IRS Workforce Changes and New Tax Rules: What U.S. Expats Should Know for 2026

The IRS recently completed one of its most successful filing seasons, processing over 140.6 million returns and issuing over 86 million refunds, averaging $2,942 each. However, significant organizational changes and new tax legislation are shaping what Americans abroad can expect for the 2026 filing season.

IRS Operational Changes

According to the National Taxpayer Advocate’s 2026 Objectives Report to Congress, the IRS has undergone substantial workforce adjustments, with staff levels dropping from over 102,000 employees to just 75,702 – a reduction of more than 25%.

Detailed Workforce Changes:

• 26% workforce reduction: More than 25,000 staff members departed in the past year
• 17,500+ early exits: Accepted voluntary separation packages before summer 2025 through a program championed by the Department of Government Efficiency
• Highest-impact areas affected: Taxpayer Services, Small Business/Self-Employed division, and IT – exactly where most expat returns are reviewed and processed
• Proposed 20% budget cut for FY2026: Would represent a 37% funding drop compared to last year, when combined with lost Inflation Reduction Act funds
• Current processing backlog: 387,000 identity theft cases with an average 20-month resolution time

“A reduction of that magnitude is likely to impact taxpayers and potentially the revenue collected,” notes Erin Collins, as reported by the Associated Press.

New Tax Legislation: Trump’s “One Big, Beautiful Bill”

Congress is working on comprehensive tax reform legislation – nicknamed the “One Big, Beautiful Bill” – that includes several provisions affecting Americans abroad, particularly regarding the Employee Retention Credit (ERC).

Employee Retention Credit Changes

The proposed legislation includes retroactive changes to ERC eligibility that could affect refunds already filed:

House Version (H.R. 1):

• Would retroactively bar the IRS from paying any Employee Retention Credit refunds filed after January 31, 2024
• Applies regardless of tax quarter, even though claims were allowed through April 15, 2025

Senate Version:

• Takes a narrower approach, targeting only Q3 and Q4 of 2021 claims
• Includes an extended six-year audit window for ERC claims

Legal Considerations: This retroactive rollback has already raised constitutional concerns and could be challenged under the Senate’s Byrd Rule, which restricts what can be included in budget reconciliation bills.

Mid-Season Implementation Challenges

Because some provisions apply retroactively to the 2025 tax year, the IRS may need to update forms and systems after the tax year has begun. This is uncommon and logistically challenging, potentially resulting in:

• Forms and instructions changing mid-season, requiring early filers to amend returns or respond to IRS notices
• Software systems and validation checks needing urgent updates are increasing the risk of processing delays or false error flags
• International forms like Form 1116 or Form 2555 are facing even longer manual review times, especially if documentation rules shift mid-cycle

IRS delays are real, especially overseas.

With fewer staff and mid-season law changes looming, early filing is your best defense. Get started now →

What This Means for Your Tax Filing Experience

Processing Timeline Adjustments

With 25% fewer staff members handling similar filing volumes in 2026, Americans abroad should plan for:

• Slower refunds, especially for returns requiring foreign documentation or manual review
• More rejected or delayed filings due to identity verification backlogs or missing system updates
• Increased scrutiny of foreign accounts, residency claims, and income exclusions

Paper Processing Bottlenecks

Key paper-processing centers in Austin and Ogden have lost thousands of staff members, creating particular challenges for forms that must be processed manually:

• Form 3520/3520-A (foreign trust or gift disclosures)
• Paper-filed FBARs (though electronic filing through FinCEN remains available)
• Complex international returns requiring documentation review

Forms Requiring Special Attention

Expat tax returns often include forms that require careful review and may face extended processing times:

• FBAR (foreign bank account reporting)
• Form 1116 (Foreign Tax Credit)
• Form 2555 (Foreign Earned Income Exclusion)
• Form 3520/3520-A (foreign trust or gift disclosures)

Practical Steps for Smooth Filing

Identity Verification Preparation

Many expat returns are flagged for identity confirmation through ID.me or paper forms. With fewer agents processing these verifications, preparation is essential.

• Action needed: Set up or update your ID.me account early and organize supporting documents, including passport, visa, and foreign residency documentation.

Foreign Tax Credit Documentation

The IRS frequently conducts manual reviews of Form 1116, especially for large claims or non-standard currency conversions that require additional verification.

• Action needed: Submit complete copies of foreign tax returns with clear labeling and precise calculations. Avoid rounding or estimating; accuracy matters more than ever.

Electronic Filing Priority

Paper forms create bottlenecks that will be more pronounced with reduced staffing at processing centers.

• Action needed: File your FBAR electronically through FinCEN when possible. For any required paper submissions, file early and use certified mail with tracking.

ERC Claim Assessment

If you filed a late Employee Retention Credit claim after January 31, 2024, or were planning to file one, the proposed legislation could affect your refund.

• Action needed: Consult with a tax professional immediately to understand your exposure and potentially prepare for refund reversals. Small business owners abroad who claimed the ERC through payroll providers should review their documentation.

Behind on past returns? Don’t wait.

Processing delays are likely, so early action gives you more time to resolve any issues. No matter how late, messy, or complex your situation may be, we can help →

Strategic Filing Recommendations by Expat Type

For Corporate Expats

If you’re working for a multinational company with complex benefits packages, early filing allows time to address any questions about tax equalization, foreign housing exclusion, or international tax treaties. Professional handling of corporate benefits is particularly valuable given potential processing delays.

For Entrepreneur Expats

Business owners abroad benefit from strategic planning around CFC rules, self-employment tax, and business compliance requirements. With increased scrutiny likely, comprehensive business documentation becomes even more important.

For Digital Nomads and Frequent Movers

Location-independent professionals should pay special attention to physical presence tests and changing tax homes, which may require more detailed record-keeping and could face longer review times.

For Late Filers

If you have unfiled returns, addressing them proactively is always better than waiting. Streamlined filing procedures can help resolve compliance issues efficiently, and early action provides more time to work through any complications.

Looking Ahead: Staying Informed and Prepared

The 2026 tax season will bring changes, but with proper preparation and accurate filing, these adjustments are manageable. Key strategies include:

• Early Filing: Submit your return as soon as you have all necessary documentation to avoid peak-season processing delays and potential mid-season form changes.
• Complete Documentation: Provide thorough supporting documentation for any foreign income, credits, or exclusions to minimize review time and additional requests.
• Professional Guidance: Consider working with specialists who understand both current regulations and upcoming changes, particularly given the complexity of expat tax situations.
• Monitor Developments: Stay updated on the final version of tax reform legislation, as provisions affecting expats could change significantly between the House and Senate versions.
• Maintain Detailed Records: Given increased scrutiny and longer review times, comprehensive documentation of foreign income, taxes paid, and residency status will be essential.

Peace of Mind Through Proper Planning

While IRS operational changes and new legislation create some uncertainty, Americans abroad have successfully handled complex tax requirements for decades. The key is working with knowledgeable professionals who understand your unique situation and can guide you through an easy, stress-free process.

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