The IRS thought it was shutdown-proof. Now most staff would go home.

WASHINGTON - The Internal Revenue Service and its roughly 90,000 employees had expected to weather the impending government shutdown by staying open for business, thanks to the $80 billion boost provided by the Inflation Reduction Act.

But that abruptly changed this week.

On Thursday, the tax agency released an updated contingency plan showing that it will furlough up to two-thirds of its workforce — 60,000 employees — if the government comes to a halt on Sunday, a move that will affect vital services to taxpayers as late-filing season closes out.

The agency’s whiplash was prompted by late guidance from federal officials that IRS could not, in fact, cover workers’ salaries during a shutdown with funds from President Biden’s landmark climate change, health care and tax law.

[Federal government starts notifying employees a shutdown may be imminent]

Although the IRS had held for months that it could do business as usual if government funding lapsed, the Office of Management and Budget told the agency this week that the money cannot substitute for the agency’s regular budget, which pays the salaries of most of its employees. The result will be a return to the backlogs at all levels of service that had begun to disappear in the last year, current and former IRS officials said.

Millions of tax refunds won’t be issued to late filers unless they file electronically and no one will be working to process payments owed to the government by millions more. Thousands of employees who staff phone lines to resolve taxpayer questions — among them 6,000 newly hired customer service representatives — will be sent home. Taxpayer assistance centers will shutter.

“Taxpayers would be completely unable to contact most IRS employees during the shutdown,” Charles Rettig, who was IRS commissioner during the Trump administration and the first years of the Biden administration, said in an email.

After the 34-day shutdown while Donald Trump was president in late 2018 and early 2019, even after the IRS made the unorthodox decision to bring some employees back to work, “It took the better part of a year for the IRS to get back,” Rettig said.

“Don’t overlook the impact on the employees or future recruitment efforts,” he added. “Current and prospective IRS employees have numerous options for employment in other organizations not similarly impacted by a dysfunctional Congress.”

The agency was already bracing for an higher-than-normal number of delayed returns by the Oct. 16 late-filing deadline from roughly 19 million California taxpayers who were extended without penalty after winter storms, wind damage, flooding and mudslides. Audits and enforcement will also cease. The IRS will not respond to any paper correspondence. A total of 365 taxpayer assistance centers will close, jeopardizing face-to-face service to 5,000 taxpayers a day, the administration said. More than 10 million individual filers received extensions through Oct. 16, Treasury officials said. Normally at this time of year, the IRS answers 46,000 phone calls a day, officials said.

After the updated plan was released Thursday, the American Institute of CPAs, a prominent organization of tax accountants, urged the IRS to rethink its decision to furlough so many employees and warned that a shutdown would delay processing of late returns for the 2022 tax season, those due for tax-exempt organizations on Nov. 15 and others with upcoming deadlines.

“We believe that tax practitioners . . . should have the opportunity to provide feedback on, as well as prepare for, the IRS’s plan,” the organization wrote.

OPM said that long-term modernization projects funded by the Inflation Reduction Act can continue during a shutdown, meaning some 30,000 employees can work with pay as they map the future of the IRS with new technology modernizations that include a Biden administration project to launch a government-backed digital tax filing software. But employees whose job it is to serve customers will provide virtually no service.

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Treasury officials said the decision to change shutdown plans was purely procedural. But the Inflation Reduction Act is among the most politically contentious elements of Biden’s legislative legacy. The IRS’s share of the more than $1 trillion law is intended to help the agency boost enforcement on wealthy tax cheats and modernize technology and customer service programs.

Daniel Werfel, the Biden-appointed IRS commissioner, said the funding would help the agency become a “world-class customer service operation” — a particular challenge it cannot remain open during a shutdown.

But Republicans on Capitol Hill and right-wing media personalities have derided the law as a massive tax increase and major expansion of government spending. During the spending fight over raising the debt limit in May, House Speaker Kevin McCarthy (R-Calif.) agreed to provide Republican votes in exchange for future spending cuts. The deal included clawing back $20 billion in IRS funding from the Inflation Reduction Act.

Some experts said that using IRA money to keep regular operations afloat during a shutdown could have set a bad political precedent for the agency and given critics more ammunition for later cuts.

“If they had continued operation, Republicans would have been able to say, ‘Hey, you got billions of dollars in new mandatory money,’” said Chris Edwards, a tax expert at the libertarian Cato Institute. “‘There’s no big disaster if we just cut your regular budget. Maybe you don’t even need that budget.’”

In its first year, the funding boost to the IRS vaulted the agency from more than a decade of disarray, tax experts say, to a once-unimaginable position: a functioning tax service.

The IRS answered 90% of its phone calls, squashed its backlog of overdue returns, introduced new online taxpayer tools to keep pace with private software companies and processed 99.7% of returns filed in the 2023 filing season, according to agency reports.

That progress is threatened by the decision to proceed with mass furloughs, experts said. While millions of taxpayers file electronic returns that are processed quickly, paper returns, complex returns and returns that involve questions from employees require a human hand to process.

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This year, the IRS will keep afloat a program that processes forms vital to the lending industry. The income verification service, whose absence in the 2019 led the Trump administration to bring employees in the program back after heavy lobbying by the mortgage banking industry, will continue to function.

The IRS chief counsel, the official who interprets tax law for the agency, has consistently held that federal workers can remain on the job during shutdowns only if their duties protect the government, as opposed to individuals. That means ordinary taxpayers could be more exposed to financial hardship.

For example, when the government shut down for 34 days in late 2018 and early 2019, employees from the Taxpayer Advocate Service, the agency’s internal consumer rights watchdog, could open mail only in search of checks payable to the government, the service reported. It could not conduct case work or help resolve taxpayer disputes, its fundamental purposes.

At the start of that shutdown, the roughly 12% of IRS employees who remained on the job couldn’t answer taxpayer phone calls, issue tax refunds, release liens and levies or complete a bevy of other taxpayer services, the service reported.

As the shutdown dragged on closer to the filing season, which begins around Jan. 1 each year, the tax agency exempted more employees and returned thousands of staffers to work answering phones and disbursing refunds.