The IRS just finished its most successful filing season in years. The agency processed 266 million returns, issued $553 billion in refunds on time, and helped over 62 million taxpayers. But this success story might be short-lived.
Republicans recently passed “One Big Beautiful Bill.” This legislation extends the Tax Cuts and Jobs Act and adds several new provisions that sound simple but hide complex implementation challenges. At the same time, Congress proposes cutting the IRS budget by 37% and eliminating 78,000 jobs.
This episode of the Federal Tax Updates podcast was recorded prior to final passage of the bill, but hosts Roger Harris, EA, and Annie Schwab, CPA, break down this collision between ambitious tax legislation and dramatic budget cuts.
The episode highlights three critical issues that could disrupt the 2026 filing season.
- Seemingly simple provisions like “no tax on tips” actually require complex new systems and guidance.
- Proposed budget cuts would gut an agency that just proved its capabilities.
- New Commissioner Billy Long faces an impossible timeline to implement these changes with a reduced workforce.
The Politics Behind the Numbers
Understanding this tax bill requires knowing how Washington works differently from the real world. When politicians talk about “cuts,” they don’t always mean what you think.
“You and I think cutting spending means if I was spending $10, now I have to spend $9 or less to call it a cut,” Harris explained. “In the world of Washington politics, a cut can be, ‘I spent $10 last year. I expected to spend $15 next year. So if I only spend $13, that’s a cut.’”
This matters because much of the bill’s tax provisions simply keep current tax rates in place. Many provisions of the Tax Cuts and Jobs Act were scheduled to sunset at the end of 2025. This would have raised taxes if nothing happened. But, since no one expects taxes to actually go up, extending current rates gets scored as “spending” rather than maintaining the status quo.
When Simple Becomes Complex
The most challenging provisions in the bill are the ones that sound easiest: no tax on tips and no tax on overtime. These campaign promises create implementation nightmares that will burden an already strained system.
No Tax on Tips
Take the “no tax on tips” provision. It doesn’t actually exempt tips from taxation. Instead, it creates an above-the-line deduction for tips already included in payroll. This creates immediate questions that require detailed guidance.
The law requires tips to be “voluntary” and earned in occupations where tipping is “customary.” But what does that mean in practice?
“When you go to a restaurant and you have more than a certain number of people at the table, they put the tip automatically in there,” Schwab explained. “So is that no longer voluntary, or is it voluntary?” Which professions qualify when tablet payment systems now prompt for tips everywhere?
Harris discovered this confusion firsthand while getting his hair cut. “All the hairdressers were talking about no tax on tips, and some of them thought it was already lost,” he said. “Others expected to see an immediate boost in their paychecks.”
The reality is more complicated. Since this works as a tax deduction, employees would only see bigger paychecks if they adjust their W-4 withholding, a notoriously complex form that few people understand.
No Tax on Overtime
The overtime exemption faces even bigger challenges. It requires employers to track and report overtime wages separately, something most payroll systems don’t currently do.
“Once I calculate the pay, I don’t store that information anywhere,” Harris explained. “I just pay them and withhold taxes, and we move on to the next pay period. Now, payroll systems are going to have to somehow store that information because there will be a box, we’ve been told, for overtime on the W-2 that doesn’t exist today.”
The complexity extends beyond federal systems. Most states base their tax calculations on federal adjusted gross income. Each state must now decide whether to match these federal changes or create its own rules. Some states may not be able to act quickly enough if their legislatures don’t meet in time.
Harris cautioned, “I have been told they tried this in Alabama, and it was just a complete disaster, so they repealed it. It just became so difficult and cumbersome and so hard to enforce and interpret.”
Both provisions are temporary, running only from 2025 through 2028. This creates strange incentives for reporting behavior. As Harris noted: “Let’s say that for the next four years, all the tipped employees in the country report 100% of what they get because it’s tax-free, and this expires in four years. Is the IRS going to track the fact that all of a sudden tips went up when they became tax-free, and they declined significantly when they were taxed again?”
Success Story Meets Budget Cuts
The timing of IRS cuts couldn’t be worse. Just as the agency proved its effectiveness, Congress wants to eliminate the very capabilities that made that success possible.
The 2025 filing season statistics show an agency hitting its stride. The IRS collected over $5 trillion in revenue, a 9% increase from the previous year. Phone service improvements jumped 11%, in-person assistance increased 26%, and the agency processed returns while issuing refunds within its 21-day target.
“I’ve been reading Accounting Today and AICPA, and nearly all of them are really giving a thumbs up and a hand clap to the IRS,” Schwab said. “And I do too. I found this tax season to be much smoother than during the pandemic.”
Yet Congress proposes slashing the agency’s budget by 37%—from $22.5 billion to $14.2 billion—while eliminating 78,000 employees. This represents 20% of the workforce and would bring IRS staffing to its lowest level since the COVID-19 pandemic.
The cuts target services that tax practitioners rely on. The stakeholder liaison program, which provides communication between the IRS and professionals, faces reductions of 50% or more.
“You’re not going to have that one-on-one relationship with the IRS that you were used to for all these years,” Harris warned. “If you’re not part of an association of some sort or organization, you better become part of one, because they’re almost being forced to communicate through those organizations.”
The proposed budget also eliminates taxpayer assistance centers and the IRS Direct File program, services that showed significant usage increases during the 2025 filing season.
The disconnect between revenue and resources is striking. The IRS collected 9% more revenue in 2025 than the previous year, contributing over $5 trillion to federal coffers. Yet, it faces cuts that could cripple its ability to maintain that collection rate.
New Leadership, Impossible Timeline
Commissioner Billy Long inherits this challenging situation. He becomes the sixth person to hold the commissioner position this year, confirmed by a 53-44 vote that split exactly along party lines.
Unlike typical commissioners who get five-year terms, Long serves only until November 2027, completing the remainder of his predecessor’s term. This abbreviated timeline adds uncertainty to an already difficult situation.
Long’s background raises questions about his readiness for the technical challenges ahead. While described as personable and well-liked, he lacks deep experience in tax system operations.
“It’s going to be interesting to see who he surrounds himself with in terms of advisors because he does not have a big history of working in the tax system,” Harris observed.
The IRS has less than six months to develop guidance, create forms, update systems, and train staff, all while managing a 20% workforce reduction.
The agency faces what Commissioner Werfel called a “stadium problem” in a previous podcast episode. “If a football team is going to play in a new stadium, it takes a while to build the new stadium,” Harris explained. “So you have to make sure the old stadium is functional until the new stadium is ready.”
The current situation attempts to build the new stadium while tearing down the old one simultaneously.
Historical precedent suggests a real risk of problems. The IRS has previously delayed filing season starts when systems weren’t ready for new tax provisions. The difference this time is that those delays occurred with fully staffed agencies working under normal conditions.
What This Means for Practitioners
These converging challenges create significant risks for the 2026 filing season. Harris and Schwab both expect major problems.
“I hope you enjoyed the 2025 filing season because it was a good season,” Harris said. “I don’t know that we’ll have the same comments this time next year.”
“I think next year is going to be rough. Really rough,” Schwab added.
- Prepare for longer wait times and delayed guidance
- Set client expectations about reduced IRS responsiveness
- Engage with professional organizations for updated information
A diminished IRS may also struggle to maintain compliance rates, potentially creating opportunities for tax avoidance that could reduce revenue and justify further cuts.
Preparing for Uncertainty
The collision between ambitious legislation and budget cuts creates unprecedented challenges for tax administration. An agency that just achieved record performance faces the elimination of resources precisely when it needs maximum capacity.
For practitioners, reduced IRS capacity means taking on more responsibility for interpreting unclear guidance and managing client expectations.
The situation demands moving beyond hoping for the best to actively preparing for potential problems. This includes developing alternative strategies for obtaining guidance, creating client communication plans, and building relationships with professional organizations.
As Schwab and Harris noted, understanding these dynamics is crucial for positioning yourself not just as a technical expert but as a guide helping clients navigate an increasingly complex system.
The full podcast episode provides essential context for understanding these legislative details, budget implications, and strategic considerations. Harris and Schwab’s insider perspective on IRS operations offers practical intelligence that could prove invaluable when theory meets reality in the coming tax season.
And, for help with managing change and the many other complicated elements of running a firm, learn more about having your firm join the Padgett network.