KEY TAKEAWAYS: IRS faces 27% workforce reduction heading into 2026 filing season Paper refund checks phased out, raising delay risks for some taxpayers Complex new tax rules may create filing and processing challenges Most refunds expected on time, but assistance delays remain a concern   The landscape for the 2026 tax season has its fair share of potential potholes ahead. But most taxpayers will most likely see federal income tax returns processed quickly with refunds heading out the door without delay, according to a new report to Congress. But we’re also getting a warning that everything will not be seamless. National Taxpayer Advocate Erin M. Collins spelled out some challenges ahead in her 2025 Annual Report to Congress issued Wednesday, Jan. 28. The IRS will be confronting a 27% reduction in its workforce, turnover in the agency’s leadership and all the challenges of implementing complex tax law changes that went into place retroactively for 2025 after the One Big Beautiful Bill was signed into law July 4, according to the report. Collins said the One Big Beautiful Bill Act is “generally taxpayer-favorable” because it expands eligibility for key tax deductions and benefits. Yet, Collins wrote: “The deductions and benefits are subject to complex eligibility rules, income thresholds, and phaseouts that will be difficult for many taxpayers to understand and for the IRS to administer accurately during the filing season.” Many changes in the tax rules for 2025, she said, involved “significant IRS programming, guidance, changes to tax forms and instructions, and taxpayer education.” Taxpayers who have problems and need help from the Internal Revenue Service should probably brace themselves in 2026, too. For those taxpayers, the upcoming filing season is likely to present greater challenges. “The success of the filing season will be defined by how well the IRS is able to assist the millions of taxpayers who experience problems,” Collins wrote in her report. Yet, some issues are bound to crop up. Let’s face it, anyone who has been following the headlines knows the odds don’t look all that great when it comes to a trouble-free tax season. Where’s my (paper) refund? Millions of taxpayers, for example, will be hit by a significant change relating to refunds, as the IRS is phasing out paper checks this tax season. During the 2025 filing season, about 94% of individual taxpayers provided their direct deposit information on their Form 1040, according to a National Taxpayer Advocate blog posted in October. But many people still received paper checks, which can trigger their own problems. “Paper refunds are more susceptible to loss, theft and fraud, and once compromised, they can trigger a long and stressful resolution process for the affected taxpayer,” according to the National Taxpayer Advocate’s blog in October. Treasury checks are 16 times more likely to be lost, stolen, returned or altered than electronic payments, according to the blog. Collins said she strongly supports efforts to digitize payment delivery, but it must be done with “care, communication and compassion.” As I reported earlier, the IRS will be issuing more alerts to further encourage tax filers to supply banking information for direct deposits when they file their 2025 income tax returns. But some taxpayers will need to open new accounts for direct deposit or find alternate safe ways, including reloadable debit card and digital wallets, for having their refund direct deposited. “Taxpayers who do not provide direct deposit information may experience significant refund delays,” Collins wrote in her annual report issued Wednesday, Jan. 28. The IRS noted earlier that the agency will send letters to individuals asking them to update their banking information if they do not provide it on their 2025 tax return. Or you’d get a letter if direct deposit has been rejected by your financial institution. The IRS, Collins said, will generally hold tax refunds for up to six weeks if someone has not provided direct deposit information. The IRS then will request banking information or determine whether an exception applies and a paper check can be issued afterward. “This transition is expected to disproportionately affect unbanked, underbanked, disabled, elderly and other vulnerable taxpayers for whom paper checks have often been the only practical means of receiving refunds needed to cover basic living expenses,” Collins wrote. One recent shift in policy helps student loan borrowers Another potential issue involving student loan borrowers in default appears to have been averted. The 2026 filing season was on track to be the first in several years where federal tax refunds would once again be subject to offset for defaulted federal student loan debt. Many taxpayers on tight budgets, of course, depend on refund cash to pay bills. If the offset resumed, some taxpayers would see their refunds reduced or eliminated, likely triggering headaches at the IRS, too, even though the IRS does not control offset decisions. Millions of student loan borrowers in default risked seeing their wages garnished and tax refunds seized as debt collection involving tax refunds and wages resumed. On Jan. 16, though, the U.S. Department of Education announced that it will delay implementing involuntary collections on federal student loans, including the offset of federal income tax refunds. But information was not given for how long the temporary delay will last — so some uncertainty could remain. Filing a paper return could trigger trouble If you’re still filing a return by paper, instead of e-filing, you could face extra headaches in 2026. Most taxpayers file their returns electronically. But individuals filed about 11 million paper returns — or 6% of the individual returns filed — in 2025. The 2026 tax season will add new, potential risks associated with a new system that involves outsourcing the processing of millions of paper-filed tax returns. In April, Collins noted in her latest report, the IRS launched what it calls a “zero paper initiative” to digitize a wide swath of the agency’s operations, including return processing. The IRS isn’t doing the work itself. Instead, Collins noted, the IRS contracted with several private companies to scan returns using optical character recognition technology. The National Taxpayer Advocate’s report warns the IRS to not “put all its eggs in one basket by eliminating or severely reducing the submission processing employees needed to process paper returns before validating technology performance.” The new initiative has the potential to reduce processing times for paper returns, but the report points out that outsourcing introduces operational and confidentiality risks. “It was just a few years ago that an employee of an IRS contractor, Charles Littlejohn, stole the return information of thousands of taxpayers and sent it to media outlets,” Collins wrote. She recommends strengthening penalties on contractors if they fail to protect taxpayer return information. Some refund delays, phone calls, ID woes raise concerns The advocate’s report, as mandated by statute, outlines the 10 most serious problems that taxpayers have faced, including: Refund delays Hundreds of thousands of taxpayers, according to the report, wait an average of more than 21 months for the IRS to resolve identity theft victim assistance cases and issue refunds due. Collins recommended that steps be taken to reduce the wait in those cases to 90 days or three months. The report also pointed to trouble spots for many filing amended tax returns during fiscal year 2025 when the IRS processed about 1.6 million business amended returns and took an average of over 13 months to do so. Delays for individuals filing amended returns were less extreme, but it still took the IRS more than five months on average to process 3.7 million amended returns for individuals. “Refund delays can cause financial harm for taxpayers, as businesses may need their refunds for cash flow purposes and individuals, particularly low-income individuals, may require refunds to pay their basic living expenses.” Part of the problem, according to the report, involves how the IRS issues unclear notices when not allowing a refund claim. Vital information is lacking, including the deadlines involved. The advocate’s report recommends that the IRS take more steps to automate processing amended returns and offer more clarity when sending a notice that disallows a refund. Last year, the IRS processed more than 165 million individual income tax returns — where about 63% of those taxpayers received refunds. The average refund amount was $3,167. The report noted that most refunds were issued in a timely manner. But about 3.6 million taxpayers  had to wait much longer, with an average wait time for that group hitting seven weeks for e-filers and 14 weeks for paper filers. Phone service The IRS generally receives more than 100 million telephone calls and several million pieces of taxpayer correspondence each year, according to the advocate’s report. Yet, Collins maintains that the IRS does not accurately measure the quality of its telephone service. Among other things, Collins said, the IRS does not have adequate measures to assess whether taxpayer needs are being met through a phone call. In addition, most calls the IRS receives are excluded from the current measure of phone service, Collins wrote, and the measure does not capture the quality or resolution of the calls. The routing of about 35 million calls to “voicebots” also was criticized. “Taxpayers generally were not satisfied with the voicebots,” according to the taxpayer advocate. “In taxpayer satisfaction surveys, only about half of taxpayers reported that they found the ‘Where’s My Refund?’ bot helpful and only 40% found the ‘Where’s My Amended Return?’ bot helpful,” the report stated. The Taxpayer Advocate Service recommended that the IRS implement comprehensive outcome-based measures for all telephone lines, including measurement of “first contact resolution.” In 2025, the number of customer service representatives who answer telephone calls and process taxpayer correspondence and casework was reduced by 22%. Although the IRS backfilled some of these positions late in the year, the IRS is operating with substantially fewer customer service representatives than last filing season, the report stated. “And the new hires have less experience than the employees who departed,” the report said. Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X @tompor. This article originally appeared on Detroit Free Press: The 2026 tax season is full of challenges for IRS, new report says Reporting by Susan Tompor, Detroit Free Press / Detroit Free Press USA TODAY Network via Reuters Connect ...read more read less