The IRS has furloughed nearly half of its employees after updating its government shutdown contingency plan last week, and the agency is now set to permanently lose nearly 1,500 employees as the administration pushes broad reductions in force. The moves could freeze audit activity, slow down new guidance, and create processing backlogs.
With the government shutdown showing no signs of an imminent resolution, the administration moved to make good on threats to pursue job cuts across the government. Office of Management and Budget (OMB) Director Russ Vought posted on social media on October 10 that reductions in force (RIFs) had begun, and 1,300 layoff notices have reportedly gone to Treasury employees. The new RIFs come in addition to approximately 25,000 in IRS job cuts earlier this year, and will compound the effects of the IRS furloughs.
The furloughs began on October 8 after the IRS’s original shutdown contingency plan expired. The original plan used Inflation Reduction Act (IRA) funding to maintain normal operations without furloughing any employees, but covered only the first five days of the shutdown. Under a new plan released October 8, the IRS furloughed nearly 35,000 of its 74,299 employees. The 39,870 employees who remain working will be paid out of IRA funds, which exceeded $22 billion as of June 30.
The new shutdown plan states that it is effective through April 30, 2026, but the administration could update it at any time. The remaining IRA funding is approximately double the IRS’s annual appropriations and would be sufficient to maintain full activities over a prolonged shutdown.
The furloughs could be very disruptive to IRS activity as it works on guidance to implement the One Big Beautiful Bill Act (OBBBA) and prepares for the upcoming filing season. The 35-day shutdown from December 2018 to January 2019 created significant IRS backlogs, including Taxpayer Advocate Service (TAS) cases, exempt organization applications, and correspondence cases.
The IRS will keep 24,470 employees in taxpayer services working during the shutdown, but is furloughing 74% of employees in the Large Business and International division and 67% in the Small Business/Self-Employed division. The IRS is expected to suspend the examinations and appeals functions, as well as TAS cases and most correspondence activity.
BDO Takeaway
The furloughs are likely to affect IRS correspondence across a variety of functions. Taxpayers should consider expediting IRS interactions that will require a response, as backlogs in correspondence will continue to grow if the shutdown persists.
Shutdown Outlook
The gridlock over government funding shows no obvious signs of abating. Senate Democrats have continued to vote down the House-passed “clean” continuing resolution that would fund the government through November 21. Only three Senate Democrats have voted with Republicans to support the resolution, leaving them five votes short (Sen. Rand Paul, R-Ky., has joined Democrats in opposing the measure). Senate Republicans plan to keep forcing votes on the issue, while House Speaker Mike Johnson, R-La., has indicated the House may stay out of session for the duration of the shutdown.
The standoff is centered around enhanced premium credits for the Affordable Care Act, which are scheduled to expire at the end of the year. Democrats want to extend them as part of any spending agreement. Some Republicans have expressed openness to an extension in some form, but leadership is generally refusing to negotiate until Democrats allow the government to reopen.
Several pressure points have so far done nothing to soften stances. Active-duty military personnel were scheduled to miss their first paycheck on October 15, but the administration announced it would continue to pay them out of funds outside the annual appropriation process. The OMB RIFs appear not to have cut into Democratic resolve, but it’s possible deeper cuts could be coming. Missed paychecks for other government employees on October 15 could take their toll, and the impact of the shutdown on other government functions like air travel could also ratchet up the pressure.
Despite the tough stances, there are some nascent indications of openness that could eventually lead to a resolution. President Donald Trump has appeared at times willing to negotiate on the ACA credits. “We have a negotiation going on right now with the Democrats that could lead to very good things, and I’m talking about good things with regard to health care,” Trump said in comments in the Oval Office on October 6. “If we made the right deal, I’d make a deal, sure.”
In Congress, Rep. Marjorie Taylor Greene, R-Ga., has expressed support for the credits, while Sen. Susan Collins, R-Maine, is reportedly trying to find a bipartisan solution. Some Republicans have hinted at promising a vote on the ACA credits, while several centrists have floated a one-year extension. Democratic leadership have said neither of those options goes far enough, but stances could change as pressure increases. Some senators have also floated moving individual appropriations bills in the Senate to try and reopen parts of the government. Small bipartisan groups of lawmakers in both the House and the Senate have held discussions on other potential spending compromises.
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BDO Takeaway
The resolution of the spending fight remains key to any year-end tax legislation. A year-long appropriations vehicle is seen as a potential vehicle for bipartisan tax priorities, which include the work opportunity tax credit, the seven-year recovery period for motorsports entertainment complexes, expensing for film and other productions, tax administration provisions, digital asset reform, reversing an OBBBA change to the gambling deduction, passing retirement tax incentives, and conferring tax treaty-like benefits on Taiwan.