As seasoned practitioners, we are all too familiar with the annual drama surrounding federal appropriations and the potential for a government shutdown. This year is no different, with the September 30, 2025, deadline looming. However, the IRS contingency plan for Fiscal Year 2026, released on September 29, 2025, reveals a significant and welcome change from past shutdowns, thanks to the Inflation Reduction Act (IRA). Here’s what you and your clients need to know.

Immediate Impact: Business as Usual

Unlike certain previous years where a lapse in appropriations meant a near-total halt of IRS operations, the contingency plan for a shutdown beginning October 1, 2025, is startlingly simple: normal IRS operations will continue.

This is a direct result of the supplemental, multi-year funding provided by the IRA, which is available through September 30, 2031. The IRS has designated its entire workforce as "exempt" under Category A1, which covers activities funded by sources other than annual appropriations. This means that the supplemental IRA funds will be used to maintain all operations, preventing a lapse in appropriations for the agency.

The plan explicitly states that for the entire 2026 fiscal year—both during the non-filing season (October 1, 2025 - December 31, 2025) and the filing season (January 1, 2026 - April 30, 2026)—all 74,299 IRS employees are designated as exempt and will be retained. However, as noted below, this particular plan only covers five business days. And, as important, it does not disclose how much funding remains from the supplemental appropriations from the Inflation Reduction Act.

How IRS Functions Will Be Impacted

Based on the contingency plan, all IRS functions and departments should remain fully operational. The plan lists exempt position totals for every major IRS division, confirming they will be staffed. This includes critical areas for tax professionals and our clients, such as:

Appeals: 1,269 employees
Chief Counsel: 2,254 employees
Criminal Investigations (CI): 3,174 employees
Information Technology (IT): 6,309 employees
Large Business & International (LB&I): 5,129 employees
Office of Professional Responsibility (OPR): 15 employees
Small Business/Self-Employed (SB/SE): 15,316 employees
Taxpayer Advocate Service (TAS): 1,484 employees
Tax Exempt & Government Entities (TE/GE): 1,623 employees
Taxpayer Service (including phone lines and processing centers): 32,381 employees

For us and our clients, this means that even if the rest of the federal government shuts down, we can expect the IRS to continue processing returns, issuing refunds, answering phone calls, conducting audits, and handling collection matters without interruption.

What Happens in a Prolonged Shutdown?

The current IRS contingency plan only describes actions for the first five business days following a lapse in appropriations. The plan does not detail what specific steps the agency might take if a government-wide shutdown drags on for an extended period.

However, the core reason for the continuity of operations—the availability of IRA funding—is not limited to just five days. The IRA provided supplemental appropriations that are available through September 30, 2031. This strongly suggests that the IRS could sustain its operations for a longer duration than what is covered in the initial five-day plan. But this would be limited by the amount of funding available via the Inflation Reduction Act supplemental appropriation which has been reduced by Congress over time. Should those funds run out, the IRS plan would clearly need to be modified.

Key Takeaways for Tax Professionals and Clients

The FY2026 contingency plan marks a significant departure from the disruptive shutdowns of the past. For our practices, this means:

No Interruption to Core Services: Expect phone lines to be open, electronic filing to function smoothly, and payment processing to continue. We will not have to tell clients that their refunds are delayed or that we cannot get through to an agent because of a shutdown at least for the first five days.
Continuity in Compliance and Enforcement: Audits, collections, and appeals will proceed as scheduled. It is crucial to advise clients that deadlines remain in effect and that enforcement activities will not pause.
Stability for Planning: The certainty that the IRS will remain fully functional allows us to plan client work without the ambiguity that has plagued us during previous shutdown threats, though a risk of a shutdown should the process drag on still looms in the background.

In summary, thanks to the Inflation Reduction Act, the IRS is effectively insulated from the immediate effects of a lapse in annual government funding for now. While a broader government shutdown will have wide-ranging economic consequences, the direct operational impact on the IRS—and by extension, on our work as tax professionals—is expected to be nonexistent this time around unless the stalemate continues for an extended period.

Prepared with assistance from NotebookLM.