How IRS Layoffs May Affect Your Taxes and Estate Planning

Takeaways

• The Internal Revenue Service (IRS) is likely to see a continuing reduction in its workforce under the second Trump administration.

• Some experts assert that dramatic reductions in IRS staff could potentially lead to delayed tax return processing, reduced customer support, and diminished enforcement efforts. It may also result in less IRS guidance on estate planning strategies.

The Internal Revenue Service (IRS) is facing significant workforce reductions as part of the second Trump administration’s broader initiative to downsize the federal government. Plans are reportedly underway to cut up to half of the employees through layoffs, attrition, and buyout offers.

In addition to workforce reductions, the Trump administration plans to lend some IRS employees to the United States Department of Homeland Security to support immigration enforcement efforts. This reallocation could further strain the agency’s capacity to fulfill its primary functions and result in lost tax revenue, experts say.

This reduction in personnel aligns with a series of mass layoffs across many federal agencies, including the Department of Education and the Department of Veterans Affairs. Former IRS commissioners and tax professionals have expressed concerns that such substantial cuts could devastate the agency’s functionality, undermining taxpayer compliance and confidence in the tax system.

The cuts are taking place after several years of efforts to shore up the agency’s workforce and capabilities. Under former President Joe Biden, the Inflation Reduction Act of 2022 had allocated $74.9 billion to the IRS over 10 years. Most of the funding was to be spent on enforcement activities, including hiring IRS agents and upgrading technology. As of 2024, the IRS workforce had grown to a total of more than 100,000 employees.

However, Congress began making cuts to the IRS Inflation Reduction Act funding in late 2024 as part of the year-end stopgap spending bill.

Potential Effects on Taxpayer Services

The anticipated reduction in IRS staff is expected to have repercussions for taxpayers, according to experts. These may include:

• Delayed Tax Return Processing. With fewer employees, the IRS may struggle to process tax returns promptly, leading to delays in issuing refunds.
• Reduced Customer Support. Cuts to personnel could result in longer wait times for taxpayers seeking assistance, making it more challenging to resolve tax-related issues.
• Diminished Enforcement. A smaller workforce may hinder the IRS’ ability to enforce tax laws, potentially leading to decreased tax compliance. It could also result in a broader tax gap, which is the difference between the amount of taxes owed to the government and the amount actually paid.

In a letter that House Democrats sent to the acting IRS commissioner earlier this month, the group asserted that agency layoffs “could exacerbate existing challenges faced by an already overburdened agency and threatens to undermine the IRS’ capacity to serve the American people effectively, including ensuring that taxpayers receive timely services and refunds.”

Implications for Estate Planning

The IRS layoffs could have significant implications for estate planning, particularly in areas such as estate tax processing, audits, and the administration of trusts.

Delays in Estate Tax Return Processing

If you’re handling the estate of a deceased loved one, you may need to file IRS Form 706 (the U.S. Estate Tax Return) if the estate exceeds the federal exemption threshold (which was $13.61 million for 2024). With fewer IRS employees, processing times for estate tax returns may slow down, leading to delays in settling estates and distributing inheritances. This could be a serious issue for beneficiaries who rely on assets from the estate for financial stability.

Increased Risk of Errors or Audits

Though IRS enforcement may weaken overall, estate tax audits are often a high priority since they involve large sums of money. If fewer experienced IRS agents are available to review complex estate tax filings, there may be an increased likelihood of errors — both on the taxpayers’ side and the IRS’ side. This could lead to drawn-out disputes, requiring executors and beneficiaries to invest more time and resources in resolving tax issues.

Challenges in Trust Administration

Many estate plans include trusts to manage wealth and reduce tax burdens. IRS staff reductions could mean slower processing of tax returns for trusts, which may affect the timing of distributions. If your estate plan relies on certain IRS determinations (such as private letter rulings for complex trusts), expect longer wait times.

Less IRS Guidance on Estate Planning Strategies

Estate planning often involves navigating complex tax laws. The IRS regularly issues rulings and guidance that help estate planners and attorneys make informed decisions. With layoffs and potential disruptions in IRS operations, there may be fewer resources available to provide clarity on evolving estate tax laws, leaving individuals with more uncertainty when planning their estates.

What You Can Do

To minimize the effects of IRS staffing shortages on your estate plan, there are a few things you can do, including the following:

• File returns promptly to help avoid delays. Consider filing electronically through Direct File if you qualify for it. The free service is available in 25 states.
• Ensure accurate record-keeping to reduce the risk of audits or disputes.
• Consult an estate planning attorney, tax advisor, or certified public accountant to help you navigate potential IRS processing slowdowns.
• Consider proactive tax strategies, such as gifting assets during your lifetime, to reduce estate tax exposure.

The IRS workforce reductions may cause disruptions, but proper planning can help mitigate their effects on your estate and ensure a smoother transfer of wealth to your loved ones.

Planning Ahead With Estate Planning

During times of uncertainty, it is as important as ever to plan ahead. Work with an experienced estate planning attorney near you so that you can set the best course for financial stability and leave the best legacy possible. Consulting with an estate planner also helps ensure that you are executing the estate planning documents that are most suitable for your unique situation. Your estate plan may include a will, trust, health care and financial powers of attorney, and other key legal documents.