Here's the lowdown
The IRS workforce fell from about 103,000 to 74,000 in one year, while annual funding dropped about 20% and remaining Inflation Reduction Act funding was cut to $26 billion.
TIGTA grouped the strain into seven challenges: resources, operations, taxpayer data, tax-law changes, taxpayer service, technology modernization, and compliance.
The pressure is already visible in nearly two-year identity-theft cases, 30% fewer new examinations, and $28.1 billion of estimated improper payments across four high-risk programs.
The IRS is being asked to become more digital, more secure, more helpful, and better at enforcement.
It is also trying to do all of that with 29,000 fewer employees than it had one year earlier.
That is the tension running through a new fiscal 2027 report from the Treasury Inspector General for Tax Administration. Its watchdog identified seven major challenges facing the tax agency.
They look like separate problems. They are really one crowded operating problem.
The IRS has fewer people and less money. Every unfinished technology project, weak security control, confusing rule change, and delayed taxpayer case now competes for the same thinner pool of resources.
The squeeze starts with people and money
The IRS workforce fell from about 103,000 employees in January 2025 to 74,000 in January 2026. That is a 30% decline.
Its annual budget also dropped about 20%. Congress had once provided nearly $80 billion of supplemental funding through the Inflation Reduction Act, but later reductions brought the total down to $26 billion. The agency had spent $16.5 billion of that amount by March 31, 2026.
That staffing math is already showing up in the work.
The IRS started 30% fewer taxpayer examinations in fiscal 2025 than it did one year earlier. By late February 2026, two major operating groups had also failed to fill about 2,300 approved jobs.
Existing employees picked up more overtime. Paid overtime hours rose 12%, adding roughly $27 million in cost.
Seven challenges, all fighting for the same capacity
TIGTA's list covers managing resources, improving operations, protecting taxpayer data, implementing tax-law changes, improving taxpayer service, modernizing technology, and ensuring tax compliance.
The operations problem includes electronic federal payments, a return-to-office directive, and the unfinished push to digitize paper. The agency reported 175 artificial-intelligence projects as of November 2025, but contractors working on paper digitization struggled to hire and clear enough staff.
Here's the thing: technology can remove work. It can also create a new queue when the people needed to approve, secure, or maintain it are missing.
Taxpayer service shows the human cost
The service numbers are the easiest to feel.
TIGTA estimated that roughly 1 million people who called certain IRS phone lines between February and May 2025 did not receive quality service.
Identity-theft cases take nearly two years to close on average. Most of that time is spent waiting for an employee to become available. Over a two-year period, those delays contributed to more than $124 million in refund interest paid to taxpayers.
The agency also lost nearly 300 trained identity-theft assistors. For a taxpayer waiting on a frozen refund, this is rent, groceries, or payroll sitting inside a government queue.
The data problem is bigger than a password reset
The IRS holds some of the most sensitive information in government. Yet TIGTA found several basic control gaps.
More than half of nearly 1,200 employees and contractors hired during the first eight months of 2025 did not complete the right security training before receiving access to sensitive systems. The IRS also had more than 1,100 known data-sharing agreements but no central database that could identify all of them.
Modernization created another warning. Of more than 18,000 SharePoint Online sites reviewed, 99% were missing audit logs or did not report an access-control method.
Moving an old process to the cloud is not the same thing as fixing it.
New tax rules create new error paths
The agency also had limited time to implement new deductions for tips, overtime pay, car-loan interest, and seniors before the 2026 filing season.
The IRS accepted more than 470,000 returns claiming $977 million in questionable car-loan interest deductions. The estimated tax effect was $122 million.
That does not mean every deduction was fraudulent. It means the controls were not strong enough to stop a large pool of questionable claims before acceptance. Preparers then inherit the mess.
Compliance has a selection problem
The IRS cannot audit everyone. So is it choosing the right returns?
The examination rate for partnerships with at least $10 million in assets fell from 2.7% in 2011 to less than 0.1% in 2023. Meanwhile, 92% of closed examinations in the Large Partnership Compliance Program produced no change.
The projected gross tax gap for tax year 2022 was $696 billion. Four high-risk credit programs produced an estimated 26.5% improper-payment rate in fiscal 2025, equal to $28.1 billion.
There is progress, just not much room for error
The report is not a claim that everything is failing.
IRS online accounts passed 64 million users in 2026, up nearly 13 million from the prior year. The agency also protected $7 billion in fraudulent identity-theft refunds during 2024 and 2025.
Those wins matter. They show the size of the bet on self-service, automation, and better case selection.
That is why the seven-item list matters. The IRS does not have seven isolated fires. It has one capacity problem touching seven critical systems at once.
Bottom line: fiscal 2027 will show whether better tools can close that gap before taxpayers and tax professionals feel it more sharply.
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