When the federal fiscal year ended on September 30, 2025, lawmakers failed to pass the funding bills needed to keep the government running. As of October 1, large portions of the federal government have gone dark—forcing many agencies, including the IRS, to suspend or sharply limit their work until Congress reaches a funding deal.

IRS Operations at Half Strength

The IRS, already stretched thin by recent workforce reductions, is now running at roughly 50% capacity. Although many of its automated systems remain active, taxpayers are feeling the strain: expect delays in refunds, longer response times, and slower implementation of new tax rules.

Initially, the IRS relied on multi-year funding from the Inflation Reduction Act to keep critical functions going beyond the fiscal year deadline. That temporary cushion lasted until October 8, when the agency’s contingency plan—known as the lapse plan—kicked in. Of roughly 74,000 employees, only about 39,870 remain on duty. The rest have been furloughed.

Divisions hit hardest include:

• Large Business & International (LB&I) – about 1,000 staff retained
• Small Business/Self-Employed (SB/SE) – about 4,900
• Tax-Exempt/Government Entities (TE/GE) – around 250
• Appeals – roughly 130

Those still working are focused on high-priority projects such as implementing the One Big Beautiful Bill Act (OBBBA), resolving cases near statute-of-limitations deadlines, and keeping essential IT and taxpayer systems functioning.

What’s on Hold

With so many furloughs, enforcement audits and taxpayer service functions have largely paused. The IRS’s 2025–2026 Priority Guidance Plan, which listed 105 upcoming initiatives (including 40 related to OBBBA), is effectively frozen. This means delayed guidance and uncertainty for practitioners and taxpayers navigating major tax changes.

Ripple Effects Across the Tax System

The shutdown’s reach extends beyond the IRS. The U.S. Tax Court has postponed most hearings, and the National Taxpayer Advocate is operating on a skeleton crew. As a result, taxpayers are likely to see:

Prolonged refund processing times

• Fewer avenues for resolving disputes
• Reduced support for those facing financial hardship

If the stalemate continues, preparations for the 2026 filing season could also be disrupted. Training programs, system updates, and seasonal staffing—normally done in the fall—are all on hold. This could mean a rocky start to the next filing season, with slower refunds and processing bottlenecks.

The Political Standoff Behind the Shutdown

At the core of the dispute lies a debate over the Premium Tax Credit (PTC). This credit, created under the Affordable Care Act, helps individuals afford health insurance. COVID-era legislation had expanded eligibility beyond traditional income limits, but those enhancements expire December 31, 2025. With open enrollment for 2026 coverage beginning November 1, the lack of congressional action means millions could lose access to advance premium subsidies—fueling a high-stakes political clash.

How Long Could This Last?

Some analysts warn this could surpass the 2019 shutdown’s 35-day record. Whether it drags on depends on political pressure and public sentiment. For now, most expect gridlock to persist through Thanksgiving or beyond, unless one side concedes to avoid deeper economic fallout.

What Taxpayers Can Still Do

• Despite the disruption, taxpayers still have options to stay compliant:
• File and pay on time: Deadlines remain in force.
• Use online IRS tools: Services like payment portals, refund status checks, and installment agreement applications are still running.
• Mail matters: The IRS continues to receive mail and deposit payments, though responses will be delayed.
• Keep records: If you’re under audit or have open correspondence, use certified mail to document timely submissions.
• If meetings or hearings have been cancelled, use this downtime to strengthen your documentation and strategy with your advisor.

The Takeaway

The combination of reduced staffing, delayed guidance, and uncertainty around new tax legislation creates a volatile environment for taxpayers—especially those with complex filings or ongoing audits. In this climate, professional tax advice isn’t optional—it’s essential.

If you’re unsure how the shutdown might affect your situation, or need help navigating ongoing IRS correspondence, reach out to our team. We can help you stay compliant and minimize risk until full government operations resume.