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Shutdown Threatens to Sideline Two-Thirds of IRS Workforce

Posted on Sep. 29, 2023

About one-third of the IRS’s employees would continue to work in the event of a government shutdown, according to the agency’s latest shutdown contingency plan, a stark reversal from last year.

In its fiscal 2024 lapse appropriations contingency plan, released September 28, the IRS said 30,063 of its 89,944 employees — or 33.4 percent — would be retained during a shutdown that occurs outside of the filing season. The rest would be furloughed.

Employees who remain on duty during a shutdown would be paid using a combination of funding from the Inflation Reduction Act, special compliance funding, and user fees, the IRS said.

The new shutdown contingency plan comes just days before it’s potentially needed. The deadline for Congress to enact its fiscal 2024 appropriations bills or a continuing resolution to avoid a government shutdown is October 1 — a date that lawmakers are widely expected to miss.

The plan notes that it describes only the actions and activities that would take place in the first five business days following a lapse in appropriations. If a lapse were to extend beyond five business days, the IRS would “reassess ongoing activities and identify necessary adjustments of excepted positions and personnel,” it says.

In the event of a shutdown during the filing season, the IRS would except additional positions, the plan adds, although it doesn’t specify how many more employees would be retained in that case.

However, it says that if there is a lapse in appropriations during the coming filing season, the IRS will “continue return processing activities to the extent necessary to protect Government property.” That includes collecting tax revenue and maintaining the integrity of the tax collection process, the plan says.

Can’t Stop, Won’t Stop

The plan also notes that in the event of a government shutdown, the IRS would continue to implement the IRA’s green energy credits, the provisions of its IRA strategic operating plan, and the direct-file pilot program. According to the plan, 2,880 full-time-equivalent employees would continue their work supporting IRA initiatives.

Treasury also said in its separate contingency plan that its Office of Tax Policy would continue regulatory work funded by the IRA.

The IRS’s decision to use IRA funding to maintain its IRA-related activities in the event of a shutdown reflects the Biden administration’s priorities, Jorge E. Castro of Miller & Chevalier Chtd. told Tax Notes. A lot of the green energy provisions require timely guidance from the IRS and Treasury, and “obviously they’ve made the call not to interfere with that,” he said.

But David Kautter, a former acting IRS commissioner now with RSM US LLP, warned that the optics of the IRS keeping IRA-related activities going could be detrimental for the agency.

“The appearance of having significant parts of the federal government shut down, like national parks, while the IRS continues to work unabated on implementing the clean energy provisions of the IRA is likely to be very controversial,” said Kautter, a member of Tax Analysts’ board of directors. That dynamic could further cement opposition to the green energy provisions, as well as eagerness to claw back more IRA funding, he said.

Even so, keeping the IRA programs moving forward while the rest of the agency is mired in a shutdown is “probably mostly aspirational,” Castro said. “The reality is, it’s probably going to have an impact there as well.”

Andrew Lautz of the Bipartisan Policy Center agreed, remarking that ripple effects throughout the agency are inevitable. “Ask any large enterprise how they would function if two-thirds of their employees disappeared from one day to the next,” he said.

A Reversion

The new plan is in line with the IRS’s fiscal 2022 contingency plan, in which the agency said it would furlough 61 percent of its employees if a shutdown occurred outside the filing season.

But that plan was released before Congress passed the IRA, which provided the IRS with nearly $80 billion in additional long-term funding. Following the IRA’s enactment, the IRS said in its fiscal 2023 contingency plan that the new funding would allow it to maintain “normal operations” and keep all its employees on the payroll during a shutdown.

It was initially reported that the IRS would reprise that fiscal 2023 plan this year, but Doreen Greenwald, president of the National Treasury Employees Union, said September 21 that that wouldn’t be the case after all.

Even though some of that IRA funding has been clawed back over the past year, it’s unclear why the IRS is reverting to its pre-IRA shutdown plan. The agency didn’t respond to a request for comment by press time.

“What a difference a year makes,” said Robert Kerr of Kerr Consulting LLC. Either the IRS never actually intended to reuse last year’s plan, or it did intend to but got overruled, he said.

The IRA provided only $3.8 billion for taxpayer services, and the IRS has already blown through a large amount of that, Kerr noted. IRS and Treasury leaders might be judging that government shutdowns are going to be regular events, “so maybe there’s a certain amount of husbanding of resources,” he said.

“Clearly, the agency has walked back some of its previous plans in regards to the IRA funding,” Lautz said. But the effect of that decision will be felt tangibly at the agency: Fewer IRA resources being deployed means fewer activities and functions that can be accomplished, he said.

The “silver lining” for the IRS is that by using fewer IRA funds now, it will be burning through the funding — which is intended to help the agency advance and transform its operations, not just keep the lights on — at a slower pace, Lautz said.

A Depleted Workforce

Beyond its IRA work, some tax professionals worry that a shutdown of the IRS’s operations could be disastrous for an agency that is still catching up on backlogs from the COVID-19 pandemic and must prepare for the coming filing season.

“It’s definitely going to hurt,” Castro said. The plan makes clear that a shutdown would have a “significant impact across a number of IRS operations,” he said.

Under the plan, most activities unrelated to the safety of life and the protection of government property would cease. That includes audits and examinations; non-automated collections; taxpayer services such as phone assistance; and planning, research, training, and development activities.

Lautz noted that even though the plan suggests that the IRS would still ramp up preparations for the filing season if a shutdown were to stretch into the new year, “during previous shutdowns it warned that filing season preparation was interrupted.”

“Again, we can expect knock-on effects when the majority of the workforce can’t work,” Lautz added.

Greenwald said in a statement that while the NTEU is grateful that 30,000 employees would stay on the job thanks to the IRA funding, it’s concerned about the welfare of those who would be furloughed.

“These frontline employees — including those who open the mail and process tax returns — are now preparing for the financial hardship that comes with missed paychecks, which is possible if the shutdown extends well into October,” Greenwald said.

Greenwald also warned that an extended shutdown could scramble IRS hiring efforts to prevent further backlogs.

For Castro, this year’s contingency plan contains at least one positive note for the IRS: It indicates that the agency has just shy of 90,000 employees, up from the roughly 83,100 employees it had on staff at the same time last year.

The IRS has been on an agencywide hiring binge since enactment of the IRA, and that growth in employee numbers is encouraging, said Castro, a former counselor to the IRS commissioner. “It’s clearly having some success — maybe not at the rate they want it to go, but still some success,” he said.

Some of those new hires would stay on for training during a shutdown, according to the contingency plan. It states that more than 5,400 new customer service representatives and tax examiners will have undergone onboarding between May and December, adding that “it’s critical they remain in training during a shutdown if they are to be ready for filing season.”

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