Modernization

IRS faces inventory backlog, IT project delays this filing season, watchdog says

A memo from Treasury’s deputy inspector general for audit warns the tax agency that massive staff cuts and the government shutdown have put the IRS behind the eight ball.

By Matt Bracken

January 27, 2026

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The Internal Revenue Service building on Feb. 23, 2025 in Washington, D.C. (Photo by Annabelle Gordon for The Washington Post via Getty Images)

The Treasury Department’s watchdog is warning the IRS that its workforce reductions and delays to modernization projects have left the tax agency in a precarious position as filing season begins.

In a memo sent Monday to the IRS commissioner, Diana M. Tengesdal, deputy inspector general for audit, wrote that the agency’s cuts have brought staffing back to October 2021 levels, prior to the Inflation Reduction Act funding infusion aimed at strengthening enforcement on wealthy individuals and corporations and modernizing antiquated IT systems.

The loss of personnel has led to a backsliding on previous agency priorities, the Treasury Inspector General for Tax Administration official noted, pointing specifically to a pandemic-created backlog of tax returns awaiting processing.

The tax agency had made serious strides in addressing that backlog, TIGTA found in a September 2023 report, but Trump administration staff cuts combined with the recent government shutdown have led to inventory levels that are 129% higher than pre-pandemic figures.

“Inventory that is not worked during the current processing year will be carried into the 2026 Filing Season and may affect the IRS’s ability to timely process tax returns during the filing season, especially with reduced staff,” Tengesdal wrote.

“This could result in delays in taxpayers receiving refunds and could result in the IRS paying interest,” she continued. “During Processing Year 2025, the IRS paid more than $2.6 billion in interest to individuals as of November 30, 2025. The interest paid includes interest due to tax return processing delays and other individual interest payments.”

According to TIGTA, the IRS had lost roughly 19% of its staff (19,000 employees) as of October 2025, including 8,300 workers tasked with key filing-season functions, such as processing returns, providing customer service and updating computer systems. In IT specifically, the IRS went from 7,091 staffers in October 2021 to 8,504 as of October 2024 and back down to 7,135 now.

“New efforts to modernize tax administration are delayed and their expected efficiencies may not occur during the upcoming filing season,” Tengesdal wrote, adding later in her memo that 16% of the IRS’s IT workforce has been wiped out. Those staffers would have worked on system updates to account for inflation and expiring or new tax provisions.

“According to the IRS readiness reports, implementation of these legislative changes is at risk for the 2026 Filing Season,” she wrote.

Other IT initiatives now in jeopardy include the IRS’s Zero Paper Initiative, amended tax return automation and Taxpayer 360, according to TIGTA. The Zero Paper Initiative, for example, is aimed at converting paper tax returns and other IRS forms to digital formats.

TIGTA is conducting a separate review of that program’s progress, Tengesdal said, but early indications are troubling: As of Dec. 6, 2025, the four contractors hired by the IRS to digitize paper returns for the 2026 filing season have scanned and digitized just 4% of the 10.7 million Form 1040 paper-filed returns, according to the memo.

Taxpayer 360, which will leverage AI tools and “user-friendly interfaces” to spur “more efficient issue resolution for taxpayers and the IRS,” is also “facing delays due to the shutdown and resource prioritization and realignment,” according to TIGTA.

“Users in the pilot program are reporting bugs, along with enhancements and other issues that require remediation before a larger scale release,” Tengesdal wrote. “One of the key initiatives for Fiscal Year 2026 is to have Taxpayer 360 available to 5,000 or more Accounts Management assistors by September 2026, which will be after the 2026 Filing Season.”

The first year of the second Trump administration was an especially bumpy one for the IRS workforce — particularly its technical staff. Last March, the agency placed about 50 IT executives on administrative leave, a move that came a month after thousands of probationary employees were dismissed.

The tax agency cycled through seven commissioners in 2025 before handing Social Security Administration chief Frank Bisignano the new title of IRS CEO. With so much turnover on the IT side of the house, former IRS tech officials offered warnings nearly a year ago that the 2026 filing season could be chaotic.

“My prediction is like in August, they’re going to start realizing that there are many balls dropped. There are systems that haven’t been worked on or planned for,” a former IRS IT executive told FedScoop last April. “The people that do the planning are the ones that they got rid of.”