IRS says layoffs possibly by 2026 without sustained funding boost

The Internal Revenue Service could begin looking to downsize its workforce as soon as 2026, its top official warned on Thursday, suggesting without additional funding the agency will have to unwind its ongoing hiring surge. 

The cutbacks could come in the form of separation incentives, followed by furloughs and, as a last resort, reductions in force, IRS Commissioner Danny Werfel told reporters. The warning came as the agency is seeking an extension of the unprecedented funding surge the agency received as part of the 2022 Inflation Reduction Act, which originally injected $80 billion into the tax agency’s coffers. 

Some of the accounts that received appropriations through President Biden’s tax, climate and health care bill will be drained by fiscal 2026, Werfel said, leaving the agency facing a series of fiscal cliffs. In its recent budget request, IRS requested the funding boost be extended through fiscal 2034 for a total price tag of $104 billion. Doing so, it said, would enable it to fully meet taxpayer needs while returning more than three times the investment back to the U.S. Treasury by increasing tax collection on high-earning individuals and corporations. 

IRS on Thursday laid out its vision for spending its cash infusion—since trimmed to $60 billion over a 10-year period—for the next two years as part of an update to its strategic operating plan. In fiscal 2025, IRS will boost live assistance, expand online services, accelerate the digitization of forms and disrupt tax scams.

Additionally, it will continue to focus on modernizing the way it attracts, retains and develops new employees. The IRS plans to increase audits of large, complex partnerships nearly 10-fold and those of wealthy individuals making more than $10 million by 50%, while maintaining consistent audit rates for anyone making less than $400,000 annually. 

Werfel said the plan should “bury once and for all” the perception that the IRS would be adding 87,000 new employees to its rolls, as Republicans and other detractors of the funding surge have warned would happen. That number was derived from an initial Treasury Department estimate, though IRS officials have long maintained the total net growth would amount to a significantly smaller figure after accounting for attrition.

Werfel newly estimated the IRS workforce would peak at 102,500 full-time equivalents in fiscal 2029—up from 90,000 currently, an increase over the 79,000 it employed at the end of fiscal 2022—a number still below the agency’s workforce peaks in the 1980s and 1990s.  

“We believe that figure represents a right-sized IRS, reflecting the needs to serve taxpayers and responsibly enforce the law given the complexity of the nation's tax laws,” Werfel said. 

The agency may never reach that level, however, if it fails to secure additional funding. President Biden in his fiscal 2025 budget request proposed keeping IRS funding through the annual appropriations process flat, instead hoping to supplement its normal allocation as did the IRA. Absent such intervention, Werfel said starting in fiscal 2026 his agency would no longer be able to maintain its boosted workforce, deploy the new technology it has installed or sustain the much higher levels of customer service it began to see last year. 

“Those are the realities that could happen if we hit a cliff,” the commissioner said. “All of that can be avoided if we avoid these cliffs and extend the funding from the Inflation Reduction Act to meet this new baseline.” 

As IRS continues to onboard a higher-than-normal level of employees, it has piloted a new process to onboard its hires. The agency is aiming to improve the orientation program and ramp it up to accommodate more new workers with the goal of enhancing the first-week experience.

The program will ensure employees’ choice to join IRS “was a good one,” Werfel said, and will “give a sense we are investing in” the workforce. The agency is now in the process of learning from the process to determine what worked, how it can be improved and how to scale it up.