Dive Brief:

• Cutbacks in the budget and staff at the IRS may perpetuate in 2026 a nearly $700 billion shortfall in the collection of taxes owed known as the tax gap, according to the IRS Advisory Council.
• Although Congress each year identifies spending deemed necessary, it “has not adequately appropriated the funding needed to ensure that the revenues will be efficiently and fully collected,” the council said in an annual report released Wednesday.
• The shortfall in IRS funding in 2026 follows “an extraordinarily difficult year with a host of personnel reductions, budget rescissions, projects placed on hold and changing leadership,” the council said.

Dive Insight:

The IRS this year will probably face severe challenges in tax collection and taxpayer services because of sweeping changes under the Trump administration, including a 25% cut in staff and extensive rewriting of tax laws under the One Big Beautiful Bill Act, according to private organizations that track the IRS.

Last year the IRS was buffeted by changes to its top brass, including a succession of seven people serving as commissioner or acting commissioner, according to the organizations. Also, more than $40 billion in rescessions of funding provided under the Inflation Reduction Act disrupted several programs aimed at upgrading operations.

“Taxpayers are venturing into uncertain territory in 2026,” Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center, said in a recent report. They “might want to lower their expectations and prepare for unanswered phone calls to the IRS and delays in tax refunds, given these ingredients for a problem-prone filing season.”

Budget legislation now before Congress would reduce IRS funding and deal “another blow to a tax system that has already been deeply wounded over the last year,” Chye-Ching Huang, executive director at the Tax Law Center at New York University’s law school, said Monday in a blog post.

Planned reductions in funding for IRS enforcement “will reward tax cheats and fraudsters who organize schemes to defraud the government and scam taxpayers who do follow the law,” she said.

Wrongdoers widened the tax gap — or the difference between taxes owed and taxes paid voluntarily and on time — to $696 billion in 2022, according to the advisory council. The gap is more than twice the $326 billion in federal spending last year for veterans benefits.

The tax gap “results in higher borrowing costs for all Americans as government borrowing puts upward pressure on borrowing costs throughout the economy,” the council said. “Ultimately, the tax gap shifts the burden of unpaid taxes onto the shoulders of compliant taxpayers.”