Source: Fortune
Summary
The IRS processed 140.2 million tax returns and issued 90.4 million refunds in 2026, slightly down from the previous year, after Elon Musk’s Department of Government Efficiency (DOGE) cut more than a quarter of its workforce. Former acting Commissioner Douglas O’Donnell warned that the cuts, which reduced staff to 74,000, could harm the agency’s long-term operations. The IRS claimed the tax season was successful, citing higher average refunds and efficient processing. O’Donnell, now with KPMG, said the IRS had long struggled with modernization and underinvestment before the cuts. The agency faces further budget reductions and challenges in maintaining services as it tries to adopt new technology.
Our Reading
The numbers tell one story.
The IRS cut 25,000 employees, now at 74,000.
The agency claims success despite fewer staff and lower refunds.
O’Donnell says long-term damage is likely.
The IRS plans to cut IT costs without disrupting operations.
The future looks uncertain with shrinking budgets and tech challenges.
The IRS is playing catch-up with a shrinking budget and a workforce that’s already been thinned.
Author: Evan Null
The IRS’s weak points
Douglas O’Donnell, a former acting IRS commissioner, has raised concerns about the agency’s long-term viability after the Department of Government Efficiency (DOGE) slashed its workforce. O’Donnell, who served in multiple roles from 1986 to 2025, said the IRS had already been underinvested in for years before the cuts. He noted that the IRS has struggled with modernization, particularly in moving to a paperless system, which would reduce costs but has been slow to implement. Despite the $80 billion infusion from the 2022 Inflation Reduction Act, the IRS faced setbacks after the DOGE cuts, which O’Donnell said reversed progress. The IRS claims it has made efficiency gains, but O’Donnell argues that the lack of replacement staff could hurt long-term service quality.
O’Donnell pointed to the IRS’s decades-long effort to reduce paper processing, which accounts for 72% of processing costs despite only 6% of returns being paper-based. The agency aims to cut paper-related expenses from $450 million to less than $20 million by 2029, but previous attempts have failed. He also highlighted the challenges of automation, noting that while AI and digital tools can improve efficiency, they initially require more labor to implement and maintain. O’Donnell warned that without proper investment, the IRS could struggle to maintain service levels and taxpayer confidence, especially as enforcement and oversight decrease.
The IRS’s budget has been shrinking, with the 2025 discretionary budget at $12.2 billion, dropping to $11.2 billion in 2026 and expected to fall further to $9.8 billion in 2027. This could lead to cuts in enforcement and the cancellation of the Direct File program, which allowed free tax filing. O’Donnell said the IRS needs to balance modernization with workforce growth, but the current funding and staffing levels make that difficult. He emphasized that the IRS must invest in systems and digital capabilities to improve service, but without adequate support, it may not be able to keep up with the demands of a modern tax system.
The IRS is now under pressure to maintain service quality while dealing with reduced staff and budget cuts. While the agency claims it has achieved efficiency gains, O’Donnell believes the long-term impact of the DOGE cuts will be felt as the IRS struggles to adapt to new technologies and maintain oversight. He also warned that without proper staffing and funding, the IRS may not be able to ensure taxpayer compliance, which could lead to a loss of confidence in the tax system. The agency’s future depends on its ability to navigate these challenges while maintaining the trust of the American public.
O’Donnell’s concerns highlight the tension between short-term efficiency and long-term stability. The IRS is trying to modernize and reduce costs, but the cuts have created a gap in capacity that may be hard to fill. As the agency faces further budget reductions, it will need to find new ways to operate effectively without compromising service quality. The challenge is not just about cutting costs, but about ensuring that the IRS can continue to serve taxpayers and enforce tax laws in a rapidly changing environment.
The impact of DOGE cuts
The impact of the DOGE cuts on the IRS has been significant, with O’Donnell noting that the agency’s long-term goals were disrupted. He said the cuts, which targeted enforcement and technology areas, were not accompanied by a clear strategic plan, making it difficult to assess their true intent. The IRS had been working on modernizing its systems and reducing the need for a large workforce, but the sudden reduction in staff has made this transition more challenging. O’Donnell argued that automation and digital tools require initial investment and staffing to function properly, and without that, the IRS may not be able to maintain the same level of service.
O’Donnell also pointed out that the IRS’s reliance on technology to improve service has been hindered by the loss of experienced staff. He explained that while automation can increase efficiency, it also creates new demands for human oversight and maintenance. Without the right people in place, the IRS may struggle to implement and manage these systems effectively. This could lead to operational disruptions and a decline in service quality, which could negatively impact taxpayer satisfaction and compliance.
The IRS’s ability to maintain its services has been a point of contention, with the agency claiming that it has managed to process returns efficiently despite the cuts. However, O’Donnell warned that this success may not be sustainable in the long term. He said that the agency’s reduced workforce could lead to a decrease in enforcement and oversight, which are critical for ensuring taxpayer compliance. Without proper oversight, the IRS may not be able to detect and address issues in a timely manner, which could lead to a loss of confidence in the tax system.
O’Donnell also highlighted the importance of maintaining a balance between automation and human oversight. He said that while digital tools can improve efficiency, they cannot replace the need for skilled workers who can manage and maintain these systems. The IRS’s current staffing levels may not be sufficient to handle the demands of a modernized tax system, which could lead to operational challenges and a decline in service quality. This is particularly concerning as the agency faces further budget cuts and the need to adopt new technologies to stay competitive.
The long-term implications of the DOGE cuts are still unclear, but O’Donnell believes that the IRS will need to find a way to adapt to the new reality. He said that the agency must invest in modernization and workforce development to ensure that it can continue to serve taxpayers effectively. However, without adequate funding and support, the IRS may struggle to meet these challenges, which could have a lasting impact on the agency’s ability to function as a key part of the federal government.
Rebuilding the IRS
Rebuilding the IRS will require a combination of increased funding, strategic planning, and a focus on modernization. O’Donnell emphasized that the agency needs to invest in technology and digital tools to improve service and efficiency, but this requires a stable and well-funded workforce. The IRS has already faced budget cuts, with the 2027 budget expected to be even lower than 2026, which could limit the agency’s ability to implement new systems and maintain existing ones. Without proper funding, the IRS may struggle to keep up with the demands of a modern tax system, which could lead to operational challenges and a decline in service quality.
The IRS’s future also depends on its ability to adapt to the rapidly evolving landscape of AI and automation. O’Donnell said that while these technologies have the potential to improve efficiency, they also require significant investment and staffing to implement and maintain. The agency must find a way to balance the benefits of automation with the need for human oversight and support. This is particularly important as the IRS faces the challenge of maintaining compliance and ensuring that taxpayers are filing their taxes correctly, which requires a combination of technology and skilled workers.
O’Donnell also highlighted the importance of workforce development in the IRS’s rebuilding efforts. The agency has been working to hire 8,000 new employees to replace those lost to the DOGE cuts, but this process will take time and may not be enough to address the long-term challenges the agency faces. He said that the IRS must also focus on retaining skilled workers and creating a work environment that supports innovation and growth. This includes offering flexible work opportunities and investing in training and development programs to ensure that employees have the skills needed to manage new technologies and systems.
The IRS’s ability to rebuild will also depend on its relationship with the Treasury Department and the Office of Management and Budget. O’Donnell said that the agency will need to negotiate for additional funding and discuss what is possible with different levels of support. This includes exploring ways to optimize resources and find cost-effective solutions that can help the IRS meet its goals. However, without sufficient funding, the IRS may not be able to implement the changes needed to improve service and efficiency, which could have a lasting impact on the agency’s ability to function as a key part of the federal government.
O’Donnell’s concerns about the IRS’s future highlight the challenges the agency faces in rebuilding and modernizing its operations. The combination of budget cuts, staffing reductions, and the need to adopt new technologies creates a complex environment that requires careful planning and strategic investment. The IRS must find a way to balance these competing demands while ensuring that it can continue to serve taxpayers effectively. Without the right support and resources, the agency may struggle to meet these challenges, which could have a lasting impact on its ability to function as a key part of the federal government.
