Taxpayers to Feel IRS Shutdown Shockwaves Past Federal Reopening

When the federal government shut down Oct. 1, the IRS was among the agencies forced to substantially reduce or halt most operations. While the short-term disruption captured headlines, the true cost will reveal itself after the government fully reopens.

For businesses and tax professionals, the shutdown triggered long-lasting operational and compliance challenges. Two of the most significant consequences are administrative backlogs and regulatory uncertainty, both of which are likely to persist in the months ahead.

Administrative Backlogs

Each day the IRS was closed, filings, correspondence, and taxpayer inquiries continued to accumulate. After the government fully reopens, the agency will confront a substantial backlog of unprocessed work, including returns, refund requests, amended filings, and correspondence that require review and response. These basic functions likely will take months to recover.

The backlog isn’t just an inconvenience; it has tangible implications as well. Taxpayers rely on timely return processing and verification times to obtain refunds. Notice responses and other correspondence that carry specific due dates require agency review to avoid collection escalation activities. Pending audits may face prolonged uncertainty as to the outcome of the examination.

Likewise, some businesses still await employee retention credit refunds, research and development tax credits, or abatements of erroneous penalty assessment, resulting in ongoing financial constraints.

As operations resume, questions remain as to how the IRS will prioritize essential functions, such as processing returns, issuing refunds, and addressing notices, before turning its attention to lower-priority correspondence. Besides the mounting notice responses received during the shutdown, filings and submissions made before the shutdown need to be evaluated. This likely will mean that some matters could remain unresolved well into the future.

The reduction of the IRS workforce will further contribute to the administrative backlog strain. The IRS began the year with approximately 100,000 employees, but recent resignations and layoffs have reduced the workforce by 25%.

The combination of reduced staffing and the buildup of more than a month’s worth of work creates significant strain on the agency’s ability to resolve matters efficiently.

Regulatory Uncertainty

Beyond administrative delays, the shutdown hindered the IRS’s ability to issue new guidance. Taxpayers rely on clarity from the IRS to plan their tax and financial strategies, and this uncertainty can be just as disruptive as the processing delays.

Amid this uncertainty, there are lingering questions about the new tax legislation signed into law July 4. Taxpayers have been seeking guidance on the changes brought on by the new law, and the IRS plays a central role in translating this legislative language into practical, enforceable rules through guidance, FAQs, and updated forms. The shutdown has stalled this process, leaving filers unsure how to interpret some new provisions or comply with upcoming requirements.

For example, a recent IRS notice states that employers won’t face penalties for failing to provide a separate accounting of qualified overtime compensation or tips. The announcement indicated that Form W-2s and 1099s haven’t been updated to reflect the changes introduced by the new tax law.

Tips and qualified overtime pay can now be deducted for federal income tax purposes, but employers have a new informational reporting requirement to separately account for these items. Without updated forms and instructions, employers have no way to comply with the reporting obligation.

Changes to various rates and phaseouts, along with foreign income disclosures, remain central themes of the new tax law that still require regulatory guidance and compliance updates.

Conclusions and Recommendations

Administrative backlogs within the IRS delay critical decisions and tie up cash flow, while regulatory uncertainty clouds planning and compliance efforts. To mitigate these impacts, taxpayers can take several proactive steps.

Maintain comprehensive records and payment confirmations. Documentation is a taxpayer’s best defense during and after a shutdown. Retain proof of filings, payments, and correspondence to support positions during the processing delays.

Monitor IRS announcements closely. When the IRS reopens after a shutdown, it often issues updated timelines, FAQs, and relief notices. Staying up to date on these communications allows taxpayers to adjust compliance strategies as needed.

Maintain communication with tax advisers. A trusted tax professional will proactively inform you about potential delays, realistic timelines for resolution, and the importance of maintaining compliance during the transition period.

The government shutdown may have been temporary, but its effects on the IRS and taxpayers will be enduring. By planning ahead, maintaining compliance, and staying informed, taxpayers can navigate the aftermath more effectively and help restore stability once operations return to normal capacity.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alan Goldenberg is a principal and leader of the state and local tax and tax controversy groups at Anchin.

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