A Conference Edition

I’m on the road again! It’s tax conference season, and my first stop in June was San Antonio, Texas, for The Tax Retreat. It’s been a terrific experience meeting up with my fellow tax professionals. I even ran into Charles Barkley (okay, I suspect he was here for the NBA Finals and not to talk tax, but still).

Of course, there was plenty of tax, too. One of the highlights of the week was hearing National Taxpayer Advocate Erin Collins sit down with Terry Lemons for a conversation that felt refreshingly candid. Rather than sticking to Washington talking points, Collins focused on what taxpayers and practitioners see when the system does not work the way it should: delayed refunds, confusing notices, collection problems, and taxpayers who cannot get answers through ordinary IRS channels.

Collins described the Taxpayer Advocate Service (TAS) as both a lifeline for taxpayers in those situations and a watchdog for the broader problems. That work is getting harder. She said TAS case inventories are climbing while the organization has lost roughly a quarter of its case advocates, leaving employees with heavy caseloads and taxpayers waiting for help on issues that are often urgent. Still, she pointed to signs of progress, including clearer math-error notices, movement toward automatic first-time penalty abatement, and bipartisan interest in taxpayer-service reform.

Fairness was a thread throughout Collins’ conversation: whether taxpayers can understand IRS notices, get timely help, and trust that the system gives them a meaningful chance to be heard. That same question—what fairness requires when the government is collecting taxes—is also front and center at the Supreme Court.

In Pung v. Isabella County, the justices are considering how much equity homeowners can lose when the government seizes property to collect a tax debt and sells it at auction. The case follows Tyler v. Hennepin County, where the Court unanimously held that governments may not keep more than they are owed after a tax sale, but Pung asks the next question: whether compensation should be based on the auction price or the home’s fair market value.

In Pung, the tax debt at issue was a little over $2,200. But, after a foreclosure, the home, which was appraised at nearly $200,000, sold at auction for about half that value. The county returned what was left after the auction, and the estate argued that they should have received more, since they lost their equity in the home (for a tax debt they also claim was never owed in the first place). Be on the lookout for a possible SCOTUS opinion later this month.

Fairness was also an issue in a pair of recent Employee Retention Credit (ERC) cases, though the taxpayers landed in very different places. In Tri-State Memorial Hospital, a federal district court in Washington allowed a hospital’s refund suit to move forward, rejecting the government’s attempt to narrow what counts as a partial suspension and whether that suspension was “due to” government orders. That same day, however, the Court of Federal Claims sided with the government in Northeast Health Services, applying a more restrictive view of causation and ending that taxpayer’s case.

The split matters because ERC claims often turn on the same basic question: How much room did Congress intend to give employers that kept workers on payroll while government orders disrupted normal operations? The IRS has taken a narrow view in many of these cases, but as the litigation develops, courts are beginning to test where the statutory line really is—and whether agency guidance can be used to turn safe harbors into hard-and-fast eligibility requirements.

Another agency move is also in the news. A new USCIS memorandum focused on immigration policy may have tax consequences, too. By steering some green card applicants toward consular processing abroad rather than Adjustment of Status in the U.S., the policy could delay lawful permanent residency for certain foreign nationals—and, in some cases, delay their becoming U.S. tax residents.

What does that look like? Immigration status and tax residency are not the same thing. A foreign national may become a U.S. tax resident by getting a green card or by spending enough days in the country under the substantial presence test, and once that happens, worldwide income and extensive foreign-asset reporting rules can apply. For some applicants, a delay in green card timing may create more room for pre-immigration tax planning, while for others, especially those already meeting the substantial presence test, the tax result may not change at all.

That’s really the thread running through this week’s newsletter: Tax administration is rarely just about the rule on paper. Whether we are talking about IRS notices, tax-sale equity, ERC eligibility, or the timing of a green card, the practical result often depends on how the government applies the rule and whether taxpayers have a fair chance to understand and respond to it.

And with that, I’m off to Vegas to talk even more tax, this time at AICPA Engage. Until next time, may your travels be smooth, your receipts be tidy, and the rules—tax or otherwise—work the way they’re supposed to.

Enjoy your weekend,

Kelly Phillips Erb (Senior Writer, Tax)

This is a published version of the Tax Breaks newsletter, you can sign-up to get Tax Breaks in your inbox here.

Questions

This week, a reader asks:

My company is giving me stock options. I thought I understood the tax consequences, but when I looked it up, Google said it would be treated as taxable income under the Alternative Minimum Tax, even if I don’t sell it. What’s the AMT, and why am I being taxed on something when I don’t have the cash?

The Alternative Minimum Tax, or AMT, is a sort of parallel tax system that recalculates your income tax using different rules. It was designed to make sure taxpayers who receive certain tax-preferred items still pay at least a minimum amount of tax. For employees with stock options, the AMT issue most commonly arises with incentive stock options (ISOs).

With regular income tax, exercising an ISO usually does not create taxable income right away, as long as you hold the stock. I suspect that’s the bit you get.

But for AMT purposes, the “spread” between the exercise price and the fair market value of the stock on the exercise date is treated as income, even if you do not sell the shares. For example, if you exercise options to buy shares for $10 each when they are worth $40 each, the $30-per-share spread, or difference, may be included in AMT income.

That can feel unfair because you may owe tax before you have cash from a sale. The reason is that, for AMT purposes, you’re treated as if you received a benefit: the right to buy the stock at a lower price, thanks to your employment. In tax terms, you have not received cash, but you may have received something of value.

When you exercise the ISO, you may be holding stock that you have not sold (and that may not be easy to sell) but the AMT rules can still treat it as income for that year. The tax result depends on the type of option, the exercise price, the stock’s value when you exercise, and whether you later sell the shares. My best advice? Work with a tax pro on this one.

Statistics, Charts, and Graphs

The federal gas tax debate is not just about pump prices—it is also about infrastructure. The tax is a primary revenue source for the Highway Trust Fund, which helps pay for roads, bridges, transit, and other transportation projects. Suspending the tax could offer drivers some short-term relief, but it would also reduce funding at a time when many infrastructure needs are already outpacing available revenue.

The tax has been around for nearly a century. Congress first enacted a federal gasoline tax in 1932 at one cent per gallon, originally as a general revenue measure during the Depression. It later became tied to transportation funding, especially after the Highway Revenue Act of 1956 created the Highway Trust Fund and directed gas tax revenue toward the then-growing interstate highway system.

Today, the federal gasoline tax is 18.4 cents per gallon and has not been raised since the Clinton Era–or indexed for inflation. That means its purchasing power has eroded even as construction costs, vehicle fuel efficiency, and electric vehicle adoption have changed. For policymakers, the question is no longer just whether cutting the gas tax would lower prices at the pump, but also how to maintain an aging transportation system if one of its core funding streams disappears.

Taxes From A To Z: V is for Vacation Homes

A vacation home is typically a second home used for personal enjoyment, such as a beach house, cabin, condo, lake house, or mountain home. It may be used only by you and your family, or rented out for part of the year.

If the property is never rented, the tax questions usually concern whether mortgage interest and property taxes are deductible as itemized deductions. For 2026, mortgage interest may be deductible only if the home is a qualified residence—generally, your main home plus one second home—and you itemize deductions on Schedule A. For newer acquisition debt, the deduction is generally limited to interest on up to $750,000 of qualifying home acquisition debt, or $375,000 if married filing separately; those caps are total limits, not per-home limits. Older grandfathered debt may have different limits. Property taxes may also be deductible, but they are included in the broader state and local tax deduction, which is capped at $40,000 for 2026, or $20,000 if married filing separately, subject to income-based limits.

If the home is rented, the tax treatment depends heavily on the number of rental days and personal-use days. A home rented for fewer than 15 days during the year generally does not produce reportable rental income, but rental expenses are not deductible. Once the home is rented for 15 days or more, you generally must report the rental income and allocate expenses between rental and personal use. If personal use exceeds the greater of 14 days or 10% of the days rented at fair rental value, the home is treated as a residence, which can limit rental deductions and prevent the rental side from producing a deductible loss.

Tax Trivia

How many National Taxpayer Advocates have been appointed in the modern era?

(A) Two

(B) Three

(C) Four

(D) Five

Find the answer at the bottom of this newsletter.

Positions And Guidance

Treasury and the IRS issued Notice 2026-36 announcing planned regulations on the OBBB’s expanded excise tax for tax-exempt organizations that pay more than $1 million in compensation or excess parachute payments to covered employees, with comments due August 4, 2026.

Noteworthy

The IRS released its 2025 Data Book, reporting that it processed 271.4 million returns and supplemental documents, collected more than $5.3 trillion, answered nearly 18.6 million taxpayer calls, and saw almost 417 million “Where’s My Refund?” inquiries during the year.

Business executive sentiment is split, according to the second-quarter AICPA and CIMA Economic Outlook Survey: Optimism about the U.S. and global economies fell, while confidence in executives’ own organizations held firmer. Despite renewed concerns about cost pressures, inflation, talent, energy prices, and geopolitical uncertainty, 54% of executives still expect their businesses to expand over the next 12 months.

Key Figures