IRS Layoffs: Potential Tax Season Impacts
The Internal Revenue Service (IRS) has initiated significant layoffs as part of the Trump administration’s broader initiative to streamline federal operations under Elon Musk’s Department of Government Efficiency (DOGE). Roughly 7,000 IRS employees were laid off in February, coinciding with the tax filing season, with plans to cut its staff in half by the end of this year. This will leave the agency with its smallest workforce since the 1960s.
The cuts affect all IRS divisions through a combination of layoffs, attrition, and incentivized buyouts, and could have major ramifications across the board. Impacts could include longer wait times and return/refund processing delays. This reduction could also lead to an overall decrease in training across its workforce, resulting in weakened tax enforcement capabilities and fewer audits. Critics also argue that these cuts could decrease tax compliance, particularly among high-income individuals and corporations, resulting in an estimated $500 billion in uncollected tax revenue. Consequentially, this decrease would further drive the budget deficit and play a significant factor in future budget negotiations.
House Republicans have introduced a funding bill that retracts about $20 billion in IRS enforcement funding that was originally introduced by the Biden administration’s Inflation Reduction Act (IRA). Several senior IRS officials that were working to revamp the agency under the IRA have also voluntarily left, and William Paul, the agency’s top lawyer, was demoted and replaced by Andrew De Mello, a supporter of the DOGE initiatives. These organizational changes, coupled with large-scale cuts, leave the agency’s plans for future improvements grim.
In response to recent legal action, a court order mandated the immediate reinstatement of the 7,000 employees that were terminated. As of March 19, the federal government will pay the probationary employees but have to put them on administrative leave, asking them not to report to duty or perform any work until further guidance. On March 24, the Trump administration asked the Supreme Court to put a hold on this ruling. The Treasury has not yet provided a reorganization or reduction-in-force plan to the IRS.
Considering these changes and future uncertainty, we encourage our clients to take the following steps to reduce the risk of IRS delays and headaches:
- Electronically file all returns when possible. If you received an Identity Protection PIN (IP PIN) last year, please check your records and provide it to your CPA as soon as possible.
- Reduce tax payments by mail and utilize electronic payment options, such as EFTPS: The Electronic Federal Tax Payment System.
- Provide tax information to CPAs timely to avoid potential for future amendments.
By taking these proactive measures, clients can navigate the evolving landscape with confidence and minimize disruptions to their tax processes.
Tolleson Wealth Management is not a CPA Firm. This presentation has been prepared for informational purposes, does not contain a complete discussion on the U.S. federal, state, local or non-US tax considerations, and is not intended to provide and should not be relied on for tax advice. Please consult your tax consultant for more information on your individual circumstances.