The IRS has maintained “normal” operations since the government shut down on October 1 but has not yet announced whether that will continue beyond the first five days covered by its initial contingency plan.
Government funding expired at midnight on September 30 after Republicans and Democrats failed to agree on a spending bill, and they appear no closer to an agreement with the shutdown now underway.
The IRS contingency plan covers only “actions and activities for the first five business days following a lapse in appropriations.” Under the plan, the IRS is using funds from its special allocation in the Inflation Reduction Act (IRA) to maintain normal operations without furloughing any employees. Nearly all the IRA funding for enforcement has been rescinded, but the IRS still has more than $20 billion of funding from other categories, according to the latest IRS release.
The five days covered by the contingency plan will end on Oct. 7 and the IRS has not yet announced whether it will furlough any employees beyond that date. The administration has broad discretion to maintain any operations with funding sources outside the appropriations process or to determine which employees and functions are “essential.” Without the special IRA allocation, any “essential” IRS employees who continue to work would generally not be paid until government funding is restored.
The IRS has already lost approximately a quarter of its workforce over the past year. Before resigning, former IRS Commissioner Billy Long said the IRS had no further plans for reductions. The agency has posted as many as 3,500 job listings for contact representatives after pushing out more than 5,000 earlier this year, and is also hiring for more than 60 chief counsel positions after rescinding offers and losing 350 attorneys over the last nine months. Bloomberg recently reported, however, that the IRS is once again offering deferred resignation to employees on administrative leave.
BDO Takeaway
Any long-term lapse in funding could be highly disruptive for taxpayers as the IRS 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. Taxpayers should consider accelerating actions that require live interaction or timely correspondence with IRS personnel.
Shutdown Outlook
It’s unclear how long the government funding standoff may continue. Republicans need at least seven Democratic votes in the Senate to reach the 60-vote threshold needed to pass a spending bill.
The House passed a “clean” continuing resolution to fund the government through November 21 in a 217-212 party-line vote on September 19. The resolution failed on the Senate floor that same day in a 44-48 vote (with one Democrat supporting and two Republicans opposing). It failed again in a second vote on the eve of the shutdown on September 30, this time by a 55-45 margin (with one Republican opposing and three Democrats supporting). A Democratic alternative also failed in the Senate on a 47-45 party line vote on September 19 and on a 47-53 party line vote on September 30.
The funding disagreement involves a constellation of complex political and policy issues. Republicans have accused Democrats of holding government funding hostage for unrelated policy demands. Democrats have accused Republicans of violating funding agreements through the rescission process and refusing to negotiate. Senate Minority Leader Chuck Schumer, D-N.Y., was criticized heavily for helping Republicans pass an extension of government funding in March while receiving little in return.
Democrats’ primary demand now appears to be an extension of the enhanced premium credits for the Affordable Care Act, which are scheduled to expire at the end of the year. There is some support in the Republican caucus for extending the credits in some form, but Senate Republican leadership wants to handle the issue separately.
President Trump has threatened to use the shutdown to impose broad reductions in the federal workforce. An OMB memo released before the shutdown instructed agencies to identify potential “reductions in force” for programs “not consistent with the President’s priorities.” Democrats largely dismissed the threats as a scare tactic, and no large reductions in force have been announced so far. It is unclear whether the IRS could be affected.
BDO Takeaway
The shutdown will affect the prospects for tax legislation this year. The longer the shutdown continues, the harder it will become to pass a bipartisan year-end tax bill. Tax legislation will become even more difficult if the ACA premium tax credits are addressed as part of a spending agreement. There are only a handful of tax provisions set to expire at the end of 2025, including the work opportunity tax credit, the seven-year recovery period for motorsports entertainment complexes, and expensing for film and other productions. Other bipartisan tax priorities appear even less urgent, and include 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. Taxpayers should not assume any of these issues will be addressed before the end of the year when considering tax planning strategies.
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