Downsizing and backlogs become national policy.
By CPA Trendlines Research
The Internal Revenue Service is heading into the 2026 filing season with fewer employees, more complex tax law changes, and less capacity to resolve problems when returns go wrong — a combination federal watchdogs say will leave tax professionals managing the fallout even as headline service metrics appear stable.
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National Taxpayer Advocate Erin M. Collins says most taxpayers with straightforward, electronically filed returns should see few disruptions. But she warned that the true test of the filing season will be how the IRS handles the millions of returns that require human intervention — at a time when the agency’s workforce has been cut by more than a quarter.
“The success of the filing season will be defined by how well the IRS is able to assist the millions of taxpayers who experience problems,” Collins says in the agency’s annual report to Congress.
For tax professionals, those problems are likely to arrive in greater volume and linger longer than in recent years, complicated by the Elon Musk DOGE budget cuts and the new One Big Beautiful Bill Act.
Workforce Shrinks as Complexity Grows
The IRS entered 2025 with about 102,000 employees and finished the year with roughly 74,000, a 27% reduction, according to the Taxpayer Advocate Service. Cuts were spread across nearly every major operating division, including Taxpayer Services, Information Technology, Appeals, and the Small Business/Self-Employed division.
Customer service representatives — the employees who answer phone calls and process correspondence — fell 22% year over year. Although the IRS backfilled some positions late in 2025, Collins says the workforce remains “substantially lower than last filing season,” and newer hires generally lack the experience of those who left.
At the same time, the IRS is implementing more than 100 changes to the tax code enacted under the One Big Beautiful Bill Act, many of them retroactive to the beginning of 2025 and reportable on returns filed this season.
While the law expands eligibility for certain deductions, Collins warned that the provisions are highly technical, subject to income thresholds and phaseouts, and dependent on accurate third-party reporting.
“Major law changes of this scope historically increase return errors, false positive rates in processing filters, taxpayer correspondence, and taxpayer contacts,” she says.
For practitioners, that combination — fewer IRS employees and more error-prone returns — raises the risk that even correctly prepared filings will be delayed or flagged.
Clean Returns Move; Problem Cases Stall
The Taxpayer Advocate Service emphasized that IRS performance in 2025 was strong by historical standards. The agency processed more than 165 million individual income tax returns, about 94% filed electronically, and issued refunds to 63% of filers, with an average refund of $3,167.
But even in that relatively smooth year, 3.6 million taxpayers received refunds beyond normal processing times — averaging seven weeks for electronic filers and 14 weeks for paper filers.
Identity theft cases remain a persistent weak spot. At the end of fiscal 2025, the IRS had an inventory of about 316,000 identity theft victim assistance cases, with an average resolution time of nearly 21 months, a delay Collins again labeled “unconscionable.”
The Advocate reiterated her recommendation that IRS employees assigned to identity theft cases not be reassigned to phone duty until average resolution times fall to 90 days.
For tax professionals, those delays translate into months or years of unresolved client cases, frozen refunds, and repeated follow-ups with little visibility into outcomes.
New Deductions, New Error Triggers
Several of the most prominent new deductions created by the One Big Beautiful Bill Act are expected to generate confusion — and processing errors — even among compliant taxpayers.
Among them:
- A new above-the-line deduction for interest paid on auto loans, capped at $10,000, but available only if multiple conditions are met, including that the vehicle be new, purchased for personal use, secured by a lien, and assembled in the United States. The vehicle identification number must be reported on the return, and the deduction phases out for single filers with modified adjusted gross income over $100,000 and joint filers over $200,000.
- A deduction for certain tip income, limited to occupations historically receiving tips, subject to income caps, and applicable only for income tax purposes — not employment taxes.
- A deduction for overtime premium pay requires payroll systems and tax software to isolate the portion of overtime wages exceeding an employee’s regular rate.
- An additional standard deduction for seniors, layered on top of existing age-based provisions and subject to its own phaseouts.
“These distinctions are likely to confuse taxpayers and increase disputes, particularly when employer practices or information reporting are inconsistent,” Collins wrote.
Tax professionals are likely to bear the burden of explaining eligibility rules, substantiating claims, and responding to IRS correspondence triggered by mismatches between returns and third-party data.
Phone Metrics Mask Resolution Gaps
Despite workforce reductions, IRS leadership has continued to emphasize telephone “Level of Service”—the percentage of calls answered by live assistors among those routed to them—as a key performance metric.
Collins and the Treasury Inspector General for Tax Administration both say that the measure is deeply misleading.
During fiscal 2025, the IRS reported a 60% Level of Service on Accounts Management phone lines. But when all calls are counted — including those routed to voice bots or abandoned before reaching a queue — only 26% of callers actually spoke with an IRS employee, according to the Taxpayer Advocate Service.
TIGTA has separately concluded that Level of Service and average wait times “do not fully reflect the taxpayer experience,” particularly when calls fail to resolve underlying issues.
Because the same employees who answer phones also process correspondence and account adjustments, the IRS has historically staffed phones to meet peak demand. The result, Collins wrote, is substantial idle time during off-peak periods.
During the 2023 filing season, customer service representatives spent up to 34% of their time waiting for calls, totaling nearly 1.3 million idle hours. If that time had been redirected to paper inventories, the IRS could have closed more than 1.5 million additional cases, she said.
“A high LOS achieved at the expense of timely case resolution can worsen the overall taxpayer experience rather than improve it,” Collins wrote.
For practitioners, the implication is clear: calling the IRS may remain time-consuming and low-yielding, while unresolved cases continue to generate repeat contacts and client frustration.
Outsourcing Paper Processing Adds Risk
Another pressure point for the 2026 filing season is the IRS’s Zero Paper Initiative, launched in April 2025, which relies on private contractors to scan paper-filed returns using optical character recognition technology.
While digitization could eventually reduce processing times, Collins warns that outsourcing introduces both operational and confidentiality risks, particularly because many contractors lack prior IRS experience.
“It was just a few years ago that an employee of an IRS contractor … stole the return information of thousands of taxpayers and sent it to media outlets,” she writes, referring to the Charles Littlejohn data breach, which included President Donald Trump and Elon Musk.
The IRS receives about 11 million paper-filed individual returns and another 11 million paper employment tax returns each year. Errors introduced at the scanning stage can propagate through automated filters, leading to refund holds or correspondence that tax professionals must untangle.
What 2026 Means for Practitioners
Federal watchdogs stop short of predicting a systemic breakdown. Collins said she remains optimistic the IRS will again deliver a functioning filing season for most taxpayers, particularly those who e-file, use direct deposit, and avoid processing filters.
But she emphasized that staffing cuts, leadership turnover, and layered complexity create a fragile environment in which problem cases are likely to linger.
For tax professionals, that means:
- Greater client education about realistic IRS timelines.
- More selective engagement in low-margin representation work.
- Increased documentation and substantiation around new deductions.
- Heightened exposure to refund delays driven by factors outside preparers’ control.
The IRS “has consistently managed to navigate formidable challenges,” Collins wrote. But she added that the true measure of success will not be how many calls are answered — it will be how quickly and accurately problems are resolved.
That distinction may matter more to tax professionals in 2026 than at any point since the pandemic.