Jessica I. Marschall, CPA October 28th, 2025
The IRS is entering the 2026 fiscal year under a confluence of severe operational stress, adding complexity and risk for both individual and business taxpayers. The recent Treasury Inspector General for Tax Administration (TIGTA) Major Management Challenges for FY 2026 report and press coverage in sources such as Accounting Today paint a clear picture of mounting deficiencies across staffing, technology, taxpayer service and compliance.
Below is a detailed breakdown of the key challenges, and what they mean for your tax-planning and compliance strategy going forward.
Key Operational Challenges
1. Dramatic Workforce Reductions
Between January and May 2025, the IRS workforce shrank from approximately 103,000 to 77,000 — a reduction of roughly 25%. U.S. Treasury Inspector General for Tax Administration U.S. Treasury Inspector General for Tax Administration
The Information Technology (IT) function lost 25% of its personnel as of May 2025; the Return Integrity & Compliance Services unit (fraud prevention) lost 18% of staff. Accounting Today U.S. Treasury Inspector General for Tax Administration
These reductions impair the IRS’s ability to process returns, respond to taxpayer inquiries, deploy system updates and guard against fraud.
2. Funding and Budget Pressures
Although the Inflation Reduction Act (IRA) initially provided the IRS with $79.4 billion in supplemental funding, Congress subsequently reduced this amount to $37.6 billion. U.S. Treasury Inspector General for Tax Administration
The proposed FY 2026 budget would reduce the IRS’s annual funding by approximately 20%. U.S. Treasury Inspector General for Tax Administration
According to TIGTA, if the agency is required to reduce staffing further, many oversight and compliance functions will be significantly impaired. U.S. Treasury Inspector General for Tax Administration
3. Technology & Legacy Systems Risks
The IRS continues to rely on more than 700 business systems, many of which have been identified as requiring replacement. The agency spent over $39 million in FY 2024 to maintain 20 of these legacy systems alone. U.S. Treasury Inspector General for Tax Administration
Inadequate staffing in IT functions slows critical updates: for example, tax-law changes such as those stemming from the One Big Beautiful Bill Act must be programmed into IRS systems ahead of the filing season, but the manpower needed to do this is dwindling. Accounting Today U.S. Treasury Inspector General for Tax Administration
4. Taxpayer Service & Rights Under Stress
Taxpayer Services staffing has been reduced by about 22%, with over 9,000 employees departing by June 2025. Internal Revenue Service The Tax Adviser
TIGTA warns of growing risk that taxpayers will face delays, reduced access to help lines, longer correspondence response times and potential errors in processing.
At the same time, complex tax law changes such as the One Big Beautiful Bill Act (signed into law on July 4, 2025) increase the burden on both taxpayers and the IRS to interpret, communicate and enforce new rules properly. H&R Block
5. Fraud/Refund Risk and Compliance Gaps
The Return Integrity & Compliance unit monitors fraudulent refund claims and erroneous credits. With the staffing reductions, TIGTA estimates nearly $360 million in fraudulent refunds may go undetected in 2026. Accounting Today
Enforcement of high-income taxpayer audits appears to be shrinking: audit rates for high-net-worth individuals and corporations are under strain due to staffing and funding limits.
Implications for Taxpayers & Advisors
For Business-Owners and High-Net-Worth Individuals
- Expect more lag: Tax return processing, refund issuance and correspondence are likely to slow. Plan for longer timelines for audits, responses and account adjustments.
- Documentation matters more than ever: With fewer staff reviewing cases, having clean records, comprehensive documentation and clear internal controls is critical.
- Enforcement risk remains real: Even though audit volumes may drop, the IRS may shift to higher-value cases or automated tools — so high-risk positions (e.g., complex transactions, large credits) still face scrutiny.
- Technology risk: With a backlog of system updates and tax-law changes (e.g., OBBBA), tax processing errors and taxpayer confusion are more likely. Clients should file conservatively, seek clarity and avoid aggressive positions where IRS law/guidance remains unsettled.
For Individual Taxpayers
- Service access may decline: Longer hold times for calls, delays in correspondence, fewer in-person services. Consider digital self-service tools and plan ahead.
- Refund timing may slip: Especially if there are complexities, amended returns, or identity verification issues.
- Be proactive with audits: Expect slower response times. Respond promptly and electronically where possible; don’t rely on fast resolution.
For Tax Advisors
- Advise clients on filing timing: Consider early filing (within comfort zone) to avoid late-season complications.
- Encourage digital communication: Use IRS online account tools, Document Upload, and e-signature channels; manual mail and paper processes will be slower.
- Review risk-positions with a higher bar: Given IRS technological/operational lag, clients with aggressive positions should evaluate whether the timing of filing is appropriate.
- Document intent and process: With IRS staffing thin, clear workpapers detailing client decisions, risk assessments and tax positions will be key in execution and possible review.
- Stay updated on IRS guidance delays: The IRS’s capacity to issue timely regulations and guidance is strained — that means ambiguities will persist longer. Advisors should factor this uncertainty into planning.
Watch-Points Through 2026
- Hiring trends – Are new hires in Taxpayer Services, IT and compliance actually slowing the exodus? If not, service burdens will worsen.
- Budget/Appropriation outcomes – A ~20% budget cut is on the table for FY 2026; outcome will materially affect operations.
- System updates – Will the IRS retire key legacy systems or deploy automation/AI in time for the 2026 filing season? Progress is slow.
- Tax-law change implementation – Major bills such as the OBBBA increase complexity; the IRS’s ability to integrate those into returns, forms and compliance is constrained.
- Fraud/identity-theft risk – With reduced staff, taxpayer-identity verification and refund reviews may face gaps; tax professionals must tighten client processes.
Conclusion
The IRS is navigating a precarious period: steep workforce reductions, budget cuts, aging technology infrastructure and mounting tax-law complexity all converge. For taxpayers and advisors, this means longer wait times, higher likelihood of processing errors or delays, and greater value in proactive, well-documented tax planning.
While some enforcement focus may soften, the risks of audit exposure, errors in processing, and taxpayer-service failures persist and, in some areas, are rising. For business-owners and high-net-worth clients, the spotlight should be on risk management, documentation readiness, timing decisions and conservative positions.
In short: now is the time to be vigilant, structured and anticipatory in tax planning, not reactive.
