What Would a Government Shutdown Do to the IRS?

As happened earlier this fall, the possibility of a November government shutdown spotlighted several federal agencies, including the Internal Revenue Service, and raised questions about what services might be impacted. (More on that below.)

But 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 earlier this 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 a January 2024 pilot planned for a tax prep and filing service where taxpayers would file their federal tax returns directly with the agency — for free. Thirteen states have signed on 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, recently announcing a moratorium on processing new ERC tax credit claims. The IRS 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.

On the other hand, the IRS has come under fire for significant missteps this year, 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 agency also recently couldn’t 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.

2023 government shutdown

Before looking at the specifics of the IRS contingency plan, it's important to note that a government shutdown has been averted for now. President Biden signed the stopgap bill in September that keeps the federal government funded until this Friday, Nov. 17. 

• The deadline is Nov. 17 for lawmakers on Capitol Hill to have a continuing resolution (CR) to fund the government. Without the CR, the government would have shut down at 12:01 a.m. on Nov 18.
• However, due to the narrow majority and political divisions among Republicans in the U.S. House of Representatives, the chances of reaching an agreement before the deadline seemed to decrease with each passing day.
• Late last week, new House Speaker Mike Johnson (R-La.) proposed a tiered CR that would fund certain agencies in the government through different dates. (So, certain agencies would be funded through Jan. 19 and others through Feb. 2.) Some House Republications expressed opposition to the approach, which nevertheless passed the House on Nov. 15 with bipartisan support.
• The CR will head to the U.S. Senate, where it is expected to pass and then to President Biden's desk to be signed and enacted.  

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 may have to partially shut down, and potentially furlough thousands of its employees.

Earlier this 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 newly released. But in any case, it's hard to know exactly how the IRS would implement its contingency plan and how that might or might not impact you — and your taxes.

Related Content

• IRS Won't Process New ERC Tax Credit Claims for 2023
• How a Government Shutdown Could Affect You
• IRS $80B Plan Targets Taxpayer Compliance, Improved Service