6 tax compliance challenges at VITA sites in 2026

Published March 5, 2026 10:03 AM

Updated March 5, 2026 11:22 AM

1 Min Read

Volunteer Income Tax Assistance sites serve as the front line of tax compliance for low- and moderate-income taxpayers. The 2026 filing season has introduced several recurring issues that require heightened diligence by site coordinators and student volunteers. Many of these challenges stem from recent legislative changes, misunderstandings regarding new deductions, and incomplete wage or income reporting documentation.

1. Overtime compensation: W-2 reporting vs. paystub detail

Daniel Acker/Bloomberg

One practical challenge we frequently see is that employers rarely break out overtime separately on Form W-2. Instead, overtime appears only as a line item on paystubs, leaving taxpayers unsure how much qualifies for the new deduction. This can create confusion at the tax table, especially when clients assume overtime must be "added" somewhere or, conversely, excluded.

Overtime is already included in Box 1 of Form W-2 along with regular wages. Before any deduction is calculated, that income must remain fully included in gross income. If the W-2 does not separately identify the overtime portion, preparers should review year-end paystubs or payroll summaries to determine how much of the wages represents the qualifying overtime premium. Importantly, only the premium portion, not the regular straight-time pay, may be used when computing the Schedule 1-A deduction. It's also important to verify shift pay differentials are not included in overtime pay calculations. This is a common misconception.

Although the deduction is technically subject to statutory caps and modified adjusted gross income phase-outs, those limitations often do not affect many VITA clients due to their income levels. Still, careful verification is essential. Taking a few extra minutes to review documentation ensures the correct amount is reported and the deduction is calculated accurately, protecting both compliance and the client's confidence in the process.

2. Tip income: mandatory inclusion

Yuki Iwamura/Bloomberg

Tip income continues to generate confusion at VITA sites. Many taxpayers fail to report unreported cash tips or believe that certain tips are not taxable. Under federal tax law, all tips — cash, credit card, pooled or allocated — are taxable income.

From a compliance perspective, all tip income must be included in gross income, regardless of whether an information return is issued. Cash tips, pooled tips and other unreported gratuities remain taxable under federal law and must be reported even if they do not appear on a Form W-2. When tips were not reported to the employer during the year, additional payroll tax calculations may be required to account for Social Security and Medicare obligations. Importantly, there is no blanket deduction for tip income simply because it is service-based compensation; tips are taxable earnings and must be properly included before any applicable deduction provisions are considered.

3. Grant-funded students: taxable scholarship income

VITA sites serving college communities frequently encounter students funded by scholarships, fellowships or research grants. Many grant institutions do not issue Forms W-2 or 1099 for stipend payments, leading students to assume the income is not taxable when it can lead to a large tax bill.

The tax treatment of scholarships and grant funding generally follow several core principles. Amounts applied toward qualified tuition and required course materials may be excluded from gross income. In contrast, funds used for room, board, travel or other personal living expenses are typically taxable. Additionally, stipends provided in exchange for teaching, research or other required services are generally treated as taxable compensation. This may not be evident on a 1098-T but is subject to federal tax payments.

4. Senior $6,000 deduction: nonrefundable impact

Lisa F. Young/Fotolia

One of the most consistent areas of confusion at VITA sites during the 2026 filing season involves the additional $6,000 deduction available to qualifying seniors. Many taxpayers arrive expecting a significant increase in their refund, sometimes believing the provision functions as direct payment. In practice, however, the provision operates as a deduction rather than a refundable credit, and its impact is often more modest than anticipated.

A deduction simply reduces the income that is taxed — it does not translate into a dollar-for-dollar payment. In practical terms, the value of the $6,000 senior deduction depends on the taxpayer's tax bracket. For example, a senior in the 12% bracket would see their tax reduced by about $720, not $6,000. That difference can feel surprising, especially when headlines emphasize the full amount of the deduction. The benefit grows for those in higher brackets and shrinks for those in lower ones.

Just as importantly, a deduction cannot lower tax below zero. Many seniors served at VITA sites already owe little or no federal income tax because of the standard deduction, the favorable treatment of Social Security benefits or modest overall income. In those situations, the $6,000 deduction may not change the refund at all. It reduces income that was not generating tax in the first place. Taking the time to explain this gently and clearly helps limit disappointment.

5. Automobile interest deduction

The automobile loan interest deduction has generated additional confusion due to the "Made in USA" qualification language embedded in the statute. Many taxpayers assume that purchasing a vehicle assembled in the United States automatically guarantees deductibility of their entire car payment. The provision allows a deduction only for qualified interest on eligible vehicles that meet specific domestic production requirements as defined under federal standards. The deduction does not apply to the full loan payment, does not include principal and does not apply if the vehicle fails to meet statutory sourcing thresholds. Because this benefit first applies to 2025 returns filed in 2026, many taxpayers are hearing about it through media summaries without understanding the technical requirements. At VITA sites, preparers must verify both the amount of interest paid and whether the vehicle satisfies the domestic production criteria before computing any deduction, while also explaining that — like other deductions — it reduces taxable income rather than producing a dollar-for-dollar refund.

6. Colorado Promise and other state-level tuition support

Colorado's Promise program provides tuition support to eligible students, particularly those with fewer than 66 credit hours and meeting income thresholds. This is an example of a state-specific new credit. While this assistance significantly reduces tuition costs, it creates important federal tax coordination considerations. Volunteers often do not spend as much time on state-level training. These types of large credits warrant adequate training to ensure proper application is state-level credits.