The federal tax system touches households in every state, and changes inside the IRS can take years to show up in audits, customer service and return processing. That broader concern sharpened on August 24, 2026, when former acting IRS Commissioner Douglas O’Donnell warned that cuts associated with Elon Musk’s Department of Government Efficiency, or DOGE, could have lasting effects even after the agency completed a stable filing season. His remarks, first reported by Fortune, centered on whether the IRS can sustain service and enforcement as staffing and funding decline.
Former IRS leader says cuts may outlast one filing season
O’Donnell, who served at the IRS from 1986 until 2025 and twice held the acting commissioner role, told Fortune that DOGE cut more than a quarter of the agency’s roughly 100,000-person workforce. He said the full impact is more likely to be felt over the next several years than in a single spring filing cycle, according to the Fortune report published August 24.
The IRS, meanwhile, pointed to performance data showing the 2026 filing season was completed without broad disruption. The National Taxpayer Advocate said the agency received 140.2 million individual returns and issued more than 90.4 million refunds during the 2026 season, while average refunds rose more than 11% from a year earlier. In a statement quoted by Fortune, an IRS spokesperson said the filing season was “historic” and “successful.”
The agency also said it expects to end 2026 with about 74,000 employees, roughly in line with the end of 2025 staffing levels, according to Fortune. That means the immediate cuts have not yet produced a collapse in core filing-season operations, but O’Donnell said service levels alone do not capture the deeper strain on enforcement, modernization and long-term administration.
At an April 15, 2026, Senate Finance Committee hearing, IRS CEO Frank Bisignano testified that the agency had cut $2 billion from its information technology budget without operational disruptions. That testimony underscored the central dispute: whether the IRS has found efficiencies or whether it is absorbing reductions that could narrow its capabilities later.
Because the IRS is a national agency, the immediate impact is not confined to one state or metro area in the way a corporate layoff or store closure would be. What is confirmed is that federal taxpayers across the country continued filing returns, receiving refunds and using IRS systems during the 2026 season, according to the National Taxpayer Advocate and IRS leadership.
What is not yet publicly clear is how any workforce reductions were distributed by office, state or enforcement division. The IRS has not released a comprehensive public list showing which local offices, service centers or audit teams were most affected by the DOGE-linked cuts described by O’Donnell. That limits any precise state-by-state accounting of the effect on walk-in help, phone support or field enforcement.
For residents, the most visible near-term measure remains whether returns are processed on time and refunds arrive as expected. By that measure, the 2026 season held up. But O’Donnell said the bigger concern is whether a thinner agency can continue providing confidence that tax laws are being applied consistently, especially in the large-business and high-complexity areas that require specialized staff.
That means taxpayers may not see the most important consequences immediately at the filing counter or in an online portal. The pressure could emerge later through reduced oversight, slower modernization and less certainty that the agency can examine enough returns to measure compliance effectively.
O’Donnell told Fortune the IRS’s problems did not begin with DOGE, saying the agency had faced years of underinvestment across multiple administrations. He pointed to delayed modernization and a long-running struggle to move away from paper-based processing, which has made efficiency gains harder to achieve even before the latest staffing reductions.
A February 2026 Treasury Inspector General for Tax Administration report said paper individual returns accounted for only 6% of filings but 72% of processing costs. That imbalance illustrates why IRS modernization has been such a central issue: the agency can save money over time through digital systems, but only if it first has the staff, budget and technical capacity to build and maintain them.
O’Donnell said cutting workers before replacement systems are fully in place can reverse progress instead of accelerating it. He argued that automation typically requires an initial increase in labor and investment while new systems are tested, corrected and integrated into daily operations. In that view, staffing reductions and lower appropriations can undermine the very efficiencies they are supposed to produce.
The budget path adds to that concern. Fortune reported the IRS discretionary budget fell from $12.2 billion in fiscal 2025 to $11.2 billion in fiscal 2026 and is poised to drop to $9.8 billion in fiscal 2027. For taxpayers, the practical takeaway is that the 2026 season’s stable performance does not settle the longer-term question of whether the agency can maintain service, enforcement and modernization under continued fiscal pressure.