The IRS is facing significant staffing challenges in 2025, with thousands of employees, including revenue agents and auditors, being laid off or resigning. This has the potential to impact how audits are conducted and how efficiently the IRS handles tax-related matters. As a small business owner or taxpayer, you might be wondering what this means for you. In this blog, we’ll explore the effects of IRS layoffs on small businesses, individual taxpayers, and the broader tax system.
1. Increased Delays in Tax Filings and Audits
One of the most immediate consequences of the IRS layoffs is likely to be delays in processing tax returns and conducting audits. Revenue agents, who are responsible for auditing tax returns, have been hit hardest by the staff cuts, with over 30% of them either fired or resigned. This means fewer agents are available to handle the increased workload, resulting in longer wait times for taxpayers and businesses.
- Tax Filing Delays: With fewer staff available to process returns, you might experience delays in receiving your tax refunds or in the resolution of any issues with your filings.
- Audit Delays: If you’re selected for an audit, it may take longer for the IRS to initiate and complete the process. While this could be a temporary relief for businesses facing audits, it could also delay the finalization of your tax situation.
2. Reduced Audit Frequency
The goal of IRS enforcement in recent years has been to increase audit rates on high-wealth individuals and complex business filers, largely due to the increased funding from the Inflation Reduction Act. However, with the significant reduction in staffing, this initiative is at risk.
- Impact on Small Businesses: Small business owners may see less frequent audits, especially as the IRS shifts its focus to handling a larger number of cases with fewer resources. This could mean more time before an audit occurs, but it could also signal that audits will be more concentrated on the highest-risk cases rather than routine checks.
- Audit Quality: With fewer agents available to conduct thorough audits, the quality of audits may decrease. Smaller businesses and individuals may find that audits are less comprehensive, potentially leading to oversight or errors in the IRS’s findings.
3. Decreased IRS Capacity for Customer Service
The IRS layoffs are also affecting other divisions of the agency, including those that deal with taxpayer support. With fewer employees available to assist taxpayers, response times for phone calls, emails, and other forms of communication are likely to increase. This could leave taxpayers and businesses struggling to get timely answers to important questions.
- Taxpayer Support: If you need help with tax filing, understanding deductions, or resolving tax disputes, you may experience longer wait times or delays in receiving assistance.
- Resolution of Issues: Taxpayers and small business owners who need to resolve issues with their filings or pay penalties might encounter slower response times from the IRS, leaving them in limbo for longer periods.
4. Potential Impact on Tax Compliance
The reduction in IRS staff could have broader implications for tax compliance. With fewer auditors available to monitor business and personal tax filings, some businesses and individuals may feel they can take more risks with their tax obligations.
- Lack of Enforcement: Without sufficient IRS oversight, there could be an uptick in non-compliance as some may take advantage of the reduced risk of getting caught. This could result in lost tax revenue for the government and place a larger burden on the IRS when it comes time to balance the books.
- Increased Pressure on Honest Taxpayers: Small business owners and individuals who comply with tax laws may still feel the impact of these changes, as the IRS may focus its limited resources on enforcing penalties and fines rather than offering assistance to those who are trying to stay compliant.
What Small Businesses Can Do to Stay Ahead
Despite these challenges, there are steps small business owners can take to stay ahead and ensure they’re compliant with tax laws.
Stay Organized: With the IRS understaffed, keeping your financial records organized is more important than ever. Proper bookkeeping and documentation can help you avoid issues with the IRS and make the audit process easier, should your business be selected for one.
- Plan for Potential Delays: Understand that processing times may take longer and prepare your business for possible delays in receiving tax refunds or resolving issues with the IRS. Stay proactive in tracking your filing status and follow up regularly.
Consult with Professionals: With the IRS’s limited capacity to assist, working with a tax professional or CPA can help you navigate the complexities of tax filing and compliance. A professional can also ensure that you are taking advantage of all available deductions and credits, which can ease the burden of filing.
Looking Forward: What This Means for the Future
The IRS layoffs are likely to have long-term effects on how the agency functions, with fewer employees and a shrinking capacity for audits and enforcement. While this might offer some relief to small business owners and taxpayers in the short term, it could also mean that the IRS will need to adjust its approach to tax enforcement in the future.
- Future Policy Changes: As IRS staffing continues to dwindle, Congress and the IRS may need to reevaluate enforcement priorities, potentially focusing on automation or other efficiencies to address the workload.
- Increased Reliance on Technology: The IRS may accelerate the adoption of technology, such as AI and data analytics, to conduct audits and manage tax filings more efficiently. While this may streamline some processes, it could also create new challenges for businesses and individuals navigating automated systems.
The IRS layoffs are reshaping the tax landscape for businesses and taxpayers. While small businesses may experience fewer audits and delays in processing, the long-term effects on enforcement and taxpayer support are still unfolding. By staying organized, planning for delays, and working with tax professionals, you can ensure your business remains compliant, even in an era of reduced IRS staffing. At Boxelder, we’re here to help you navigate the complexities of tax compliance and stay ahead of any potential challenges posed by these changes.
