President Donald Trump signed a government funding compromise on February 3 that locks in substantial cuts to IRS funding.
The spending agreement was completed after a partial three-day government shutdown that did not affect the IRS. The IRS declined to furlough any employees and remained fully staffed until the legislation was signed.
The deal settles government funding through September 30, 2026, except for the Department of Homeland Security (DHS). DHS funding is now set to expire on February 13. A suspension of DHS funding is possible if Democrats and Republicans cannot agree on an extension, but it would not affect the IRS or other agencies.
The completion of the appropriations process leaves the IRS with major challenges and affects the outlook for tax legislation.
IRS Funding
The spending agreement provides $11.2 billion for the IRS for fiscal year 2026, down $1.1 billion from the $12.3 billion the agency received in 2025. The legislation also rescinds $11.7 billion of the approximately $20.7 billion left of the special funding allocation from the Inflation Reduction Act (IRA).
The funding cuts could present challenges as the IRS looks to implement the One Big Beautiful Bill Act (OBBBA) and manage the filing season. The National Taxpayer Advocate released an annual report last week warning of a potentially difficult filing season and noting that the IRS has lowered its phone service goals. The IRS also announced leadership changes at the agency, including naming Jaron Koopman both chief compliance officer and head of criminal investigations. David Borden was named head of the Office of Appeals, which lost a substantial number of employees last year.
Funding cuts, job losses, and OBBBA implementation demands could disrupt the filing season. Taxpayers should take steps to verify that payments and returns are free of issues that could create delays and should be prepared to quickly respond to any IRS correspondence. Taxpayers should also consider the impact of recent Post Office changes on the “mailbox rule” and the IRS’s transition to electronic payments.
Tax Legislative Outlook
Some lawmakers were hoping to use the government funding bills as potential vehicles to move unfinished tax priorities. But efforts to attach provisions reversing a limit on deducting gambling losses under the OBBBA and conferring tax treaty-like benefits to Taiwan failed to gain traction due to the delicate spending negotiations.
There are very few must-pass legislative vehicles expected this year that could carry tax provisions. Other tax legislative priorities include addressing tax administrative and retirement tax issues and extending the work opportunity tax credit (WOTC), the seven-year recovery period for motorsports complexes, and expensing for film, television, and theatrical productions, all of which expired at the end of 2025.
Tax “extenders” have typically been a year-end exercise, and Congress has often waited to extend the provisions retroactively up to a year or more after they expired. Taxpayers that would benefit from a retroactive extension should continue to track and retain the information needed to claim the incentives. Taxpayers who historically claim a WOTC should also consider continuing to submit the necessary documentation to state workforce agencies even if the forms are not currently being processed.
Healthcare Negotiations and Reconciliation
A bipartisan healthcare bill could also serve as a potential vehicle for other tax provisions, but prospects for an agreement are dimming. Sen. Bernie Moreno, R-OH, sent Democrats a new offer last week that was not received well.
“My sense is that we’re 90% this is not going to happen,” he told reporters.
Republicans could pivot to a party-line reconciliation bill, though healthcare remains a divisive issue for the party. Republicans have also floated using reconciliation to issue a “tariff dividend,” or address housing costs. President Trump’s recent comments on housing have been aimed at the cap on the exclusion from income of gain from selling a principal residence, the ability of private equity to buy single-family homes, and the disparity in the ability to deduct depreciation between individual homeowners and investors.
President Trump and Senate Republicans have so far been cool to the idea of another reconciliation bill, though it has more support among House Republicans. Republicans would need to first pass a budget resolution to make reconciliation possible.