IRS Operational Changes Ahead of the 2026 Filing Season: Navigating a Year of Transformation and Challenges

As the 2026 tax filing season approaches, the Internal Revenue Service (IRS) stands at a pivotal juncture marked by ambitious legislative reforms, significant operational hurdles, and evolving policy guidance. These developments collectively threaten to reshape the landscape of tax compliance, enforcement, and taxpayer experience in ways that could have lasting implications for the agency's effectiveness and public trust.

A Historic Legislative Overhaul: The One Big Beautiful Bill Act (OBBBA)

Enacted in 2025, the OBBBA represents one of the most comprehensive overhauls of the U.S. tax code in recent history. Featuring over 100 amendments, many of which are retroactively effective for the 2025 tax year, the reforms aim to promote energy sustainability, international transparency, and enhanced tax enforcement. However, their complexity has introduced new challenges for taxpayers, preparers, and the IRS alike.

Key Legislative Changes and Their Impacts

• Retroactive Provisions and Amendments:
  Several provisions went into effect retroactively, requiring taxpayers to revisit and amend prior-year filings. This retroactivity raises the risk of audit triggers and enforcement actions, as discrepancies surface when applying current rules to past returns.

• Enhanced Enforcement Measures:
  The IRS has announced a public comment period ending in April 2026 for Form 14242, targeting abusive tax schemes. This signals a more aggressive stance on cracking down on tax fraud and non-compliance, especially as new reforms expose previously hidden schemes.

• Reporting Threshold Adjustments:
  Starting with wages paid after 2025, the W-2 and W-3 reporting thresholds increased from $600 to $2,000. While this reduces administrative burdens for employers, it diminishes the IRS’s data granularity, potentially reducing the agency’s ability to detect underreporting.

• Energy and International Tax Clarifications:
  Recent IRS guidance clarifies that foreign-controlled entities are ineligible for certain solar energy tax credits, aiming to prevent misuse. Additionally, Foreign Entity Ownership and Control (FEOC) rules are being strictly enforced, affecting international investors and energy project developers involved in credits 45X and 48E.

• International Transfers and Cross-Border Measures:
  A remittance tax targeting large cross-border transfers has been introduced, impacting workers in Texas, students in New York, and others engaged in international money movement. Taxpayers are encouraged to plan carefully to minimize costs and avoid surprises during filing.

• Retirement and RMD Policy Changes:
  The IRS has delayed the start ages for Required Minimum Distributions (RMDs), introduced new calculation methods, and raised penalties for missed distributions to 25%. Contribution limits have also been adjusted, with new reporting obligations reflecting these reforms.

• Enforcement Initiatives:
  The recent release of Bulletin No. 2026–7 in February underscores the IRS’s accelerated enforcement efforts, with increased scrutiny of filed returns, especially targeting non-compliance and fraud schemes.

Notable New Guidance: The CAMT Impact on R&E Deductions

Adding further complexity, the IRS recently issued new guidance affecting Research and Experimentation (R&E) deductions through the Corporate Alternative Minimum Tax (CAMT) provisions. As Maureen Leddy reports, the latest CAMT guidance clarifies critical aspects of how R&E expenses are treated under the new corporate minimum tax regime. This guidance affects taxpayer calculations, potentially limiting deductions or altering tax planning strategies for businesses engaged heavily in research activities. With the CAMT rules now firmly in place, corporations must carefully review their R&E activities to ensure compliance and maximize allowable deductions.

Operational Constraints and Their Consequences

Despite legislative momentum, the IRS faces severe operational challenges that threaten to undermine the efficiency and timeliness of the upcoming filing season.

Staffing Shortfalls and System Delays

• The agency’s staffing levels are estimated at only about 2% of what is necessary to handle current demands, leading to processing delays, longer wait times, and increased risk of refund delays.
• System upgrade delays and persistent software bugs have hampered the deployment of new digital systems, further contributing to processing backlogs.

Digital Transformation and Outreach Efforts

• The IRS is investing heavily in digitizing submission processes, upgrading online portals, and streamlining workflows to reduce errors and speed refunds.
• Programs like Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) are being expanded to support underserved communities, especially as taxpayers grapple with more complex rules and digital filing requirements.

Political and Budgetary Headwinds

Recent bipartisan budget agreements have limited the IRS’s funding and enforcement capacity, raising concerns about fewer audits and reduced outreach efforts.

• Budget caps restrict hiring and program expansion.
• Enforcement restrictions could diminish the agency’s ability to detect and deter tax evasion, potentially undermining compliance efforts.
• These constraints risk delaying processing times further and dampening public confidence.

State-Level Responses and Guidance

States are actively responding to federal reforms, with notable updates from Louisiana and South Carolina:

• Louisiana’s governor, Jeff Landry, emphasized state-level adjustments, urging residents to review their filings early and seek professional guidance, especially regarding international transfer rules and energy credits.
• South Carolina has introduced state-specific tax provisions that diverge from federal rules. Taxpayers are advised to carefully compare their federal and state returns to avoid discrepancies, particularly with energy credits and international transactions.

Recent Technical Developments and IRS Guidance

The IRS continues to issue important technical guidance impacting compliance and processing:

• The recent release of Bulletin No. 2026–7 highlights enforcement priorities and special focus areas for the upcoming season.
• CAMT guidance affects the treatment of research expenses, potentially limiting deductions under the new corporate minimum tax regime.
• The Treasury Department also issued updates clarifying international transfer reporting and energy credit eligibility, aiming to reduce ambiguity and support taxpayers in navigating complex rules.

Recommendations for Taxpayers and Professionals

In this evolving environment, taxpayers should be proactive:

• File early to avoid delays and refund disruptions.
• Review previous returns for potential amendments in light of retroactive provisions.
• Consult qualified tax professionals, especially for issues involving international transfers, energy credits, and retirement distributions.
• Stay informed by monitoring IRS guidance, public comment periods, and state-specific updates.

Current Status and Future Outlook

The 2026 tax season is shaping up as a significant stress test for the IRS’s modernization efforts and enforcement capacity. While the agency is actively working to mitigate operational challenges and expand outreach, resource limitations and political headwinds threaten to delay processing, diminish service quality, and erode public trust.

Success in overcoming these hurdles could lead to a more transparent, efficient, and taxpayer-friendly system in the long run. Conversely, failure to address these operational constraints risks public dissatisfaction, delays, and diminished confidence in the tax system’s integrity.

Final Reflection

This period marks a historic turning point in U.S. tax policy and administration. The interplay between transformative legislation, technological modernization, and resource limitations will shape the 2026 filing season and beyond. How the IRS manages these multifaceted challenges will determine the future resilience and public perception of the nation’s tax system. Taxpayers, professionals, and policymakers must remain vigilant, adaptable, and proactive to navigate this complex and rapidly evolving landscape.