What Would a Government Shutdown Do to the IRS?

As has happened numerous times in the past year, 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 to about $60 billion due to the debt limit deal reached last year.)

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 IRS also has launched a 2024 filing season pilot for 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. Taxpayers in twelve states may be eligible to participate in the Direct File pilot program.

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IRS tax concerns

The agency is cracking down on fraud and tax scams, having announced a moratorium on processing new ERC tax credit claims and processes for businesses to withdraw ERTC claims or return refunds already received. 

The IRS also wants to hire 3,700 new agents to audit complex returns. In addition to ramped-up enforcement efforts, the agency 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 is waiving nearly $1 billion in back tax penalties for certain taxpayers who didn't receive automated collection notices during the COVID-19 pandemic.

On the other hand, the agency has come under fire for significant recent 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 also could not account for millions of backup tax records, according to the TIGTA (Treasury Inspector General for Tax Administration), and mistakenly labeled 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 last government shutdown, feared for mid-March was averted. President Biden signed a stopgap bill that keeps the federal government funded for a while. 

• The next key funding deadline was March 22, 2024, for lawmakers on Capitol Hill to have a government funding agreement in place. 
• Congress came to terms on a deal that President Biden signed Saturday, March 23.

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 reports indicate that 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,— especially since there hasn't been a government shutdown during tax filing season. 

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

Related Content

• IRS Won't Process New ERC Tax Credit Claims
• How a Government Shutdown Could Affect You
• Tax Season is Here: Seven Big IRS Changes to Know Before You File
• IRS $80B Plan Targets Taxpayer Compliance, Improved Service