Starting with the Inflation Reduction Act in 2022, the Internal Revenue Service started to feel it finally had the resources to start upgrading its antiquated technology systems, beef up enforcement activities to reduce uncollected taxes, and improve customer service.

In 2025, all of that has come to an end.

Between January and May 2025, staffing was reduced from around 103,000 employees to around 77,000, or around 25%. The nearly $80 billion in funding from the Inflation Reduction Act has been gradually reduced to $37.6 billion.

As of this writing, in the face of the federal government shutdown due to lack of approval of a federal budget for the 2026 fiscal year, after maintaining staff for the first week of the shutdown, the IRS has announced the furlough of around 34,000 employees, or about 46% of its current workforce. The IRS intends to use remaining funding from the Inflation Reduction Act to retain 39,878 employees for essential functions.

Although we had known the numbers of reduced staffing, it was not clear what functions were impacted by the reductions. Now, however, the Treasury Inspector General for Tax Administration has released a report dated Oct. 15, 2025, which adds some detail to those numbers. The report is titled “Management and Performance Challenges Facing the IRS for Fiscal Year 2026.”

Reduced workflow and budget

In addition to the reduced Inflation Reduction Act funding, the Fiscal Year 2026 IRS proposed budget lowers annual funding by 20%. The TIGTA report states that the IRS has already spent $13.8 billion (or 37%) of its remaining Inflation Reduction Act funding.

The functions that the IRS has identified that it is trying to maintain during the shutdown are e-filing systems, payment processing, issuance of automatic refunds (especially for direct deposit), testing of tax filing systems for the upcoming tax filing season, processing remittances, and updating tax forms. Sufficient staff is also being maintained to keep technology operating. Automated notices such as collections, intent to levy, and warnings of asset seizures may continue to be issued.

Areas that the IRS has identified as receiving little to no support during the continuing shutdown include in-person and phone contact, audit correspondence, staff associated with enforced collections, the Taxpayer Advocate Service (with only 93 employees retained), paper return processing, payments, and correspondence.

Pete Kiehart

The Large Business & International Division was estimated to be losing 74% of its staff, the Small Business/Self-Employed Division 67% of its staff, and the Tax-Exempt and Government Entities Division 84% of its staff. The Tax Court at present stated that it was still open for filings but that there were potential cancellations of trial sessions.

The TIGTA report states that the information technology staff has lost 25% of its people. The IRS placed 48 senior IT employees on administrative leave, 26 of whom were in key management positions or were individuals specifically recruited for their expertise in restructuring efforts. The TIGTA report states that half of the IRS’s 700 business systems are legacy systems requiring replacement.

While the IRS has made some progress with individual tax processing systems, it has abandoned some other modernization efforts. The agency is hoping that integrating AI capabilities into its systems may help; however, it still has not adopted cloud computing.

Improving operational efficiencies

The IRS is hoping that the federal government program to eliminate paper checks will help with its efficiency. It is also hoping to automate processing of amended tax returns. Although the agency’s Document Upload Tool permits online responses to mailed notices, the IRS must still print out those responses for review.

Protecting taxpayer data

TIGTA faults the IRS for failure to terminate access to systems by departing employees. New efforts by the Trump administration to expand interagency document sharing have resulted in some instances of the IRS transferring inaccurate data. The IRS was also criticized for careless disposal of sensitive documents.

Implementing tax law changes

TIGTA stated that the IRS had assessed an estimated $591 million in penalties and interest on 403,711 tax accounts for employers who failed to timely pay their deferred Social Security taxes. The IRS computers also were incorrectly rejecting tax returns claiming the Clean Vehicle Credit, largely due to late submissions by dealers.

TIGTA stated that it reviewed nearly 1,000 tax returns with signs of potential identity theft involving recovery of erroneously paid Employee Retention Credits. The IRS was also developing a strategy to try to effectively remove certain tax benefits from noncitizens.

While the IRS has made some progress in addressing virtual currencies and high-income nonfilers, it has yet to take enforcement action against an estimated 150,000 individuals with $13.2 billion in gambling winnings and tax debts of $1 billion in taxes, interest and penalties who failed to file tax returns. The agency also continues to struggle with challenging fact situations involving refundable tax credits such as the Additional Child Tax Credit, the Earned Income Tax Credit, the American Opportunity Tax Credit, and the new Premium Tax Credit.

Depending on how long the shutdown lasts, the IRS may be unable to finalize 2025 forms, instructions and publications in time for a normal start to the 2026 tax filing season.

Taxpayer services and rights

TIGTA found that the recent positive IRS statistics on telephone responses and wait times only included the most utilized phone lines and did not include many other phone lines with less favorable statistics. The IRS decided to discontinue self-service kiosks at Taxpayer Assistance Centers after finding that nearly one-half were inoperable. And it is trying to use voicebots to try to reduce wait times and to develop some of the artificial intelligence tools used by private collection agencies.

Impact on taxpayers

While the government is shut down, obligations of taxpayers under the tax law remain. In general, filing deadlines remain in effect. Interest and penalties continue to accrue on unpaid balances due.

Often the IRS has delayed the start of tax filing season, such as during COVID, when the agency was also shut down, or to allow it to reflect last-minute legislative changes at the end of the tax year, or due to federally declared natural disasters for the areas affected by those disasters.

It is possible that, as this shutdown continues, it could result in a later-than-normal start to the 2026 tax filing season. After some initial hints that the tax filing season would be delayed due to efforts to incorporate the One Big Beautiful Bill Act, those indications were superseded by an announcement that the date of the start of the tax filing season has not yet been set.

Tax planning

Taxpayers should assume all tax deadlines remain in effect unless specially announced otherwise. To ensure timely processing of tax returns and receipt of refunds, taxpayers should file electronically and set up for direct deposit of any tax refunds. Any need for human intervention will delay the processing and any refund.

It is possible that IRS online accounts may not continue to be accessible during the shutdown. Taxpayers should create documentation for all communications and submissions to establish timely compliance.

If taxpayers need action taken by the IRS, such as transcripts and powers of attorney, they should make those requests as soon as possible in anticipation of possible further deterioration of IRS support.

They should try to structure any direct deposit installment agreements online without the need for IRS approval.

Taxpayers and tax professionals should expect more delayed responses to notices, refund processing, and audit resolutions.

Taxpayers should try to make any required statutory payments online. They may wish to consider making other tax payments as well, even for items in dispute, to cut off the continued accumulation of interest and penalties should the IRS ultimately win on the disputed issues.

Should the shutdown continue for some time — as seemed possible as we went to press — it is also likely that the issues discussed above will continue for some period of time after the shutdown ends. Following the COVID shutdown, the IRS required many months to get through the stacks of correspondence that had accumulated unread. Especially with a reduced staff, taxpayers should anticipate the possibility that these slowdowns will continue for a period of time somewhat in proportion to the period of the shutdown.

Summary

Hopefully, by the time that this column is being read, the shutdown will be over and many of the furloughed IRS employees will have returned to work.

It is still likely, however, that the effects of the reduced staff, reduced funding, and the shutdown will be felt during the 2026 tax filing season and perhaps beyond.