IRS Shutters More Functions as Shutdown Drags On

The IRS has posted new information on its shutdown operations, indicating that business refunds could be significantly delayed as the stalemate over government funding continues.

The IRS said in its announcement that it will not process any refunds except those arising from electronically filed error-free Form 1040 returns that can be automatically processed and direct deposited. Refunds from corporate business returns filed before the October 15 filing deadline could see significant delays depending on how long the shutdown continues and how big the backlog becomes.

The IRS also indicated the following: 

• Any payments and remittances received either electronically or by mail will be accepted and processed.
• Limited live IRS telephone customer service assistance will be available, but most automated toll-free telephone applications will remain operational. 
• All appointments with Appeals and Taxpayer Advocate services are cancelled, and IRS personnel will reschedule meetings when the government reopens.  
  
  

The shutdown is compounding challenges the IRS was already facing after losing a quarter of its workforce over the past year. The Treasury inspector General for Tax Administration said in its annual report released on October 27 that “providing quality service to taxpayers, and enforcing tax laws with a reduced workforce and budget will be challenging for the IRS.”

OBBBA Guidance

The government shutdown could affect the timing for issuing guidance on the One Big Beautiful Bill Act (OBBBA). New Treasury Assistant Secretary for Tax Policy Kenneth Kies acknowledged the challenge in comments last week: “Yes, there are some people who have been furloughed; we have a plan once they come back to catch up with what has slipped,” he said. “We are very keenly focused on getting the guidance out.”

The IRS’s top OBBBA guidance priorities include the following areas:

• New material assistance and foreign entity of concern rules for energy credits
• Expensing for qualified production property under new Section 168(n)
• Transitional reporting rules for overtime and tip income
• Elimination of the one-month deferral election under Section 898
• Exclusion from the foreign-derived deduction-eligible income for certain transfers of tangible and intangible property after June 16, 2025
• Transition rules for the new pro rata share rules for certain dividends paid by a controlled foreign corporation on or before June 28, 2025
• The application of the 10% foreign tax credit haircut to previously taxed income for certain amounts distributed after June 28, 2025
  
  

Government Shutdown Outlook

The current government shutdown is already the second longest in history, but new pressure points are emerging that could move lawmakers toward a resolution:

• ACA open enrollment begins on November 1 for most states.
• Treasury Secretary Scott Bessent said on “Meet the Press” that the funding being used to pay military salaries will run out by November 15, though he has come under pressure to find other funding mechanisms.
• Funding for SNAP food assistance will run out on November 1, but there is pressure to identify funding sources to allow benefits to continue.
• The largest union representing federal employees, the American Federation of Government Employees, put out a statement on October 27 telling lawmakers to immediately pass the “clean” continuing resolution.
  
  

So far, the pressure has not changed the Democratic stance. Senate Democrats blocked the House-passed continuing resolution to fund the government for the 13th time on October 28, with Republicans picking up no new Democratic votes. Democrats also blocked legislation to pay essential employees during the shutdown on Oct. 16, instead offering legislation rejected by Republicans that would have paid all government employees. Two additional Democrats voted for the bill to pay essential employees, bringing the total number of Democrats to vote for any Republican spending bill during the shutdown to five.

Senate Majority Leader John Thune, R-S.D., has openly discussed potential votes on narrow spending bills to pay the military and air traffic controllers. Some Republicans are opposed to the votes, arguing that they would relieve pressure on Democrats to pass the continuing resolution.

The House still has not returned to session since the shutdown began, but discussions are ongoing over the need to return at some point to pass a longer continuing resolution. The current clean resolution would fund the government only through November 21. Republicans have discussed extending funding through the end of the calendar year or even until after the midterms in 2026. A full-year continuing resolution would be a major blow to appropriators from both parties. 

Some Republicans have also floated the idea of using the reconciliation process to address health care after the shutdown is resolved. Republicans are deeply divided over health care and the ACA credits, with some fiercely opposed and others supporting working with Democrats on the issue. Thirteen Republican House members wrote to House Speaker Mike Johnson, R-La., last week urging him to extend the enhanced ACA credits, but only after Democrats agree to reopen the government.