The Internal Revenue Service's contingency plans for a government shutdown are currently unknown, with the
Former IRS acting commissioner Doug O'Donnell, who is now a senior managing director of KPMG's Washington national tax practice, discussed the possibilities during a
Now the IRS is facing the prospect of a government shutdown at midnight on Oct. 1 if Senate Republicans and Democrats can't agree on a compromise to pass a continuing resolution to keep the government running.
"There is not a ton of communication that goes on about where the budget is and what's happening and what the IRS is planning with respect to a potential lapse," said O'Donnell. "That is not inconsistent with the past. This is basically an MO for the IRS and most federal government agencies. Those decisions on what to say and when to say it are largely managed by senior members of the administration. In the case of the IRS, it was [the Office of Management and Budget], and then the Treasury Secretary, so that's not unlike what it's been in the past. ... In my experience, there's a reason for that, and it's largely due to their not wanting to be a signal by the agencies themselves that they know something about what's happening — because they don't. That's all being worked at a very different level."
The Treasury Department did not immediately respond to a request for comment about the latest contingency plans. But the IRS is no doubt preparing for the possibility of a shutdown. "There's this legal framework around government spending, and the Anti-Deficiency Act basically says you can't spend that which you don't have," said O'Donnell. "If you don't have appropriated funds of some manner, the agencies can't operate. And in the instance of the IRS, if there's a budget lapse, what ends up happening is that there are a number of activities that are not considered to be essential, and those activities do not continue. And it's important to understand what those are. And it's useful to have what the contingency plan is that the agency puts together because they'll spell out what those activities are, the numbers of people that will be available and the services that will be available."
He noted that it can be a very fluid environment. "In my experience at the agency we made sure that there were new people that were coming into the planning process for the contingency plan, so that we were thinking about what has changed in the agency," said O'Donnell. "A plan to respond to a lapse could look the same from year to year, but typically there are differences."
It will be important for tax professionals to reassure their clients and colleagues during any shutdown. "I think for the clients of KPMG, for our colleagues at KPMG, understanding what's actually happening and what it may mean is super important, just so that you can manage expectations, your own or those you work with," said O'Donnell. "If it lasts more than a couple of hours, one does need to be paying attention to what does this mean? What do I need to do? How should I respond? And how should we be thinking about what could happen if this goes longer than we may have thought originally?"
The duration of the shutdown will be key. "There are times where the lapse of the budgets will run up till midnight on a day, and at that point, if there's no funding, then operations would halt," said O'Donnell. "Frequently in most government agencies, certainly the IRS, once you get past the end of the normal workday, there are not a ton of people that are working in any event. There are the campuses where returns are processed and accounts are adjusted, but typically, the majority of employees are not going to be working. And so if, if there were a lapse that occurred at, say, 12:01 a.m., and it were resolved by 6 a.m. that would be a blip. You'd read about it, you'd hear about it, but the effects would be very minimal. When it's a couple of days out, it depends on what your frequency of interaction is with the agency. If you're involved in something where there's been an ongoing effort to try to resolve a question or a challenge or an account issue, and that person is no longer available, that becomes difficult, because managing that without somebody being available can be very difficult. And so there does begin to be a greater impact to taxpayers, to tax professionals, if it runs longer."
During the 35-day lapse from December 2018 to January 2019, the lapse actually lasted until the beginning of the tax filing season. "There were impacts that at the outset were minimal, not even really considered," said O'Donnell. "But as time went on, it was a very different scenario."
IRS leadership conducted daily calls to decide what to do. "Some of these issues that we wouldn't normally worry about, we need to start talking about, and we need to be thinking about whether our plan for only having 30% of the workforce, or 40% of the workforce in, does that work?" said O'Donnell. "And then that turns into a communication with Treasury Department, who will be working with the Office of Management and Budget to understand whether there's any flexibility, because that which we thought was essential for a day is one thing, but when you get out a week or two weeks, it becomes a very different matter, and that's something that leadership will know about and will be prepared for. And there are leaders at the IRS who have been through this, and do appreciate that if something were to happen, the pivot to this is not an hour or a day, it's something more than that. They do have experience with that and how to make the case for allowing additional folks to be involved in some of the work. It doesn't turn everything back on, but some of the things that you need to make sure you do that are essential to the operation of the IRS that they will be turned back on."
Accounting Today asked about where the contingency plan could be. "I've been looking around and poking," said O'Donnell. "I can't find an official updated version, but my sense is that there will be an updated version because that's an ongoing exercise. It's done by top level leadership to take a look at the programs across the board. And it's a heavy lift initially, and then it's got to be a close read by the different operational components to understand what might be happening, what's different about the way we're operating now than last year, and so that's an ongoing effort to update."
Accounting Today also asked about the staffing cuts at the IRS and how those would affect the shutdown. President Trump and White House Office of Management and Budget director Russell Vought have threatened mass firings of federal employees in the event of a shutdown, although the IRS was
"They lost a significant number of people through the Deferred Resignation Program and other reductions in force, and they then have moved to hire and there's also this offer for people that did take the Deferred Resignation Program to come back," said O'Donnell. "We don't know how many, and we don't know the classes of employees, and we don't know how many accepted it, but there is a move to make sure that there is some rebuild of the staff. But they've got to get in and get trained up, and that's got to happen before they can do some of this work that I was talking about, like answering phones, staffing walk-ins, adjusting accounts. And so it all begins to work together in terms of the environmental challenges that the Service is going to face that are primarily focused on the individual work. But this affects entities large and small because anything that they may need to do to interact with and the professionals that represent them to interact with the IRS is going to be in the same bucket of demand that everything else is, where we've got this environment with new provisions, a lot of new people, fewer people, and in a relatively challenging environment, so that the Service is going to be thinking about this very carefully, about how to best position. They could make an argument that some of these activities that would not normally be considered essential could be categorized as essential."
The IRS will need to train employees about the new tax law as it tries to rehire staff. "We're in an interesting period here in the United States where there's an effort to hire," said O'Donnell. "It was reported in late August, roughly 3,500 employees, which seem to be mostly in the customer service space, will be coming in to do this work where typically phones are being answered, amended returns are being processed, accounts are being adjusted, and those folks will need to be trained for a much longer period. That typically takes three-plus months to bring them up to speed."
The One Big Beautiful Bill Act adds new complications. "And then there are the folks that need to be trained in the new tax law, which, this year there was significant change to provisions for tax year 2025 that affect millions of individuals: the overtime, the tips, the deduction of interest on automobiles," said O'Donnell. "That is a bit nuanced. And there's other provisions, but those are going to affect large numbers of individuals that don't have access to, for example, a KPMG to help them navigate. And that will spike demand for assistance, and that's going to come at a time where there may be fewer people, and there may be fewer people that have the deep level of expertise that may have existed before the 6,000 or so employees in the customer service representative space did leave, and actually a number of them that took the Deferred Resignation Program, the majority of them will leave payroll September 30. They've not been working since the middle of May. So there's a lot that's going on in that space. And then if you get into the filing season, there's a completely different set of decisions that need to be made. We are now in the really primary season for the IRS. Processing returns and taking in payments are two of the essential functions that the IRS has. The good thing for the IRS, for the United States, frankly, is that most individual returns, like 95 or 96% of the individual returns, are filed electronically. So that process happens, it works, but there are still paper returns that are coming in."
The IRS will need to communicate in the event of a shutdown. "If there is a lapse, there will be communications that will be out there about what what functions are on and which ones are off," said O'Donnell.
"Managing expectations becomes really important, and that's on the part of the IRS and for their employees, understanding what's going to happen," he added. "They know when they come back to work if there is a lapse that there are a lot of things that need to be turned back on, that need to be restarted. Even when there is a lapse that ends, if it's longer than a couple of days, turning things back on is not an inconsequential challenge, and it's something to keep in mind. So I think it's really important to pay attention to what the IRS puts out. They'll put things out on
Hardin Tanguay summed it up. "The IRS has been here before," she said. "There are playbooks for shutdowns. Essential operations will go on, how those are defined will meet the needs of the moment, but taxpayers should potentially expect a slower service on everything else in the event that we do face a shutdown. The key is to stay informed and continue meeting your tax obligations as normal."
O'Donnell said taxpayers and tax professionals should continue to file. "Make sure you're doing the things we normally do, to file, to make the payments, keep your records, pay attention to how things are evolving, and make sure for us, we'll be communicating within the firm and then sharing that information with clients, but It's going to be really important for all of us to just keep track of what's happening," he said.
The National Treasury Employees Union is urging a resolution before the shutdown. "Hardworking Americans deserve better than the current chaos in Washington," said NTEU national president Doreen Greenwald in a statement Thursday. "We elect leaders to work together to ensure government provides the necessary services effectively and efficiently for its citizens. Instead of the parties working together, we face another potential government shutdown. This is politics at its worse, using the federal budget as a game of chicken with federal employees as the collateral damage. Again. And this time even more so with the Administration's latest illegal threat of mass layoffs if the government shuts down. This needs to stop. We must expect more from the government and stand with federal employees so they can continue to provide the services we rely on and are not used as political pawns. We all need to call on Congress and the Administration to do their jobs. The mandate is clear: Negotiate a bipartisan deal to fund the government so that services continue and taxpayer dollars are not wasted by a shutdown that serves no one."
