After Elon Musk’s Department of Government Efficiency (DOGE) slashed more than a quarter of the 100,000-person workforce at the IRS, the agency received 140.2 million individual returns and issued more than 90.4 million refunds, slightly down from the year before.
While the IRS described the 2026 tax season as successful, former acting Commissioner Douglas O’Donnell said DOGE’s extensive cuts will more likely be felt years down the line and made worse by an ever-shrinking agency budget.
“I’ve been very concerned with the ability of the agency to carry out on its mission, whether it’s at the services level or enforcement level, but also just in general to be a functioning federal government agency going forward,” he told Fortune.
For its part, the IRS said its headcount should be relatively stable, expecting to end 2026 with 74,000 employees, about the same as the end-of-2025 staff level.
“Contrary to claims from critics, the IRS delivered a historic, successful 2026 filing season efficiently processing returns and issuing average refunds that were 11 percent higher than last year as Americans benefited from the President’s Working Families Tax Cuts,” an agency spokesperson told Fortune in a statement. “IRS Chief Executive Officer Frank Bisignano remains committed to maintaining the right workforce to deliver the world-class service American taxpayers deserve.”
The IRS’s weak points
O’Donnell’s career at the IRS spanned from 1986 until 2025. He served as acting commissioner from November 2022 to March 2023 and again from January to February 2025, at which point he stepped down from the role. He now serves as the senior managing director in the KPMG Washington National Tax practice.
Despite his criticism, O’Donnell wants to be clear: The IRS’s problems did not begin with DOGE nor the Trump administration. Before the staff cuts, the agency had lagged behind other countries for years on modernization that would’ve produced savings, he said.
For example, the IRS has tried to go paperless for nearly four decades, because paper tax returns make up just 6% of all returns but 72% of processing costs, according to a February report from the Treasury Inspector General for Tax Administration. The IRS plans to reduce the expense of paper processes from $450 million to less than $20 million by 2029. Still, previous plans often sputtered.
“It was clear that there had been underinvestment for a number of years across multiple administrations,” O’Donnell said. “So it’s not pointing any fingers here.”
The 2022 Inflation Reduction Act included a strategic plan to transform the IRS into a “modern tax administration” with an $80 billion infusion. The IRS was to modernize its technology and securely increase employee and taxpayer access to data, as well as hire and retain more high-skilled workers through recruitment campaigning, and offer more flexible work opportunities.
But after the DOGE cuts that began in February of last year with the first wave of personnel reductions, progress didn’t just stall, O’Donnell said, it reversed.
In a testimony before the Senate Finance Committee in April, however, Bisignano said the IRS has already made efficiency gains.
“We have successfully cut $2 billion from the IRS information technology budget without any operational disruptions,” he said. “We achieved these cost savings by renegotiating, scaling back, and in some cases eliminating, wasteful IT and professional services contracts.”
The impact of DOGE cuts
What was unclear to O’Donnell was what DOGE had originally intended when it made those cuts: “It’s hard to know exactly what the objective of DOGE was. I’ll just say that. I’m not completely sure because there’s really no strategic document that’s out there. The focus seemed to be cutting in the enforcement space and the technology space, but maintaining the service levels as much as possible,” he said.
The IRS has long tried to use technology to bolster those services and eventually reduce the size of the workforce. But O’Donnell argued that decadeslong goal was actually hurt at first by having fewer workers.
Just like in any sector being potentially transformed by AI, automation initially increases demand for labor, both because human workers need to smooth out kinks associated with adopting new technologies, and because it can lead to greater productivity and expansion of operations.
“If you’re going to improve services through digital means, you’re going to need to have a bit of a bump in the budget to be able to invest in the systems and the digital capabilities, and at some point, then you can reduce the number of people,” O’Donnell said. “The loss of people…that’s not the worst thing in the world, so long as there’s a replacement. The concern was that there was not a replacement, at least not an immediate one, that could step in and provide the level of service.”
The IRS managed to maintain its services this year, but that trend may not continue. At risk from these reductions is the peace of mind that taxpayers are indeed filing their taxes correctly every year as systems become more strained, O’Donnell noted. Nobody likes an audit, but some oversight of activity creates confidence in the tax administration system.
“In the large corporate space, just over time, losing employees, you just basically reduce what you can get to, and you cover less of it,” he said. “Over time, that diminishes the ability of leaders in the IRS to have confidence that taxpayers are complying because you’re not getting to a large enough number of them to be sure about that.”
Rebuilding the IRS
At first glance, the challenges the IRS faces are likely to grow. The IRS’s annual discretionary budget for fiscal 2025 was $12.2 billion, a total that fell to $11.2 billion for fiscal 2026, and which is poised to drop even more to $9.8 billion for fiscal 2027. It would mean a reduction in enforcement operations, as well as the scrapping of the Direct File program, a 2024 effort that allowed Americans to file their federal income taxes directly to the IRS for free.
Not all hope is lost, though. IRS leadership under Bisignano will likely meet with the Treasury Department and with the Office of Management and Budget to negotiate for additional funding, or at the very least discuss what is possible to complete with different levels of funding. It’s also not unheard of for congressional appropriations staff to consult with the IRS about their needs.
But the IRS’s future challenges involve not just making technological improvement and regrowing its workforce, reportedly through hiring 8,000 new employees. It’s that the agency will have to keep up with the rapidly advancing world of AI to find tools both affordable, effective, and secure if it wants to technologically advance, O’Donnell explained.
“If the objective of the IRS is to be able to improve service to taxpayers, 24/7, 365, you’re going to need to have systems availability to do that, and in order to have the systems, you have to build them, and then you have to maintain them,” he said. “And I don’t know how that happens in an environment where you’ve got reduced budgetary support to perform those actions to take those steps.”
