Implementation of Select Provisions of the Working Families Tax Cuts Act

Why did we do this audit?

The Working Families Tax Cut (WFTC) Act, commonly known as the One Big Beautiful Bill Act, established four new individual tax deductions for qualified tips, overtime compensation, passenger vehicle loan interest, and senior deductions. Enacted shortly before the 2026 Filing Season, the law gave the IRS limited time to issue guidance, update tax forms, and implement processing and compliance controls. We conducted this review to assess the IRS’s implementation of select provisions of the WFTC, including its effort to identify potentially erroneous or improper deduction claims.

What did we find?

Overall, the IRS successfully implemented the four WFTC provisions reviewed. However, we identified weaknesses in its guidance processing controls and compliance strategy.

The IRS's initial guidance for the Overtime Deduction did not adequately explain exemptions under the Fair Labor Standards Act (FLSA), increasing the risk of taxpayers incorrectly determining eligibility for the deduction. In response to our concerns, the IRS issued more helpful guidance and in August 2026, further clarified which employee categories are generally exempt from FLSA overtime requirements.

We also identified significant weaknesses in controls for the Car Loan Interest Deduction. As a result, we determined that the IRS accepted more than 470,000 electronically filed (e-filed) Tax Year 2025 returns claiming $977 million in questionable deductions (with a total estimated tax effect of $122 million).

The IRS uses business rules to reject e-filed tax returns that do not meet required criteria prior to acceptance. However, the IRS did not timely implement a business rule to reject certain e-filed returns because of concerns about the legal implications of rejecting otherwise valid returns. 

Additionally, as of August 2026, the IRS had not established a post-processing compliance strategy to identify and address potentially improper claims, increasing the risk that such claims would go undetected or uncorrected.

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