In the wake of large-scale staffing reductions, the Internal Revenue Service (IRS) is undergoing a transformation that is already affecting taxpayers across the country. From voluntary resignations and retirements to broader agency-wide layoffs, the downsizing impacts critical functions across many IRS departments, including those focused on taxpayer services, appeals, and IT modernization.
While these changes are intended to streamline operations and increase reliance on automation, taxpayers should prepare for new challenges in how they interact with the IRS. Understanding these evolving dynamics can help individuals and businesses navigate tax compliance more effectively during this period of transition.
As the IRS operates with fewer personnel, routine processes such as filing returns, processing refunds, and handling amended filings are slowing. Taxpayers may experience delays in receiving tax refunds or finalizing administrative requests. For example, requests to change a business’s legal entity name may take months to complete, creating payment processing issues with customers and vendors when IRS records do not align with new entity names.
Some taxpayers are discovering that payments made to the IRS have not been properly applied—or worse, not applied at all. This may occur without any notification from the IRS, leaving taxpayers unaware of accrued penalties and interest. In certain cases, tax payments made by consolidated subsidiaries are not being properly attributed to the parent company's consolidated return, despite correct filing of Form 851. This has resulted in automatic IRS notices requesting returns from entities with no filing requirement.
The IRS has lost approximately one-third of its auditors, leading to a shift toward correspondence audits—where issues are addressed by mail rather than in person. These exams often result in miscommunication and tax return adjustments, even when taxpayers have valid supporting documentation. In many cases, the only available remedy is petitioning the Tax Court, which can be time-consuming and costly.
The IRS Office of Appeals is also operating with fewer employees amid rising demand. As more disputes arise due to processing errors or audit findings, the Appeals function is facing mounting pressure. Taxpayers seeking resolution through Appeals should anticipate longer timelines and may benefit from working with professional tax advisors to guide and represent them through the process.
Organizations applying for tax-exempt status may face longer wait times to receive their IRS determination letters. Without this letter, entities are unable to file Form 990 as required, which could trigger late filing penalties despite timely applications.
The Taxpayer Advocate Service (TAS), which traditionally serves as a vital resource for resolving IRS errors, is also affected by the downsizing. With fewer staff and a growing number of error-related inquiries, TAS is becoming increasingly difficult to access. As a result, some taxpayer issues may go unresolved for longer periods or require outside assistance to address effectively.
As IRS resources continue to shift, it is more important than ever for taxpayers to proactively manage compliance risks and prepare for administrative delays. At Wei, Wei & Co., LLP, our Tax Services team provides support and strategic insight to help you address issues with the IRS, manage audits, and navigate complex tax matters confidently.
If your business or personal tax matters are affected by IRS delays or unresolved issues, contact us for assistance in developing a solution-oriented plan.
IRS downsizing has impacted multiple departments, including the Taxpayer Experience Office, Taxpayer Advocate Service (TAS), IRS Office of Appeals, and IT modernization teams. These departments are critical in assisting taxpayers with compliance, appeals, and issue resolution.
Due to reduced staffing, the IRS is experiencing backlogs in processing original and amended returns, refund claims, and administrative requests such as business name changes. These delays may also affect the issuance of tax refunds.
A correspondence audit is conducted entirely by mail, without interaction with a live IRS agent. These are increasing because the IRS has lost about one-third of its auditors. This type of exam may lead to confusion or incorrect adjustments if documentation is not properly reviewed.
Yes. The IRS Office of Appeals is handling a more complex caseload with fewer staff, leading to longer resolution times. Taxpayers may need to consider professional assistance when navigating Appeals.
Entities applying for tax-exempt status may experience delays in receiving IRS determination letters due to reduced staffing. Without this letter, organizations cannot properly file Form 990, which may result in penalties.