Automation is Reshaping IRS Risk
Written by: Rachel (Libowitz) Paine, Senior Tax Advisor, Tax Guard
Amid automation failures and staffing shortfalls at the IRS, skilled representation is more essential than ever.
Automation is everywhere, dominating the conversation these days. Disciplined processes and technology can handle routine tasks, but experience and judgment remain essential for resolving corner cases, those rare or extreme situations automation cannot manage. Nowhere is this more evident than in dealing with the Internal Revenue Service (IRS), an agency that generates no shortage of such cases. As the IRS pursues yet another modernization effort, cutting staff while leaning on unproven technologies, it is drifting, at least temporarily, toward normalized deviance (it feels like everything is a corner case). The solution remains people with experience and expertise, but you’ll find them outside the IRS because they are rapidly disappearing from within the agency.
Inflation Reduction Act
For all its longstanding challenges, the IRS’s current predicament can be traced to a more recent inflection point: the 2022 passage, and subsequent rollback, of the Inflation Reduction Act (IRA). The law initially allocated $80 billion over a decade to modernize the agency, requiring the IRS to publish a Strategic Operating Plan (SOP) outlining priorities through 2031. The plan identified five objectives, including improved taxpayer service, faster dispute resolution, expanded enforcement targeting high-dollar noncompliance, adoption of advanced technology, and workforce reforms. To execute these goals, the IRS launched 23 separate modernization programs.
Budget and Staff Cuts
As of late January 2026, Congress is racing to complete appropriations ahead of a January 30 deadline. The IRS faces pressure on two fronts: cuts to its annual operating budget and another rollback in IRA funding. If enacted as written, the 2026 bill would reduce the agency’s operating budget to about $11.2 billion, roughly 9% below 2025 levels. Across four bills since 2022, lawmakers have already rescinded approximately $42 billion of the IRA’s modernization funding, with another $11.6 billion now on the table.
These cuts coincide with a sharp contraction in the IRS’s workforce. According to the Treasury Inspector General for Tax Administration (TIGTA), the IRS lost roughly 25% of its staff in 2025, shrinking from about 103,000 employees to 77,000. The cuts span experience levels and functions, eroding institutional knowledge and operational capacity. Service disruptions and backlogs were widespread throughout 2025, and further cuts in 2026 will likely compound those problems.
Modernization in Permanent Transition
The IRS has long emphasized modernization, but its efforts often stall as priorities shift. Central to these initiatives are IT upgrades, as many agency goals depend on retiring legacy systems. Yet in the first quarter of 2024, the Government Accountability Office (GAO) reported that the IRS had not aligned its 23 modernization programs with the SOP’s technology objective, a notable omission given IT’s central role.
By early 2025, the IRS reported, and the GAO confirmed, that most projects tied to the programs were delivered on time and within budget for fiscal year 2024. Despite that progress, the GAO found that the core technology misalignment was still unresolved a year later. Instead, the IRS abruptly paused its modernization programs to reevaluate priorities. In June 2025, the agency released a new draft framework, yet another shift, replacing the original 23 programs with nine technology-focused initiatives centered on cloud, AI, and APIs.
How the IRS will execute this transition remains unclear. To enable the pivot, many existing projects were paused or canceled, according to the National Taxpayer Advocate. The GAO has called for more detailed implementation plans, particularly considering the loss of 1,000 IT staff in 2025 and major reassignments announced late in the year. The Zero Paper Initiative, which relies on contractors to digitize filings, illustrates the challenge: automation failures and staffing shortfalls have produced delays, errors, and a growing need for manual fixes.
Shutdown Fallout
The 42-day government shutdown beginning Oct. 1, 2025, the longest in U.S. history, further disrupted IRS operations. Roughly half the workforce was furloughed, and most non-automated activities, including audits, appeals, correspondence, and taxpayer assistance, were halted. While operations have resumed, pent-up demand is expected to create sizable backlogs.
The shutdown also hindered the IRS’s ability to issue guidance on the One Big Beautiful Bill Act and prepare for the 2026 filing season. In a January report to Congress, the National Taxpayer Advocate warned that a workforce reduced by 27%, combined with more than 100 retroactive tax changes, raises the risk of filing errors and delayed refunds. Simple electronic returns may process smoothly, but cases requiring human review, particularly amended business returns, are likely to face long delays (don’t even get us started on ERCs).
Implications for Lenders
Roughly one in five businesses owes money to the IRS. For lenders, the risks are familiar: lending behind federal tax liens and exposure to levies on accounts and receivables. The IRS’s growing reliance on automation, particularly notices and lien filings, accelerates both risk and deadlines. Revenue officers, overwhelmed by caseloads, are less accessible and more unpredictable. Automated liens leave business borrowers in limbo, needing installment agreements and subordinations to satisfy lenders, but with no assigned revenue officer to negotiate.
As the corner cases multiply, the IRS appears to be drifting toward normalized deviance. If you need something from the IRS, it can feel like the system is broken. Expecting business owners to navigate an increasingly dysfunctional system alone is unrealistic. Yet solutions remain possible. In 2025, it was still feasible to negotiate installment agreements, subordinate liens, reconcile payments, and abate penalties, though it took longer. The same is true for 2026 and beyond. Relying on the experience, creativity, and sustained persistence of skilled representation remains the most effective counterweight to the unintended consequences of the IRS’s unpredictable automation, protecting lenders and their business customers while preserving critical funding relationships.
About the Author:
Rachel is the Senior Tax Advisor of Resolutions. She advises businesses on resolving federal and state tax issues while preserving relationships with factoring companies and asset-based lenders.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.