Here's a scenario that might keep tax accountants up at night: the IRS, already stretched thin, gets even thinner. That's the warning from Douglas O'Donnell, who twice served as acting commissioner of the agency. He's concerned that the cuts pushed through by the Department of Government Efficiency (DOGE) could quietly erode the IRS's ability to do its job, not just today but for years to come.

O'Donnell told Fortune that the real impact of these workforce reductions will likely show up gradually, as the agency tries to function with a smaller 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 said.

The context here is stark. DOGE has cut more than a quarter of the IRS workforce from a base of about 100,000 employees. Yet, during the 2026 tax season, the IRS still managed to receive 140.2 million individual returns, process 138.6 million, and issue over 90.4 million refunds. That's a lot of paperwork, and it's not getting any easier.

Modernization: A Long-Standing Challenge

O'Donnell is quick to point out that the IRS's problems didn't start with DOGE. He highlights years of underinvestment in modernization, particularly the slow, painful move away from paper-based processing. Here's a staggering stat: paper returns make up only about 6% of all returns but account for a whopping 72% of processing costs, according to the Treasury Inspector General for Tax Administration. The IRS has a plan to slash those costs from $450 million to under $20 million by 2029, but that's a tall order.

"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 Inflation Reduction Act originally handed the IRS about $80 billion for modernization, enforcement, and services, but much of that has since been clawed back. Still, the agency is pushing forward with tech upgrades, including better fraud detection and digital taxpayer services, all while undergoing a reorganization under CEO Frank Bisignano.

DOGE itself hit its sunset date on July 4, 2026, as set by President Donald Trump's executive order. The initiative was supposed to root out waste, fraud, and abuse across the federal government, but its legacy at the IRS is now a source of concern.

Enforcement Under Pressure

The numbers on enforcement are already telling. In fiscal 2025, IRS enforcement revenue dropped 5%, nearly $5 billion, and the agency opened over 120,000 fewer audits. Heading into 2026, enforcement lost roughly 5,000 employees. O'Donnell warns that with fewer people, the IRS simply can't cover as much ground.

"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 explained. "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."

It's a classic catch-22: you need to audit enough people to ensure compliance, but if you don't have the staff, you can't do the audits, and then you can't be sure who's complying.

IRS Says Tax Season Was a Win

Despite the doom and gloom, the IRS insists the 2026 filing season was a success. An agency spokesperson told Fortune, "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. IRS Chief Executive Officer Frank Bisignano remains committed to maintaining the right workforce to deliver the world-class service American taxpayers deserve."

Bisignano also touted $2 billion in IT budget savings, achieved by renegotiating or cutting contracts without disrupting operations. But the budget picture is still grim: the IRS's discretionary budget fell from $12.2 billion in fiscal 2025 to $11.2 billion in fiscal 2026, and it's projected to drop further to $9.8 billion in fiscal 2027. Those cuts could hit enforcement and the Direct File program.

O'Donnell stresses that the IRS needs to keep investing in technology and AI to meet taxpayer expectations. "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.

In other words, you can't cut your way to a modern, efficient IRS. You have to spend money to save money, and that's a lesson that might be hard to learn in the current climate.