IRS staffing, budget cuts threaten 2026 filing season, taxpayer advocate says

The IRS had “one of the most successful filing seasons in recent history” in 2025, but the 2026 season is at risk because of job losses and funding cuts, the national taxpayer advocate (NTA) said Wednesday in a midyear report to Congress.

As of June, the IRS workforce had decreased by over 25% to fewer than 76,000 from the 102,000 employees at the agency at the start of the filing season, NTA Erin Collins said in the Fiscal Year 2026 Objectives Report to Congress. The figure takes into account employees who accepted an early resignation offer but remain on the rolls through Sept. 30, the report said.

And the administration’s budget proposal recommends a 20% reduction in appropriated IRS funding next year or 37% when the decrease in supplemental funding from the Inflation Reduction Act is added, she said.

“A reduction of that magnitude is likely to impact taxpayers and potentially the revenue collected,” Collins wrote, noting in the preface to the report from the Taxpayer Advocate Service (TAS) office that the IRS collects about $5 trillion annually from individuals and businesses.

Taxpayer Services, which processes tax returns, answers taxpayer calls, and processes taxpayer correspondence, lost over 21% of its workforce, she said.

“As the name implies, it is responsible for the heaviest lift of serving taxpayers,” she wrote. Collins recommended that the Trump administration lift the hiring freeze and provide direct hire authority in Taxpayer Services so that it can hire essential filing-season employees to meet taxpayer needs early in 2026.

“And if that happens, it is critical the IRS hire them by the end of summer so it can onboard them, provide them with adequate training, and ensure they are prepared to assist taxpayers when the 2026 filing season begins in January,” she wrote.” Especially in the short term, the number of total IRS employees is less important than the number of trained IRS employees.”

2025 filing season

The IRS processed about 138 million of the nearly 141 million individual income tax returns that it received in the 2025 filing season. Over 95% were filed electronically, and about 62% resulted in refunds.

“This year marked its third consecutive year of delivering a generally successful filing season, and by some measures, it was the smoothest yet,” the report said. “Most taxpayers filed their returns and paid their taxes or received their refunds without any delays or intervention from the IRS.”

The IRS received 38.6 million calls, of which 12.4 million, or 32%, were answered by an IRS employee, the report said. That equates to a 70% level of service (LOS), which reflects service only on account management lines.

The LOS does not include the experience of taxpayers who call non-account management lines, including compliance-related lines or other parts of the IRS. It also does not include calls sent to automation and calls that are dropped before they reach a queue.

The report indicates a concern for phone service in the upcoming filing season.

“Typically, the IRS receives more calls in years following significant changes in the tax law,” the report said. “If Congress enacts the One Big Beautiful Bill Act as drafted, several provisions will retroactively affect the 2025 tax year, thus impacting millions of taxpayers and requiring the IRS to quickly update tax year 2025 tax forms and programming for the 2026 filing season. With new legislation, the IRS is likely to receive a higher volume of calls, so it may need more employees, in addition to improved digital tools, to maintain this year’s LOS next year.”

Other issues highlighted in the report include:

Employee retention credit

The IRS has a backlog of about 1.4 million claims for the pandemic-era employee retention credit (ERC) that have been submitted but not paid, Collins said. If the IRS continues processing ERC claims at the present rate, it should finish by the end of 2025, she said.

The IRS has received nearly 5 million ERC claims and has either disallowed, reversed, or recaptured about 214,000, Collins said.

Communication with businesses whose claims were fully or partially disallowed has been unclear, the report said. Specifically, the IRS has not included information about how to appeal and little information about the reason for the disallowance. The IRS tried to fix those problems with web pages that provide the information, but that happened after the problems arose, she said.

“Sadly, the ERC program serves as a cautionary example of poor tax credit administration, marked by excessive processing delays, opaque communications, and insufficient taxpayer support, from enactment through the expiration of the statute,” Collins said. “Many businesses awaiting a refund now face the potential for retroactive congressional limitation on the credit despite believing they were eligible at the time they claimed the credit. Retroactive tax law changes threaten to undermine taxpayer confidence and fairness.”

Identity theft

The IRS’s resolution of identity theft cases “continues at a glacial pace,” Collins said.

One type of identity theft case involves returns that the IRS flags as potentially fraudulent. To resolve these cases, the taxpayer must authenticate their identity to receive a refund. The IRS typically resolves these cases in several months.

The second category generally involves cases where a thief has stolen a taxpayer’s identity and filed a tax return using the legitimate taxpayer’s name and Social Security number. As of the end of the filing season, the IRS had about 387,000 of these cases, which were taking about 20 months to resolve.

“We found these delays disproportionately affect vulnerable populations dependent on their refunds to meet basic living expenses,” she said, noting that in fiscal year 2023, 69% of affected taxpayers had adjusted gross incomes at or below 250% of the federal poverty level.

While IRS leadership has said that reducing the wait time to resolve identity theft cases, the wait remains “unacceptably long,” Collins said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.