Trump's budget bill could complicate 2026 tax filing season after IRS cuts, watchdog warns

Key Points

• IRS workforce fell 26% over the past year to 75,702 employees, with the largest losses in taxpayer services, the small business/self-employed office and information technology.
• Republican budget proposes a 20% IRS funding cut next year—equivalent to a 37% reduction when factoring in stripped-away Inflation Reduction Act supplements—which the watchdog says could hurt taxpayers and revenue collection.
• 2026 tax season at risk as staffing cuts and retroactive provisions in Trump’s legislative package may force the IRS to rapidly update 2025 forms and programming with fewer employees.
• Identity theft case backlog persists with about 387,000 unresolved cases taking up to 20 months to resolve, leaving victims waiting nearly two years for refunds.

WASHINGTON (AP) — The budget bill championed by President Donald Trump could complicate next year's tax filing season after the IRS lost one-quarter of its employees through staffing cuts, an independent watchdog reported Wednesday.

The IRS workforce has fallen from 102,113 workers to 75,702 over the past year, according to the latest National Taxpayer Advocate report to Congress. The report Wednesday offered the first official numbers on the IRS job losses associated with Elon Musk’s Department of Government Efficiency.

Most of the employees took the “fork in the road" resignation offer from DOGE rather than waiting to get laid off.

Some of the findings from the report:

Taxpayers will likely see effects of staffing reductions

The Trump administration's efforts to shrink the size of the federal bureaucracy to a mass exodus of probationary employees who had not yet gained civil service protections and were offered buyouts through a “deferred resignation program.” More than 17,500 IRS workers took that route. The biggest cuts were in taxpayer services, the small business/self-employed office and information technology.

The report noted that the Republican administration's proposed budget includes a 20% reduction in IRS funding next year. That's a 37% reduction when taking into account the supplemental funding in the Biden-era Inflation Reduction Act that Republicans previously stripped away.

“A reduction of that magnitude is likely to impact taxpayers and potentially the revenue collected," wrote Erin M. Collins, who leads the organization assigned to protect taxpayers’ rights.

The 2026 tax season could be precarious

Collins said the 2025 filing season was “one of the most successful filing seasons in recent memory,” though she warned that the 2026 season could be rocky.

“With the IRS workforce reduced by 26% and significant tax law changes on the horizon, there are risks to next year’s filing season,” Collins wrote. "It is critical that the IRS begin to take steps now to prepare.”

She said that, halfway through the year, there were concerns that the IRS had not yet undertaken key preparation steps, including hiring and training seasonal and permanent employees.

Trump's package could add new layer of problems

The report warned about the possibility of understaffing to manage new provisions from Trump's legislative package if it's enacted.

“Several provisions will retroactively affect the 2025 tax year, thus impacting millions of taxpayers and requiring the IRS to quickly update tax year 2025 tax forms and programming for the 2026 filing season," the report said.

Specifically, the House bill retroactively prohibits the IRS from allowing or making payment of Employee Retention Credit claims filed after Jan. 31, 2024.

The report also said the IRS historically receives more calls in years following significant changes in tax law, so it may need additional employees and improved digital tools to maintain its level of service.

Identity theft cases are still piling up

The IRS is dealing with delays in resolving self-reported identity theft victim assistance cases — taking up to 20 months to resolve, the report said.

As of the end of the 2025 filing season, the IRS was handling about 387,000 of these cases.

That is a slight improvement from the more than 22 months it took to resolve identity theft cases, as noted in last year's report, which outlined roughly 500,000 unresolved cases in its inventory.

“The cycle time remains unacceptably long," Collins said. “I continue to urge the agency to focus on dramatically shortening the time it takes” to resolved identity theft cases, "so it does not force victims, particularly those dependent on their tax refunds, to wait nearly two years to receive their money.”