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.

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."

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.

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.