Dive Brief:

• The IRS halted most of its operations on Wednesday and furloughed all but its most essential employees after drawing down unused funding that enabled it to function a week beyond the start of a federal government shutdown.
• The agency gave employees not exempted from the furlough four hours to wrap up work, including updating their out-of-office email and voice mail, according to an agency-wide memo from Acting IRS Human Capital Officer David Traynor. He did not identify the roles of staff exempt from the furlough.
• The IRS operated a week longer than other federal agencies by tapping funds provided for upgrading technology and rebuilding the workforce under the Inflation Reduction Act of 2022. IRS staff will receive pay by Oct. 16 for work before the shutdown, Traynor said in a generic letter for employee creditors, adding “we cannot predict when pay may resume.”

Dive Insight:

The IRS wound down all but its most vital operations just a week after the Treasury Inspector General for Tax Administration warned that sweeping cuts to the agency’s payroll this year may impair efforts to process returns during the coming tax season.

Trump administration reductions in the federal workforce slashed staff in IRS departments that manage tax filing by as much as 19%, according to a TIGTA report.

The department that processes the submission of tax forms laid off 1,930 employees even though the agency will need to move unprocessed forms from last year into the 2026 filing season, TIGTA said.

“This could result in delays in taxpayers receiving refunds, which can result in the IRS paying interest,” TIGTA said.

An 18% staff reduction in the department that detects fraud may mean the IRS fails to avert illegitimate refunds totaling $360 million, TIGTA said.

Also, in order to meet White House workforce mandates, the IRS during the first half of this year cut headcount in the department that handles taxpayer telephone and mail contacts, as well as adjustments to tax accounts and amendments to tax returns. Staff reductions totaled 4,147, or 17% of the department total.

In August, however, the IRS began hiring an estimated 3,500 new employees in order to achieve an acceptable level of telephone service to taxpayers, TIGTA said.

Staff cuts have slowed the pace of work. The number of tax returns requiring adjustments in the new tax year may swell to about 6 million, or 2 million more than during the pandemic, according to TIGTA.

“The IRS will need to hire additional staff for the 2026 filing season to process paper-filed tax returns if it is unable to scan and electronically process all paper-filed Forms 940, 941, and 1040, as it expects,” TIGTA said.

“However, most IRS functions remain under an indefinite hiring freeze and the opportunity to hire and train the people it would need for the 2026 filing season is quickly closing,” according to TIGTA.