by Edward Garris, CFP
One can be forgiven for thinking that threats of a government shutdown seem to occur with increasing frequency. Since the 1970s, there have been a total of 21 actual shutdowns, with the number of such closures per decade peaking at eight in the 1980s. Most have ended after only a few days, while the most recent shutdown in 2018-2019 set a record, lasting 35 days.
In the last six months alone, credible risks to shutter the federal government have arisen on three occasions – September and November 2023, and January of this year – and the possibility of a shutdown in March 2024 looms as of the time of writing.
Due to a revised reading of the Antideficiency Act (the “Act”) in 1980 – and still observed today - failure to make appropriations for a federal agency by the end of the fiscal year will result in a funding gap for that agency in the new fiscal year. Because the Act prohibits funding gaps, those unfunded agencies must then close up shop or severely curtail operations (excluding certain services subject to various carve outs).
The Internal Revenue Service (“IRS”) is not immune to this rule. As with other agencies, subject to limited exceptions, the services offered by the IRS cease in the case of any broader government shutdown due to funding gaps.
Given the increased incidence of shutdown risk in recent months, this might not necessarily be news, but for the background against which it is happening. The IRS has already suffered headwinds to its services over the past several years. Between 2010 and 2019, the audit rate fell by more than half, due to budget cuts and a 39% drop in revenue agents. While it may be the rare practitioner who wishes for more audits, it would be the even rarer practitioner who would wish for a protracted audit or an audit that doesn’t begin until immediately before the expiration of the statute (e.g., in the case of a Form 706). By example, the exposure to liability that attaches in the time between when a refund issues and when a return is deemed not to be accepted as filed can be significant.
Despite – and possibly in response to – funding reductions to the IRS, the Inflation Reduction Act (the “IRA”) had, by many accounts, improved the Service’s ability to function to levels not seen in years. Additionally, the IRS further relied on the IRA to undergird its operations in the case of a government shutdown; in its contingency plan for a possible shutdown in Fiscal Year 2023, the IRS interpreted Section 10301 of the IRA as a means to fund itself and exempt 100% of its employees from furlough. Before the start of Fiscal Year 2024, however, the Office of Management and Budget disagreed with this reading and determined that, rather than 100% of IRS employees being exempted from furlough, two-thirds of IRS employees would, in fact, be furloughed in the case of a shutdown.
If the government were to close later this month, it would be the first instance of a government (and Service) shutdown during tax season. By definition, this would be unprecedented.
So, what could taxpayers expect? The Service’s stated position can be a guide. In fact, the IRS does have a contingency plan, entitled “Fiscal Year 2024 Lapsed Appropriations Contingency Plan,” 144 pages detailing what work continues and what work will pause. Similarly, recent history can be equally instructive.
In the October 2013 shutdown, which spanned 17 days, audits were postponed. The “opening” of the 2014 tax season was delayed by several days but there was no adjustment to the deadline for filing tax returns due on October 15, 2013.
The shutdown beginning December 22, 2018, saw the IRS pause audits, examinations and non-automated collections. Appeals officers were barred from working, and hearings were rescheduled. Audit and examination appointments were canceled and rescheduled. The IRS Chief Counsel’s Office was also affected. Even as offices were closed, taxpayers nonetheless received Notices of Deficiency, thereby triggering the period to petition Tax Court, or prompting them to seek relief even if there was uncertainty surrounding counterparties to furnish that relief. Penalties for failure to file and failure to pay were still assessed (potentially subject to subsequent abatement).
However, electronic returns were processed as were returns with payments, and services “necessary for the safety of human life or protection of government property” also continued. This included technical functions, and criminal law enforcement and investigations, among other tasks. By January 7, 2019, before the government reopened, the IRS had been directed to issue tax refunds and workers were ordered back from furlough to the extent necessary to comply with this mandate.
Throughout that episode, the IRS maintained more than 57% of its employees, more than the approximately 33% who would remain on the job under the current fiscal year contingency plan.
The Service’s 2024 Contingency Plan sets out just how steep cuts would be in a shutdown this year. As of September 19, 2023, the Service counted 89,944 employees. In the event of a shutdown, 30,063 would continue to work. Those remaining would fall into one of three categories:
Those whose compensation is funded by a resource other than annual appropriations
Those who are necessary to perform activities necessarily implied by law; or
Those whose work is necessary to protect life and property. (As the National Taxpayer Advocate’s office has pointed out, that property is defined as government property, not the property of individual taxpayers).
The first two categories include roles such as carrying out mandates specific to the IRA (e.g., implementing green energy credit provisions, the Strategic Operating Plan and Direct File pilot program) and assisting the Social Security Administration. The third category, interestingly, encompasses services familiar to taxpayers and practitioners, although, as with most things during a shutdown, in a more limited scope. This category contemplates activities related to protection of statute expiration, bankruptcy, liens, and seizure cases; administering contracts related to safety of human life or the protection of federal property; accounting data preservation; and maintaining criminal law enforcement and undercover operations.[1]
The activities that will cease during a shutdown also include functions familiar to taxpayers and practitioners: processing transcripts, audit and examination of returns, appeals, non-automated collections, taxpayer services such as responding to taxpayer questions and most activities of the Chief Counsel’s office.
Indeed, the Chief Counsel’s office would feel the effects of a shutdown under the current Contingency Plan. The Chief Counsel’s office duties are wide ranging: “[providing] advice to the IRS Commissioner on all matters pertaining to the interpretation, administration and enforcement of the Internal Revenue laws, representing the IRS in litigation, and providing all other legal support needed by the IRS….” Importantly for practitioners, the Office prepares regulations, revenue rulings and procedures, actions on decisions, and other items of public guidance and legal advice. The Office’s mandate covers letter rulings and other responses to taxpayer requests.
As of the end of Fiscal Year 2022, the Chief Counsel’s office employed a staff of 2,334, with the IRS and the Chief Counsel’s office employing a combined total of 1,655 attorneys. That year, they closed nearly 60,000 cases, approximately eight percent of which were resolved through guidance and assistance, including published guidance. The Contingency Plan allows only 451 employees of the Chief Counsel’s to continue their work – attorneys and all other staff. (Appeals had 980 officers in Fiscal Year 2022, and closed more than 72,000 cases that fiscal year; the Contingency Plan protects only 31 from furlough.)
Of the various divisions of the Chief Counsel’s office, Small Business Self-Employed would retain the greatest number of staff with 113, with Finance & Management coming in second at 70 staff; Pass Throughs & Special Industries, which covers trusts and estates as well as partnerships and S corporations, comes in a distant fourth with 40 staff exempted from furlough. The division covering exempt organizations would maintain a mere nine staffers. Area Counsel offices in Philadelphia dedicated to Criminal Tax and Large Business & International would keep 18 and 67 staff on their rolls, respectively, during any period of furlough.
The Contingency Plan, however, provides a notable carve out for litigation:
“Due to Counsel's separate litigation function, the number of excepted Counsel positions will not align with excepted activities authorized in other IRS business units. Counsel's plan assumes that the Federal and District Courts will be open, and that litigation will continue uninterrupted. The plan excepts, on an as needed basis, those personnel assigned to litigation that is scheduled for trial or where there is a court-imposed deadline within the plan timeframes. If a continuance is denied, the case will be reviewed to determine if work on the case may be excepted. If the judiciary does not operate, excepted personnel are placed in non-duty status. Personnel engaged in excepted litigation activities are excepted...”
Beyond matters requiring the input of the Chief Counsel’s office, practically, the Contingency Plan restrictions mean that the IRS would no longer respond to the 46,000 phone calls it normally accepts on a daily basis; 363 Taxpayer Assistance Centers would close, reducing access to information for 5,000 taxpayers per day. Many refunds would go unprocessed, and paper correspondence would go unanswered. Refunds could issue but only for returns that were electronically filed, free of errors, and remitted via a direct deposit option. As such, one-third of taxpayers entitled to refund would be without refund or recourse.
Further, a shutdown would not halt automated notices of intent to levy and automatic transfers to collections. With no Taxpayer Advocate, no appeals, and uncertainty surrounding a counterparty on a Tax Court docket, taxpayers could be left with no recourse and still be subject to additional interest and penalties.
Administratively, a shutdown could erect barriers to the implementation of new reporting requirements, and the clearing of backlogs from earlier obstacles would be halted or even reversed. CPAs, attorneys, enrolled agents and other representatives who do not yet have a power of attorney on file might be barred from obtaining the information they need to effectively represent clients during a reduction in services.
In short, during a shutdown induced by a funding gap, the Contingency Plan does keep the lights on at the IRS – or some of them, at least. However, in the absence of refunds, appeals, guidance, and other central components of the IRS mandate, the burden to report, to remit and to make a reasonable evaluation of how best to comply would seem to weigh more heavily on taxpayers than some may feel it already does. Furthermore, in a shutdown, the Service would be largely absent as a counterparty.
Will there be a shutdown? Will it be protracted? What will the after-effects be on the Service, on taxpayers, on practitioners? The answer, it seems, is that it depends.
Edward Garris, CFP® is a wealth advisor at Glenmede Trust Company, N.A. He is a graduate of the University of Texas at Austin and Chicago-Kent College of Law. He has previously practiced in the areas of trusts and estates as well as tax controversy.
[1] There is a fourth category of employees who will continue to work during a shutdown, and all 17 of these employees perform tasks related to preparing for a shutdown, implementing a shutdown, and then – presumably – reopening after the shutdown has concluded.