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 because the agency was allotted $80 billion in the Inflation Reduction Act (IRA). (That amount dropped about $20 billion due to a prior 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 up for the IRS tax filing service. And given Republican control of the White House and Congress next year, it's hard to say what will happen to the program in the future.

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 has been 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 December 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 was averted.

• The next key funding deadline is December 20, 2024, for lawmakers on Capitol Hill to reach a continuing resolution to fund the government.
• Lawmakers reportedly believe a shutdown can be avoided since a stopgap passed the House of Representatives Friday evening.

Debt limit debate

What helped derail the initial government funding deal? President-elect Donald Trump and tech mogul Elon Musk made statements on social media.

Musk, who posted numerous times about the funding bill on his platform X (formerly Twitter), stated, "This bill should not pass." He also warned: "Any member of the House or Senate who votes for this outrageous spending bill deserves to be voted out in 2 years!"

Their effort effectively killed the first bipartisan stopgap measure that contained about $100 billion in disaster relief before it could reach a vote. Now, Congress is considering a new version of the stopgap bill.

Reportedly, Trump, who is not yet in office, wanted to increase the debt limit before his inauguration.

Posting on his social media platform, Truth Social, Trump stated, "If there is going to be a shutdown of government, let it begin now," apparently expressing a desire to shift the blame for a shutdown to the Biden administration.

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, it was assumed that the IRS would function as usual during a government shutdown, as its operations could be sustained through IRA funding.

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

Last year, the U.S. Treasury Department released an Internal Revenue Service contingency plan. Under that 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.”

Note: This story has been updated to reflect recent developments.

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