How a smaller IRS, budget cuts could impact the 2026 tax season

Meanwhile, the agency faced workforce cuts from Elon Musk’s so-called Department of Government Efficiency, or DOGE, and other reductions in 2025. Those cuts included 17% to 19% of “key IRS functions” for the filing season, according to a September report from the Treasury Inspector General for Tax Administration, or TIGTA, an independent federal agency.

Many critical filing season positions were exempt from the reductions in early to mid-2025. But the cuts could impact “key processing programs and customer service” going forward, the report found.

The agency could also have a smaller budget for the current fiscal year as Congress finalizes appropriations. A bipartisan agreement released in January would provide $11.2 billion for the remainder of the 2026 fiscal year, which is roughly 9% lower than the 2025 IRS budget of $12.3 billion.

A separate TIGTA report from October said, “completing IT modernization projects, providing quality service to taxpayers and enforcing tax laws with a reduced workforce and budget will be challenging for the IRS.”

Amid recent staffing reductions, “taxpayers may have to increasingly rely on IRS self-service tools,” according to the report. However, the number of IRS online account users continues to grow, exceeding 51 million in 2025, up by 12 million from 2024.

One of the “biggest challenges” for the IRS will be implementing Trump’s tax law changes, particularly the deductions for tips, overtime and auto loan interest, according to Holtzblatt. 

While the U.S. Department of the Treasury has spent several months updating guidance, “the law is complicated,” she said. For the tips and overtime deductions, waived reporting requirements for employers adds “an additional burden for taxpayers,” she said. 

Treasury Secretary and acting IRS Commissioner Scott Bessent in early January said in a statement that the agency was “diligently preparing to update forms and processes” before the passage of Trump’s legislation. 

Another issue policy experts will be watching is how quickly filers receive refunds this season.

Taxpayers could see bigger refunds in 2026 due to Trump’s changes enacted in 2025. Without paycheck withholding updates, many could see the benefit when filing returns in 2026. In 2025, the average refund for individual filers was $3,052 through Oct. 17, according to IRS data.

Taxpayers with an accurate, e-filed return should get their refunds “in a timely fashion,” Holtzblatt said. But it could take longer for paper-filed returns or filings “flagged in processing” for mistakes. Generally, e-filed individual tax returns are processed within 21 days, according to the IRS.

But new deductions create more opportunities for math errors, which could cause the IRS to flag returns and delay refunds, she said.