How Businesses Will Feel the Impact

Over 6,000 IRS employees have been let go as part of a comprehensive effort to shrink the size of the federal government. While employees have been let go from IRS offices nationwide, the Washington, DC, office was substantially impacted. The downsizing of that office carries special significance as it is a hub of support and enforcement for small businesses and tax-exempt entities.

Industry reactions

Impacted employees stated that they anticipated a hiring freeze, but the mass firings were unexpected. Former IRS commissioners have indicated that this reduction in staff will likely result in increased tax evasion efforts, leaving government funding to be supported by an honest minority. They also noted that these layoffs have thwarted IRS efforts to streamline processes and communication with the general public.

“Americans deserve a fully functioning agency that can be respected by taxpayers and their preparers, thereby allowing them to comply with their tax obligations,” said the American Institute of Certified Public Accountants (AICPA) president. This recent move to reduce staff will likely hinder those efforts.

Why you should care about the IRS layoffs

Most people care about their relationship with the IRS because they don’t want to be audited. While the general likelihood of being audited by the IRS is less than 1%, your odds of a personal tax return audit increase when income exceeds $500,000.

At an income of $10 million or more, your odds of an audit increase substantially — as much as 10% by some estimates. Included in those numbers is the chance of your number coming up in the IRS’s random audit generator.

With that in mind, there are several reasons why you should care about the IRS layoffs, many of which are listed below. The potential benefits of this new dynamic should be viewed with cautious optimism, and the drawbacks as relatively probable outcomes.

Possible benefits

• Fewer potential audits: Nearly 70% of the displaced IRS employees were responsible for collection and enforcement. As a result, the IRS’s ability to administer audits may diminish, leading to temporary relief for taxpayers.
• Delayed collection activity: The reduction in enforcement personnel could result in slower initiation of collection activities for outstanding tax liabilities. Taxpayers with existing debts might experience delays in collection notices or actions, providing them additional time to address their tax obligations.

Likely drawbacks

• Processing delays: The layoffs are expected to cause unprecedented delays in processing tax returns, issuing refunds, and responding to taxpayer inquiries. A reduced audit workforce may result in longer and more suspenseful waiting periods for taxpayers waiting for audits to play out. Slow-moving audits can translate to higher costs to taxpayers as aging tax balances continue to accrue interest.

• Decline in customer service: Fewer staff members mean longer wait times for assistance, making it more challenging for taxpayers to receive timely help with tax-related issues. In 2022, increased IRS staffing and funding led to a 90% decrease in wait times. We can expect that progress to be reversed in tandem with the rescinded funding and hiring opportunities.
• Reduced adherence to tax rules: A decrease in enforcement activities could subvert voluntary compliance, potentially creating funding issues for government obligations.
• Increased number of deficiency notices: With fewer staff in the IRS Appeal’s office, more notices may be issued that leave taxpayers with limited options outside the US Tax Court. A notice of deficiency
  

  
  
  This is also known as a 90-day letter.
  
  is a specific letter issued by the IRS indicating that an examination has been conducted and the IRS concluded that you owe additional money. Disputing these notices is generally done in legal court, which can be a long, elaborate, and expensive process.

• Increased difficulty in verification processes: If you need the IRS to provide a verification letter, you may find yourself facing a delay due to the staffing shortage. For example, if you need proof that you made an S-corp election for your business, obtaining CP261 Notice (S Corporation Approval Letter) or Letter 385C (S Corporation Verification Letter) may prove to be an uphill challenge.

What are your next steps?

Now that you have a better feel for the landscape, here are your next steps.

File your tax return as soon as you can.

Not only is this a good practice to prevent identity theft

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, but filing early will also help you beat the crowd of taxpayers that will keep expanding the IRS backlog as deadlines approach. Also, in situations where refunds have been substantially delayed, the IRS may credit a refund to a future year due to the timing of issuance instead of providing the refund directly to the taxpayer as requested. While this may not be standard practice, it has been known to happen.

Even before the layoffs began, there were certain situations where taxpayers waited several months (and in some cases years) for a response and support from the IRS. This issue will likely persist and possibly worsen with a staff decrease. Filing early will allow you to identify issues early and start the clock on IRS filing and assistance.

Don’t spend your refund before you have it.

Even though some who filed early in tax season may already have received their 2024 refunds, the next round of refunds may be delayed, especially if there are any inconsistencies with the returns. Getting someone to explain the holdup to you might be difficult.

You may have previously heard hold messages from businesses indicating that the organization is experiencing unusually high call volume. Well, when these guys say it, they mean it. Since it may be a while before your refund makes it to you, it might be best not to make any short-term plans for those funds.

Use authorized parties for correspondence.

If you would like a trusted party such as a CPA or lawyer to deal with the IRS on your behalf, consider filing a Form 2848 to authorize that individual to communicate with the IRS regarding your tax matters.

This will allow the authorized party to pull online records or even talk with an IRS representative on your behalf — if they’re lucky enough to reach an agent. The records that you or your authorized representative access may be vital in expediting the resolution of any outstanding tax issues.

Don’t sit on tax notices.

If you get a tax notice, address it immediately in writing. This allows you to begin a paper trail to use for support if the IRS has made an error. If your notice requires substantiation (e.g., receipts or other proof of expenses), responding quickly will get you in the processing queue earlier and hopefully prevent escalation.

Be sure to send any written correspondence through a trackable mail service. Given that the layoff process is ongoing, it isn’t wise to count on the IRS examiner, advocate, or other representative to have properly noted your account or categorized your paperwork without the secondary accountability of tracked mail.

Utilize the online tools offered by the IRS.

The IRS has online tools to help resolve basic issues without having to speak to an agent. A few helpful links are listed below.

Request a copy of your tax records from the IRS online.