Key Takeaways
- Congress ended a brief shutdown affecting Treasury and the IRS, funding the agencies until the end of September.
- The bill also enacted cuts for the IRS.
- The agency is facing new scrutiny on staffing as filing season begins.
- The appropriations bill does give Treasury and the IRS more flexibility with where to spend.
- Watchdogs raise alarm over Trump lawsuit against IRS.
In D.C., good news rarely comes alone.
For instance, for the Internal Revenue Service, the good news this week is that the agency, and all of the Department of the Treasury, is funded through September, after Congress enacted a spending bill for most of the government on Tuesday. Following a short technical shutdown over the weekend and Monday—which did not affect the agency's workers or services—they won't need to worry about appropriations for the next half-year.
The bad news? The spending bill also included an $11.7 billion cut in the funding originally provided to the IRS for operations support by the 2022 Inflation Reduction Act. (That's more than the overall annual IRS budget of $11.2 billion, which was also cut 10% by the bill.) While the IRA gave the IRS $80 billion in increased funds for systems updates and to heighten enforcement, over the past four years that amount has been rolled back to less than $10 billion.
These latest decreases come at the start of filing season, and as the IRS comes under increased scrutiny for how the cuts and staff turnover have affected the agency's mission. A recent piece in the federal workforce magazine Government Executive said that workers in roles unrelated to taxes have been assigned to take taxpayer calls and process returns. As one anonymous worker put it, the agency had been set up for failure.
A recent report from the U.S. Treasury Inspector General for Tax Administration also expressed concerns about the agency's capacity to handle the upcoming filing season. It notes increasing backlogs in key areas such as processing amended returns and resolving taxpayer errors. According to TIGTA, the agency lost 19,000 employees, nearly 20 percent of its staff, in the federal workforce reductions at the start of the second Trump administration.
Of course, one of the goals of the IRA funding was modernization—which the agency will need to use to run more efficiently in the upcoming months. Congress may be looking to help here. The House Ways and Means Committee unanimously approved legislation last month to streamline the processing of paper returns that are prepared electronically, by requiring that such returns include a scannable code that converts the return into an electronic format. While most tax filers have gone online, the processing of paper returns has become a major backlog for the agency. According to TIGTA's report, in December 2025 there were about 295,000 returns awaiting processing, larger than the inventory before the Covid pandemic.
That bipartisan bill has yet to get a full vote in the House of Representatives, or the Senate, and likely wouldn't be in place in time for this filing season. Until then, the IRS will have to make do.
Recent Tax Pieces:
IRS Gets Money-Moving Authority at Same Time It’s Losing Funds – Chris Cioffi, Bloomberg Tax ($):
They argue it’s already diminished after the agency lost a quarter of its workforce in the last year and is racing to implement the sprawling 2025 GOP tax-and-spending law.
The IRS is auditing millionaires less frequently because “they don’t have the personnel,” said Rep. Steny Hoyer (D-Md.) in an exclusive roundtable interview with Bloomberg Government reporters Thursday.
Trump’s Lawsuit Against I.R.S. Creates ‘Enormous Conflict of Interest’ – Andrew Duehren, The New York Times:
“It’s hard to imagine that they wouldn’t feel that pressure, even if it wasn’t explicit,” she said. Congress could try to limit the Justice Department’s ability to pay a settlement to Mr. Trump, she said, but otherwise “there’s not really another check.”
Mr. Trump has previously sought to extract payments from the Justice Department, demanding that the department pay him about $230 million in compensation for the federal investigations into him. The department has also been responsive to Mr. Trump’s call for the government to prosecute people he perceives as his political enemies.
Former Tax Officials Raise Ethics Alarm on Trump’s IRS Lawsuit – Erin Schilling, Bloomberg Tax ($):
“The conflicts of interest make it uncertain whether the Department of Justice will zealously defend the public fisc in the same way that it has against other plaintiffs claiming damages for related events,” the brief said.
Former IRS Commissioner John Koskinen, former Department of Justice Tax Division Assistant Attorney General Kathryn Keneally, former National Taxpayer Advocate Nina Olson, and former DOJ Tax Division Appellate Chief Gil Rothenberg are on the brief. Two government watchdog nonprofits, Common Cause and Project On Government Oversight, also joined.
Amazon Saved Billions Under Trump’s New Tax Law – Richard Rubin, The Wall Street Journal:
Second, the new law reversed a piece of the prior Republican tax law that companies had been complaining about. The old law required them to spread out deductions for research, starting in 2022. The new law permits immediate deductions for new domestic research and lets companies accelerate previously delayed deductions.
Trump Rebuked Over Latest Johnson Amendment Comments – Trevor Sikes, Tax Notes ($):
But Americans United for Separation of Church and State sees it differently. “He lied about the Johnson Amendment, America’s popular law that prevents tax-exempt nonprofits, including houses of worship, from endorsing or opposing partisan political candidates — falsely claiming he got rid of it,” the organization said in a statement. “In fact this federal law is very much still in effect.”
The political activity ban provision in section 501(c)(3) is still codified and is characterized as currently enforceable on the IRS’s webpage titled “Charities, Churches and Politics.”
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