The recent government shutdown was unique because prior funding allowed many IRS employees to remain on the job. However, after a rough year and a 43-day pause for audits, appeals, many refunds, and more, the agency is facing backlogs and other challenges.
An ‘Exempt’ Shutdown, Not an ‘Excepted’ One
During the recent shutdown, a significant portion of the IRS workforce remained on the job with regular pay, explained EY’s Kirsten Wielobob. According to the October 18 iteration of the IRS’ Lapsed Appropriations Contingency Plan, 39,982 employees, or 53.8% of the agency’s workforce, were retained. This included all 3,001 Criminal Investigation (CI) employees, over 4,552 Information Technology (IT) employees, and 24,470 Taxpayer Services employees.
And whereas during past shutdowns, employees could only perform “excepted” tasks to protect life and property without pay, this shutdown saw many employees classified as “exempt,” Wielobob explained during a November 14 EY webinar. In addition, during prior shutdowns, “excepted” employees were not paid until the shutdown ended, said Wielobob.
Retaining and paying more IRS staff this time around was possible because their compensation was financed by a resource other than annual appropriations. Namely, part of the remaining Inflation Reduction Act funding “was used to keep certain functions of the IRS going during the shutdown,” explained KPMG’s Mary Slonina during the American Institute of CPA’s (AICPA) National Tax Conference on November 17.
OBBB Implementation Moved Forward, While Other Work Paused
While the IRS significantly curtailed its operations during the shutdown, work continued on several key priorities. The “biggies,” said Wielobob, were implementation of the One Big Beautiful Bill Act, as well as preparations for the 2026 filing season and modernization efforts. Among the other activities that continued during the shutdown were processing remittances and disaster relief transcripts, protecting short statutes of limitations, and limited live telephone customer service.
Many core functions, however, were paused. Notably, work was put on hold for tax refunds, other than electronically filed, error-free Forms 1040 with direct deposit, said Wielobob. Audits and non-automated collections were also paused, and Taxpayer Assistance Center (TAC) appointments were canceled. In addition, the IRS stopped processing and responding to most paper correspondence, Wielobob noted.
“Yes, we still had people working,” said Kostelanetz’ Melissa Wiley. “But it was only the essential people, and processing mail is not typically essential, other than pulling out those checks and cashing them.”
“The IRS has already been incredibly backed up due to its resource constraints,” Wiley added, speaking at the AICPA Tax Conference. “Closing the government for 40-something days did not help.”
The IRS Reopens
As the IRS returns to full operations, Wielobob explained that it must now address return and correspondence backlogs. She noted that after the 35-day shutdown in 2019, the IRS had 5 million pieces of unsorted mail.
The IRS also must reschedule canceled exams, Appeals hearings, and TAC appointments. Wielobob said that during the 2019 shutdown, 16,530 in-person TAC appointments were canceled. Also of note to the tax community – the Tax Court canceled three sessions during the recent shutdown which now must be rescheduled.
Another concern is IRS staff morale. While “shutdowns always impact employee morale,” said Wielobob, she worries the impacts of the most recent shutdown will be “greater.” Wiley went into further detail, noting this year’s staffing reductions across IRS units, travel budget restrictions, return-to-office mandates, and limits on conference participation.
Now that the government has reopened, employees need to “get back up to speed,” Wielobob said, but that could be challenging given the time of year. She is concerned that the upcoming holidays and “use-it-or-lose-it” leave deadline will impact “how quickly IRS is able to mobilize to resolve their backlogs.” And furloughed employees could not use leave, but continued to accrue it, during the shutdown, Wielobob explained.
Next Steps for Practitioners
Shutdown aside, 2025 has been a rough year for the IRS, between staffing losses and budget reductions, Wiley and Slonina stressed. Wiley offered some advice to tax practitioners – ensuring clients “understand this current situation” and “setting their expectations.” Clients are “going to be in for a big surprise” if they think things are operating the same way they were a year or two ago, she noted.
Slonina said she views it as her job as a practitioner to “know the procedural process.” But whereas she would typically lay out the most plausible steps for a client, she’s now “being more upfront with the client and more comprehensive in how the entire process could go.” The reason for this shift, said Slonina, is that “there’s just not a ‘routineness’ anymore.” Consequentially, she’s now educating her clients on the “different, disparate ways we can go.”
Beyond the uncertainty, Wiley and Slonina noted that it’s harder to get in touch with IRS agents and specialists – and even when you can get in touch, those answering the phones won’t necessarily have the requisite expertise. Wiley and Slonina suggest practitioners take a proactive approach with these agents. “Brush up on your teaching skills,” Wiley told the AICPA audience.
“Sometimes we do have an agent or an IRS specialist across from us” where “there might need to be a little nudge and some kind of educational method,” Slonina explained. “We’re supposed to be zealous advocates for our clients,” she added – and these efforts can “help just move the examination forward.”
“Even though you might not think you want to help the IRS get to the right answer, the alternative is fighting them on the wrong law or getting it punted to Appeals,” Wiley noted. And that can just mean a longer time to resolve a client’s case.
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