What Would a Government Shutdown Do to the IRS?

As has happened numerous times in recent years, the possibility of a government shutdown is spotlighting several federal agencies, including the IRS, and raising questions about what services might be impacted. (More on that below.) 

Now those questions are arising again, with talk of a possible temporary government shutdown if lawmakers don't reach a funding agreement in time.

Additionally, the IRS is already in the news, mainly due to being allotted $80 billion in the Inflation Reduction Act (IRA). (That amount will drop about $20 billion due to a recent debt limit deal.)

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After releasing a multibillion-dollar spending plan for the funding, the IRS launched new compliance initiatives focused on tax-evading millionaires, high earners, complex partnerships, and corporations. 

The tax agency has also launched Direct File, an IRS-run tax prep and filing service where some taxpayers can file their federal tax returns directly with the agency — for free. The agency says Direct File will be permanent beginning with the 2025 tax filing season, though not all states are signing onto the IRS tax filing service.

IRS tax concerns

The IRS is cracking down on fraud and tax scams while having eased its moratorium on processing new ERC tax credit claims and creating processes for businesses to voluntarily disclose troublesome ERC claims.

The agency also wants to hire 3,700 new agents to audit complex returns, though, as Kiplinger reported, the agency has hit some roadblocks partly due to a lack of interest in the accounting field. 

In addition to ramped-up enforcement efforts, the IRS has touted gains such as reduced processing times, faster tax refunds, shorter wait times for taxpayer phone assistance, and improvements with paperless processing.

And in an announcement that came at the end of last year, the IRS waived nearly $1 billion in back tax penalties for certain taxpayers who didn't receive automated collection notices during the pandemic.

On the other hand, the tax agency has come under fire for significant missteps, like allegedly violating taxpayer rights in some instances, back-dating documents in a conservation easement tax case, and auditing Black taxpayers at higher rates. The IRS is also struggling with the tax audit directive not to increase audit rates for those making less than $400,000 a year.

The IRS also could not account for millions of backup tax records, according to the TIGTA (Treasury Inspector General for Tax Administration), has no set plan to replace much of its legacy IT, and mistakenly labeled some living taxpayers as deceased.

So, a question was whether IRS enforcement activity and process improvement would halt if the federal government shut down. And what services would be shuttered? 

Here’s what you need to know.

Government shutdown 2024?

Before looking at the specifics of the IRS contingency plan, it's important to note that the latest government shutdown, feared for the beginning of October has been averted. 

• The next key funding deadline was October 1, 2024, for lawmakers on Capitol Hill to reach a continuing resolution to fund the government. 
• Lawmakers worked through a stopgap bill to keep the federal government funded for a while. 
• Per the resolution, Congress will fund the government through December 20, 2024.

What happens if the government shuts down?

In a government shutdown, most federal agencies and workers experience some impact. All "non-essential" work is forced to stop. However, federal agencies have backup plans, and essential services continue to function — at varying levels. For example, critical services like Social Security, Medicare, and Medicaid payments continue. 

Of course, anytime the federal government shuts down, significant impacts ripple throughout the U.S., affecting people across the U.S. in different ways.

President of the National Treasury Employees Union, Doreen Greenwald, has emphasized that “a government shutdown is not a harmless, DC drama. Federal employees in every American community will lose income, through no fault of their own and, in many cases, they will be locked out of doing the work they were hired to do for the American people,” Greenwald stated in a release.  

NTEU represents federal workers in 35 departments and agencies.

IRS contingency plan: Does the IRS close during a shutdown?

Initially, there was an assumption that the IRS would function as usual during a government shutdown, as its operations could be sustained through IRA funding. 

However, more recent reporting indicates the IRS would likely partially shut down and potentially furlough thousands of its employees. These actions would significantly impact agency operations.

Last year, the U.S. Treasury Department released an Internal Revenue Service contingency plan. Under the IRS plan, it appears that in the event of a shutdown:

• Most core tax administration activity would stop.
• Nearly 60,000 IRS employees could be furloughed.
• Some services could continue, supported by only about a third of the IRS workforce.

These are just a few aspects of the plan. But it's hard to know exactly how the IRS would implement its contingency plan and how that might impact you and your taxes. Luckily, there hasn't been a government shutdown during tax filing season. 

“We experienced shutdowns before,” IRS Commissioner Danny Werfel previously told reporters. “We have not experienced a shutdown in the middle of filing season, so there’s some uncertainty there.”  

Related Content

• Incorrect ERC? IRS Points to Five New Red Flags
• How a Government Shutdown Could Affect You
• IRS $80B Plan Targets Taxpayer Compliance, Improved Service