The Internal Revenue Service has a long-standing reputation in the U.S. that is largely negative in nature. A simple internet search of the “IRS reputation” results in articles logging the challenges with timely processing and concerns with the quality of support provided by the agency. These issues, among others, have led many legislators and lobbyists to call for an overhaul of the organization. The Trump administration has echoed these sentiments and recently initiated efforts to shrink the IRS with a reduction in existing staff and a hiring freeze on new staff. Reports indicate its target is to reduce the existing 90,000-person workforce by as much as 50% in a short time frame. At first blush, cutting the size and staff of the IRS may be viewed as a welcome change. In reality, shrinking the IRS will have a direct impact on business owners and individual taxpayers alike that may create mixed reviews. Learn more about the key changes to expect from reducing the size of the IRS and how these cuts may impact you this year.
The Hiring Freeze
On President Donald Trump’s first day in office, he issued an executive order establishing a hiring freeze for all federal civilian employees. In essence, the order provided a 90-day moratorium on hiring while the administration crafted a plan to reduce the size of the federal government’s workforce. The IRS was the lone exception to this timeline, as the order stated the hiring freeze for the IRS shall remain in effect “until the Secretary of the Treasury, in consultation with the Director of OMB and the Administrator of USDS, determines that it is in the national interest to lift the freeze.” In short, the IRS hiring freeze remains in force indefinitely.
Beyond the freeze on new hires, the IRS also laid off over 6,000 probationary employees who had been employed for less than two years. Further layoffs are expected as the administration requires the agency to draft a workforce reduction plan.
The Good: Less IRS Auditors
The hiring freeze is particularly impactful in light of the planned increase in audit personnel by the IRS. In January 2023, the Biden administration passed the Inflation Reduction Act that provided $80 billion in new funding to the agency. A portion of this funding was earmarked to add significantly more auditors to the IRS workforce, resulting in a higher percentage of taxpayers who would be subjected to audits. This increase was met with major concern by conservative legislators and taxpayers alike. The hiring freeze served to calm the concerns that more audits would be completed by the IRS. In supporting the executive order, Jason Smith, Ways and Means Committee Chair stated, “President Trump’s cease-and-desist order to the IRS is a crucial first step to helping middle-class Americans and small businesses living in fear of 87,000 new IRS agents targeting them with new audits and monitoring their personal transactions.”
Small business owners are one of the key groups impacted by Trump’s pause on expanding the workforce at the IRS. The new auditors’ planned focus would put small business owners taxed as S Corporations squarely in the crosshairs for additional review and enforcement. The agency planned to focus on income levels at or above $400,000, which would impact a significant number of small businesses and result in a higher frequency of audits for their owners. The hiring freeze serves as good news to business owners and high-income-earning individual taxpayers who can now breathe a sigh of relief that their audit risk remains unchanged from prior years.
The Bad: Slower Tax Return Processing
An IRS workforce reduction during the tax filing season is expected to result in delays in the processing of tax returns and their resulting refunds. In the 2024 filing season, the IRS reported nearly 79% of all tax returns were filed electronically. The IRS notes that e-filed returns should only see modest impacts from the reduction in workforce. In contrast, nearly 57 million tax returns were filed on paper last year. The typical processing timeline for paper-filed returns is six to eight weeks. This timeline is expected to more than double in the current tax season as a result of the workforce reduction.
Democratic legislators have been highly critical of the planned workforce reduction noting it will have a negative impact on taxpayers. Democratic committee members, led by Ron Wyden of the Senate Finance Committee, said in a letter to the Trump administration, “Americans need the IRS to be fully staffed with employees who can answer their questions, process their returns, send them refunds, and keep IRS systems online and functional. It is nearly inevitable that this hiring freeze, compounded by layoffs and further reductions in staff mandated as a result of Elon Musk’s unprecedented power grab, will delay refunds and degrade taxpayer service.”
Statistics published by the IRS on processing timelines show that current-year return processing remains on track with the pace of prior years. However, the agency reports its work on prior year returns and amendments have been backlogged over six months. This lag is greater than typical and has declined from the 4-month lag reported by the IRS in January. Processing delays like this declined to over 12 months during the pandemic, and many have concerns that the workforce reduction will result in even greater backlogs than in 2020. This sentiment is echoed by John Koskinen, a former IRS commissioner. In response to the planned workforce reduction, he stated, “A reduction in force of tens of thousands of employees would render the IRS “dysfunctional.”
This is bad news for tax filers who file their tax returns on paper and may experience significant delays in their return processing. Plus, any prior year filings that are unprocessed will continue to experience delays, resulting in billions of dollars in delayed refunds and credits that remain incomplete.
The Ugly: Adding Insult To Injury
The IRS was already underperforming due to its difficulty with hiring and retaining employees, and the workforce reduction is expected to further downgrade the agency’s performance. Each year the NTA reports on the top 10 problems reported by taxpayers in their interactions with the IRS. Its 2024 Annual Report reported on matters of concern with the IRS before the executive order. The report noted the most serious problems encountered by taxpayers are attributed to IRS processing delays of the Employee Retention Credit, current and prior year return processing, and the gaps in quality service provided by the IRS. The report noted the following key findings:
- The IRS’s average processing time for ERC claims is now more than a year. An estimated $10 billion in refunds due to business owners are unprocessed.
- Only 32% of callers reached an IRS employee during the 2024 filing season. An estimated 68% of calls to the IRS went unanswered.
- Approximately 739,000 taxpayers were still waiting for the IRS to unfreeze their refund due to potential frivolous credits, many of which likely resulted from tax scams or schemes. An estimated $3.7 billion in refunds are frozen.
- IRS customer service representative positions are understaffed. Attrition for this position was 24% and 19% in fiscal years 2023 and 2024, respectively. Plus, 63% of the IRS workforce is eligible to retire within six years, resulting in a massive staff shortfall in the years ahead.
The ugly news is that these issues will likely be exacerbated by the IRS’s workforce reduction, and the financial impact on business owners and individual taxpayers will be compounded.
Lessening The Impact
While the complete effects of the hiring freeze and workforce reduction are not certain, it is inevitable that small businesses and individual taxpayers will be impacted. Here are three key things you can do to minimize the impact for you and your household.
File Your Tax Returns Electronically
The IRS accepts e-filed returns for the current year and up to two prior years. Additionally, you can electronically file an amendment to your current year or prior two years’ returns. Electronically filed returns and amendments will not experience significant delays as a result of the changes at the IRS, and ensure your filings are processed timely.
Utilize The National Taxpayer Advocate
The NTA is an independent division of the IRS and works on behalf of taxpayers to ensure their tax matters are resolved. Advocates can help address your questions in the absence of the availability of IRS customer service representatives and can guide you through resolving tax matters.
Utilize A Tax Professional
Working independently with the IRS does not always serve the best interest of the taxpayer who may not be well informed on tax rules and regulations. A CPA can provide the support you need to ensure your tax matter is resolved and you avoid costly mistakes that could result in significant delays.
What’s Next?
While the timing and extent of the IRS’s shrinking efforts remain unknown, it is important for small business owners and individual taxpayers to be proactive and protect themselves from the inevitable impacts of the expected changes.
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