Since the first chatbots were installed by the Internal Revenue Service (IRS) in December of 2021, the Service has continued to improve and increase the use of computers to assist taxpayers. Voicebots, a software that simulates human conversation through an automated interactive voice response system, and chatbots, a software tool that interacts with taxpayers through web-based automated text interactions, are powered by artificial intelligence (AI) and interact directly with taxpayers. The automated IRS bots are designed to reduce the need for IRS staff to answer phone calls.

Former IRS Small Business/Self-Employed Division Commissioner Darren Guillot stated, "The voicebot is a huge success story for the IRS and collection." He noted the IRS has produced far more value from collections related to payment plans created by the voicebots than the cost of producing the technology.

Evgeny Kagan, an Assistant Professor at Johns Hopkins University’s Carey Business School, has researched the IRS bots and estimates they can resolve approximately 30% to 40% of taxpayer inquiries. He notes, "It is not that taxpayers do not want to engage with chatbot technology… they do not like the fact that there might be two service stages. People would prefer human interaction because it is not what we call a gatekeeper process – it is a single, one-stop-shop process."

Mandi Matlock, the Lead Attorney for the Return Preparer Project at the Center for Taxpayer Rights, expressed concern about the chatbots. She stated, “I fear we will be relegated to chatbots and voicebots in greater numbers. The rubber will hit the road when we no longer have access to adequate telephone assisters."

The IRS has focused on chatbots that assist taxpayers in setting up payment plans. The chatbot "automates the preconstructed conversations created through a series of queries based on the available premade options selected by the taxpayer."

The current chatbots primarily operate based on the rules created by the IRS. Future chatbots may use generative AI. However, generative AI is not as accurate.

After interacting with the chatbot, a taxpayer is typically permitted to interact with a live service agent. The chatbot is reasonably good at answering general questions, but generally fails to provide specific information or answer specific questions.

Chatbots were initially created in 2021 because the IRS service level had declined. By September 2022, the voicebots had assisted on over  4.8 million calls. Approximately 40% were answered "within the voicebot without the need to escalate to a live assistor."

Data for 2024 indicates that taxpayers were able to complete a payment plan or receive desired information 22.5% of the time on calls. However, approximately 67% of the calls needed to be transferred to a live agent.

Editor's Note: The IRS clearly needs to improve the quality of chatbots and voicebots. With the current reductions in the IRS budget and staffing, it is highly probable that taxpayers will be more likely to interact with automated assistants in the future. Fortunately, as with all technology that is widely used, it is likely the IRS will be able to improve chatbot capabilities and functionality.

House Passes 2025 Tax Bill

After intensive discussions between the House Speaker, the White House and Members of the House, the 2025 Tax and Budget Bill passed the House on May 22, 2025, by a vote of 215 to 214. The key last-minute compromises were increasing the state and local tax (SALT) limit to $40,000, starting the Medicaid work requirements in 2026 and phasing out some of the green energy credits. Even with these compromises, the bill passed by a single vote.

While the House version of the 2025 tax bill will be changed by the Senate before the final bill is enacted, the general framework of the plan is now clear. This tax and budget bill is likely to have significant impact on all Americans. Because many tax provisions sunset at the end of 2025, it is essential for the House and Senate to pass a new tax bill that will establish rules and guidelines for 2026.

There are substantial provisions in the 2025 draft bill that affect individual taxpayers.

1. Child Tax Credit — The child credit for 2025 through 2028 increases from $2,000 to $2,500. The taxpayer(s) and the child must have Social Security Numbers.
    
2. Credit for New Children — There will be a one-time $1,000 credit for a new "Money Account for Growth and Advancement" or MAGA account. This credit is available for eligible individuals born from 2025 through 2028, and the contribution limit will be $5,000. The MAGA funds may be available after age 18 for higher education or first-time home purchase.
    
3. No Tax on Tips — Those occupations that traditionally received tips will be able to avoid tax. The benefit of tax-free tips will phase out for individuals with incomes over $160,000. An estimated four million traditional tip workers will qualify.
    
4. No Tax on Overtime — There are approximately 80 million hourly workers in the USA. They would no longer be required to pay tax on their overtime.
    
5. Increased Standard Deduction for Seniors — Individuals who are seniors would qualify for an additional $4,000 increase in the standard deduction. This benefit from 2025 through 2028 phases out for individuals with incomes over $75,000 or married couples with incomes over $150,000.
    
6. Car Loan Interest Deduction — Purchasers of new cars with final assembly in the United States may deduct up to $10,000 in annual interest. The 2025 through 2028 deduction phases out for individuals with incomes over $100,000 or married couples over $200,000.
    
7. Increased Standard Deduction — The general taxpayer population would have an increase in the standard deduction of $1,000 for individuals and $2,000 for couples.
    
8. Estate Tax Exemption — The estate exemption of $13.99 million in 2025 increases to $15 million in 2026.
    
9. Additional Pass-Through Deduction — The existing 20% deduction for pass-through businesses increases to 23% in 2026.
    
10. State and Local Tax Deduction Limit — The existing $10,000 limit is increased to $40,000. The SALT deduction increase will be phased out with incomes over $500,000 but will not be lower than the existing $10,000 amount.
     
11. Clean Energy Credits — The credits under the Inflation Reduction Act would generally be reduced or eliminated. The $7,500 credit for an electric vehicle, credits for home energy conservation and the 30% credit for solar panels and storage batteries are phased out at the end of 2025.
     
12. Nonitemizer Charitable Deduction — There is a nonitemizers deduction of $150 for individuals and $300 for married couples, excluding gifts to a donor advised fund.
     
13. Excise Tax on Private Universities and Private Foundations — There is an increased excise tax on the investment income of certain private colleges and universities. The graduated plan creates a 1.4% tax for private colleges and universities with over $500,000 of endowment per student. Those with over $750,000 of endowment per student pay a 7% tax on income. Institutions with assets over $1.25 million per student pay a 14% excise tax. Finally, private universities with assets of over $2 million per student pay a 21% excise tax. There also will be a graduated excise tax for private foundation net investment income. With assets below $50 million, the tax is 1.39%. Private foundations with assets over $50 million will be subject to 2.78% tax. Those with assets over $250 million are subject to a 5% tax and foundations with assets over $5 billion pay a 10% tax.

Editor's Note: This is a summary of some key provisions of the 2025 tax bill that impact individual taxpayers. There will be major amendments by the Senate. While many Senators plan to seek changes in the bill, Senate Majority Leader John Thune (R-SD) believes the House bill is a good starting point. This information is offered as a service to our readers.

Estate Transfer Not a Qualified Deduction

In Estate of Richard D. Spizzirri v. Commissioner; No. 23-14049 (11th Cir. 2025), the Eleventh Circuit determined that a $3 million inheritance to stepchildren under a prenuptial agreement was a donative transfer and not a bona fide payment deductible under Section 2053.

On March 4, 1997, Richard Spizzirri and his fourth wife Holly Lueders signed a prenuptial agreement. Spizzirri had a net worth of approximately $25 million and four children from his first marriage. Lueders had three children from a prior marriage.

The agreement established the rights of Lueders if they remained married. She was to receive one-fourth of the gross estate, the right to live in an Easthampton home for five years without payment and 12.5% of the sale of a home in Aspen. If the marriage were dissolved, Spizzirri would pay Lueders approximately $5.5 million.

The marriage continued for 18 years, and the agreement was modified five times. In a modified agreement, Spizzirri agreed to pay $6 million to Lueders and $1 million each to her three adult children.

After 18 years, Spizzirri and Lueders became estranged. Spizzirri executed four codicils to his will in 2014 and provided various payments to family members and friends.

After Spizzirri passed away in May 2015, the three stepchildren filed claims. In 2016, the estate paid $1 million plus penalties to each child. The estate filed an estate tax return and deducted the $3 million in payments as Section 2053 claims against the estate.

The Tax Court conducted a trial to determine whether the $3 million in distributions to the stepchildren was a qualified deduction. A taxpayer witness stated the intent of the payments to the stepchildren was to "keep his fourth marriage [a]s his last marriage” and “avoid the expense… of a potential divorce." The Tax Court ruled that the estate did not produce "credible evidence" required for a deduction.

An estate may deduct "claims against the estate." See Section 2053(c)(1)(A). However, the claim must be bona fide and for an adequate and full consideration. The IRS maintained the transfers to three stepchildren were neither bona fide nor for adequate and full consideration.

While the estate claimed that the burden of proving entitlement had shifted to the IRS, the court noted that a deduction requires "credible evidence" to substantiate the amount. The estate failed to introduce credible evidence and did not call the stepchildren to ask whether they reported the payments as taxable income.

The "bona fide" requirement is designed to preclude deduction for transfers that are essentially donative in character. There is a five-part test to determine whether the transaction is bona fide. Reg.20.2053-1(b)(2)(ii). The transaction must be in the ordinary course of business, not related to a claim of inheritance, must originate pursuant to an agreement between the decedent and the beneficiary and the amounts paid in satisfaction of an obligation must be reported as taxable income.

In this case, the prenuptial agreement was designed to “keep his wife happy." It was not an arms-length transaction. In addition, Spizzirri made gifts to a stepdaughter of $21,000 in 2015. These gifts and additional amounts transferred to the other stepchildren indicated donative intent.

Therefore, there was not a bona fide transaction. In addition, the estate did not introduce evidence the stepchildren reported the payments as income. The Tax Court decision that the deduction was denied was affirmed.

Applicable Federal Rate of 5.0% for June: Rev. Rul. 2025-12; 2025-23 IRB 1 (15 May 2025)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2025. The AFR under Sec. 7520 for the month of June is 5.0%. The rates for May of 5.0% or April of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”