Government Shutdown Ends, Tax Questions Remain

Tax Notes reporters Cady Stanton and Benjamin Valdez discuss the tax credit debate that led to the government shutdown and the potential effects on the IRS and the 2026 filing season. 

For related tax news, read the following in Tax Notes:

• Democrats Say It's Too Late for Any ACA Credit Alternative
• Shutdown May Hinder Filing Season Timeline, Former IRS Chiefs Say
• Republican Leaders Harden Stance Against ACA Tax Credit

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This episode is sponsored by Avalara. For more information, visit avalara.com.

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Credits
Host: David D. Stewart
Executive Producers: Jeanne Rauch-Zender, Paige Jones
Producers: Jordan Parrish, Peyton Rhodes
Audio Engineers: Jordan Parrish, Peyton Rhodes

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Transcript

This transcript has been edited for clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: The lights are back on.

After a record-breaking 43-day shutdown, the U.S. government has reopened. On November 12 the House passed the Senate-approved continuing resolution and minibus appropriations bill, which President Trump signed into law the same day. However, a key sticking point that led to the shutdown — extending the expiring Affordable Care Act credits — was not included in the legislation, setting up a race to find a solution before the year-end expiration date.

But Congress isn't the only one facing potential post-shutdown challenges. The IRS furloughed roughly half of its workforce during the shutdown, and even with those employees now returned, the agency is facing a full plate as it addresses the backlog and prepares for the upcoming filing season.

So where do things stand with both Congress and the IRS now that they've been open for just over a week? Joining me now to talk more about this are Tax Notes Capitol Hill reporter Cady Stanton and Tax Notes IRS reporter Benjamin Valdez. Cady, Ben, welcome back to the podcast.

Cady Stanton: Great to be here.

Benjamin Valdez: Thanks for having me.

David D. Stewart: So why don't we start off with some background on how we got here, how this shutdown happened?

Cady Stanton: Sure thing. The government shutdown began back on October 1. In the weeks leading up to the September 30 government funding deadline for the 2026 fiscal year, Democrats realized that the government funding fight might be one of the few points of leverage they'd have this year, given Republican control of the House, Senate, and the White House.

A continuing resolution, also known as a CR, to temporarily fund the government was able to pass the House, since the chamber just needed a simple majority. But the Senate's 60-vote threshold meant Republicans needed some Democrats to support the measure to keep the government open, and members of the caucus really dug in their heels to oppose it.

Not only did the move eventually lead to the longest government shutdown in U.S. history, it was also the longest full government shutdown. Many of the records it was competing with from recent years were only partial shutdowns, meaning some of the government was still funded and operating, while other parts were closed.

So an important question here is: What were Democrats asking for in exchange for their vote? The answer really depends on who you ask. The main sticking point had to do with an enhanced premium tax credit from the Affordable Care Act that was boosted during the pandemic and is set to expire at the end of this year. If it isn't addressed, millions of Americans are expected to see a sharp spike in healthcare premiums in 2026.

Part of the reason that there hasn't been an extension on this credit sooner has to do with the price tag. A permanent extension of the premium tax credit would cost $350 billion over 10 years, according to a September analysis from the Congressional Budget Office.

An expiration of the credit would also have some pretty serious consequences, as I mentioned, which is part of the reason why Democrats were so adamantly pushing for it to be addressed. The CBO has estimated that without a permanent extension of the credit, the number of uninsured people will rise by 2.2 million in 2026, by 3.7 million in 2027, and by 3.8 million on average in each year through 2034.

But putting the ACA credits aside, Senate Minority Leader Chuck Schumer also said early on that Democrats wanted even more as a condition of their support, not just the credits. And those demands included a reversal of some of the cuts to Medicaid made in Republicans' One Big Beautiful Bill Act earlier this year, and a promise that the Office of Management and Budget would refrain from more rescissions, which are moves to undo congressionally appropriated funds that lawmakers had already voted to approve.

David D. Stewart: During this whole shutdown, what was happening on the Hill?

Cady Stanton: While there were quite a few immediate impacts from the full shutdown — including the furlough of hundreds of thousands of federal employees, as I'm sure Ben will speak to — the Senate didn't exactly move with urgency in October. The day after the shutdown began, the chamber recessed October 2 for the full day, and the Senate largely took regular breaks for weekends and other commitments throughout the month of October.

The House did honestly even less. It recessed September 19 and didn't return until November, when a deal had already been reached in the Senate. The Senate, meanwhile, continued to hold failed votes on two different CR proposals, one so-called clean Republican CR, and another Democrat proposal that would extend both government funding and the ACA credits simultaneously. And like I said, both of those proposals failed over and over and over again.

So by week three and week four, it really honestly started to feel like Groundhog Day, and when November came and the shutdown broke the record for the longest one ever, it was really hard to see a way out of the stalemate. Democrats, who saw some big wins in gubernatorial and mayoral elections on November 5, appeared ready to stay dug in, honestly.

But other pressures did continue to grow; some food assistance payments through SNAP [Supplemental Nutrition Assistance Program] were halted and delayed in various states beginning in November, and travelers began to see widespread flight delays and cancellations. Tensions grew, and Senate Majority Leader [John] Thune even had an outburst on the Senate floor around this time. He lost his composure for the first time since the disagreements began.

David D. Stewart: So what broke the logjam? What got the government back open again?

Cady Stanton: While from an outside perspective, it really looked like the stalemate would continue, behind the scenes, movement was starting to happen. Behind closed doors, some moderate Senate Democrats began discussions with Republicans about pathways to reopening the government, especially after they saw the impact of the shutdown on their individual states that they represent. The talks between moderate Democrats and Republicans ramped up the weekend of November 9, and a handful of members left meetings and told reporters they felt like they might have a deal.

An initial procedural vote was held late that Sunday night, and eight members of the Democratic caucus — and I don't say Democrats, because among the group was this independent from Maine who caucuses with Democrats, Angus King — they all joined Republicans on this procedural vote to reopen the government. While it was initially a procedural vote, it really forecasted that the government shutdown was coming to an end because the issue in the first place had really been with getting enough Democrats to support reopening the government in the Senate.

It's also important to note here that the majority of the Senate Democratic caucus, including Senate Minority Leader Chuck Schumer, opposed the deal. They didn't feel like they got enough out of concessions from Republicans in what the agreement was in the end. But ultimately, the Senate passed the legislation November 11, and the House returned after nearly two months to advance it on November 12.

David D. Stewart: Well, let's turn to the other side of this. Ben, could you tell us, what did we see out of the IRS during this whole shutdown period?

Benjamin Valdez: So the IRS began furloughing employees on October 8, which was about five business days after the start of the shutdown. For the first five days, the agency was fully staffed using Inflation Reduction Act funding.

David D. Stewart: So what determined who was working and who wasn't during that period?

Benjamin Valdez: Employees who were still working, which was about 39,870 employees, or just over 50 percent of the entire workforce, were focused on testing and updating systems ahead of the 2026 filing season, processing payments, and drafting guidance for the One Big Beautiful Bill Act. Automated collections were also continuing, and there was some limited telephone assistance.

David D. Stewart: So what's been the effect of the shutdown on implementation of the One Big Beautiful Bill Act and the October filing deadline?

Benjamin Valdez: Regarding implementation of the new tax law, it appears that guidance is still on track because it was a priority during the shutdown, and most of [the IRS] chief counsel [office] was exempt from furlough.

Regarding the October filing deadline, the IRS urged taxpayers to file their returns as they normally would during the shutdown, but resource constraints at the agency, which includes less staff due to resignations, are expected to have an impact on the processing of extended returns.

David D. Stewart: So I understand there was some action on an attempt to lay off additional workers. What happened there?

Benjamin Valdez: Yeah, there was. Treasury issued reduction-in-force notices to around 1,300 IRS employees, but legislation reopening the government required agencies to reverse those actions within five days of enactment.

The Office of Personnel and Management recently issued guidance urging agencies to inform those employees of the reversal and issue back pay for those who weren't being paid at the time of the RIF. And I've heard from at least one source in the small business division at the IRS that employees who did receive RIF notices were told about the reversal.

David D. Stewart: So during the shutdown, we heard about — I guess this is a new role at the IRS — the CEO of the IRS. What is that role?

Benjamin Valdez: Yeah, Treasury, a few days into the shutdown, they announced that the Social Security administrator, Frank Bisignano, would be the CEO of the IRS, which is a newly created role. Essentially, he's going to oversee day-to-day operations at the IRS, like the commissioner would, but he's going to answer directly to Treasury Secretary Scott Bessent, who is also acting commissioner of the IRS.

David D. Stewart: So are we expecting to see some lingering effects from the shutdown as the 2026 filing season starts up?

Benjamin Valdez: It's a bit early to say exactly how the shutdown will affect the 2026 filing season, but several former officials have expressed concern that the lengthy shutdown might impact the timeline for the IRS being prepared for the next filing season, including former IRS Commissioner Daniel Werfel, who's concerned that the shutdown in combination with the workforce reductions at the IRS this year might make the filing season start later.

Some practitioners are also expecting changes from the One Big Beautiful Bill Act to spike taxpayer demands for phone and in-person assistance this filing season, and it remains to be seen whether the IRS will have enough resources to provide adequate service.

David D. Stewart: So Cady, turning back to the Hill, where do we stand now that some things have been resolved, but other things seem to be still sitting out there to deal with?

Cady Stanton: Yeah, it might be important to start here with what just ended up in the final agreement that reopened the government. So an important aspect here is that deal really didn't include concrete progress on any of the three major demands by Democrats that they started digging their heels on in the first place.

So in the final version, the agreement included an extension of government funding through January 30, 2026, so setting a new government funding deadline that really kicks the can down the road by a few months. It also included funding for three segments of the government through September 30, 2026, which is the end of the fiscal year. It included guaranteed back pay for all federal workers, a reversal of the reduction-in-force notices that Ben mentioned that were sent to federal employees during the shutdown, and then a temporary ban on any federal layoffs or furloughs until the end of the new CR at the end of January 30.

But on ACA credits here, little was really won. Democrats received a promise from Majority Leader John Thune on some kind of vote on an extension in the Senate, but it's really unclear what proposal might make it to the floor. And it's also important to note that a vow to hold a vote is not a vow to whip votes for passage, so there's no guarantee that whatever makes it to the floor will have any kind of success.

Plus, House Speaker Mike Johnson has made it clear he's making no such promise to hold a vote in the House, and add on to that, time is not on the side of those hoping for an extension, given the deadline is just about six weeks away at the end of the year.

David D. Stewart: So what are we seeing in terms of potential solutions on the ACA credit question?

Cady Stanton: Well, your guess on a solution is as good as mine or Congress's at this point. But in the first few days of sessions since the shutdown was resolved, there's been what I would call a trial balloon period. Members from both parties and chambers are throwing healthcare proposals at the wall to see what might stick. Democrats are still hoping for an extension of the credit by its expiration at the end of the year, and there are a handful of Republicans who support that solution, but not many.

The majority of members of the GOP caucus are opposed to the idea of any extension and certainly not one without some kind of reform to the program, whether it be an income cap, provisions to address fraud, or some other changes. Some bills introduced in the House over the past week include an income cap on the credit, with varying definitions of what the cap would entail, and an alternative has been floated as well.

Senate Finance Committee member Bill Cassidy has proposed replacing the ACA credits with a federally funded flexible savings account. That idea would attempt to address the concerns of some lawmakers that some recipients may be fraudulently enrolled in the ACA health plan by unscrupulous insurance companies and brokers. The idea seemingly has the support of President Trump, but it's hard to tell how many other members might like that idea, or even how effective it might be in filling the hole left by the boost to the credit that's set to expire.

Myself and the other members of the Capitol Hill team will be watching how each of these proposals develop, and Congress is likely to pick up the pace on choosing an idea, if they do choose one, when the chambers return from recess after Thanksgiving, especially with the end-of-year deadline approaching.

David D. Stewart: Well, it's definitely an interesting issue to keep an eye on, and next year it'll be fascinating to see how the IRS copes with the 2026 filing season. Cady, Ben, thank you so much for being here.

Cady Stanton: Thanks for having us.

Benjamin Valdez: Thank you.