Legislative & Policy Developments

Covering January 1- February 2, 2026

1) FY2026 funding flight and partial shutdown risk

What’s happening:

• Congress has been trying to finalize FY 2026 appropriations; a lapse triggered a partial shutdown beginning January 31, 2026, with IRS among agencies affected depending on which funding bills have cleared and what’s included in the stopgap packages.

Why it matters to IRS managers:

• Shutdown mechanics can mean furlough planning, limits on onboarding/contracting, delayed projects, and rapid priority resets—right in filing season.
• IRS contingency planning has emphasized keeping critical filing-season functions running as long as possible, but disruptions still cascade quickly (paper processing, correspondence backlogs, IT changes, etc.).

Manager watch-outs / actions:

• Reconfirm your org’s shutdown contingency roles, timekeeping guidance, and “excepted” work rules.
• Prepare quick comms for employees on pay/lapse procedures and what work can/can’t proceed.

2) IRS funding pressure: proposed FY 2026 cut + IRA rescissions What’s happening (January legislative activity):

• Multiple briefings/roundups describe FY 2026 funding proposals that would reduce annual IRS appropriations (often cited around $11.2B vs. $12.3B FY25) and pair that with additional rescissions of remaining Inflation Reduction Act (IRA) IRS funds (commonly cited around $11.6B rescission).
• Outside analysts and stakeholders are flagging downstream impacts to service/enforcement capacity and modernization timelines.

Why it matters to IRS managers:

• Budget tightening + rescissions typically show up as hiring freezes/slowdowns, training cuts, delayed tech, reduced taxpayer service surge capacity, and heavier workload compression on frontline managers.

Manager watch-outs / actions:

• Track how your function is re-baselining: staffing targets, overtime policy, and backfill rules.
• Document mission impacts (service levels, compliance coverage, cycle time) in plain language—this is advocacy fuel.

3) Filing-season operational strain is now a congressional-facing issueWhat’s happening (late January):

• The National Taxpayer Advocate annual report and major coverage highlight a 2026 filing season shaped by workforce reductions plus significant law changes the IRS must implement.

Why it matters to IRS managers:

• This frames IRS performance and resources as a legislative oversight topic (funding, staffing levels, outsourcing/paper processing risk, phone vs. casework tradeoffs).

Manager watch-outs / actions:

• Expect increased questions up the chain about: service metrics, backlog drivers, and what “minimum viable capacity” looks like.

4) “One Big Beautiful Bill” implementation continues What’s happening (January IRS/Treasury actions tied to the 2025 law):

• IRS continues rolling out implementation guidance and proposed regulations, including changes affecting backup withholding thresholds for certain third-party payments.
• IRS is maintaining a central hub of provisions and resources.

Why it matters to IRS managers:

• Implementation workload lands on: customer service scripts, training updates, forms/instructions, compliance guidance, and IT deployment timing—often with tight deadlines and high public visibility.

Manager watch-outs / actions:

• Flag where policy is changing faster than training (a common risk in surge periods).
• Push for fast, consistent internal FAQs to reduce manager-by-manager improvisation.

5) Payments modernization policy: reduced paper checks What’s happening (January updates):

• IRS posted updated FAQs tied to Executive Order 14247 on modernizing payments, including changes affecting paper refund checks and handling for taxpayers without bank accounts.

Why it matters to IRS managers:

• Expect increased contacts from taxpayers who are unbanked/underbanked, plus new exception-handling pathways.

Manager watch-outs / actions:

• Make sure frontline teams have crisp guidance for: alternative payment methods, exception handling, and where to route edge cases.

6) Federal pay updates effective in January 2026 What’s happening:

• An executive order finalized a 1.0% across-the-board GS increase, effective the first applicable 2026 pay period; Office of Personnel Management issued implementation guidance (including the pay-adjustment memo).

Why it matters to IRS managers:

• Pay decisions affect retention, recruitment, and morale—especially alongside budget tightening and RTO/telework friction.

Manager watch-outs / actions:

• Prepare to answer employee questions about pay tables, effective dates, and how this interacts with locality and step increases.

7) Telework / return-to-office policy remains a live legislative flashpointWhat’s happening:

• Federal workforce outlets continue reporting on RTO implementation and exceptions, while legislation such as the “Federal Employee Return to Work Act” (introduced earlier but still relevant) reflects ongoing pressure to restrict telework benefits.

Why it matters to IRS managers:

• Telework policy affects office capacity, hiring competitiveness, reasonable accommodations, and day-to-day productivity—especially in high-volume processing and service functions.

Manager watch-outs / actions:

• Track whether new constraints alter staffing flexibility, and document business impacts (space constraints, throughput, attrition).

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