No end to shutdown in sight, workforce reductions stayed, for now

Tax Hot Topics

Though the situation could become more fluid quickly, Congress and the Trump administration appear no closer to a deal to end the current government shutdown in its third week than they were in the first week of the lapse in funding.

The shutdown largely revolves around insistence by Democrats — supported by the healthcare industry — to extend the current tax credit to subsidize premiums of health insurance bought through Affordable Care Act marketplaces. A strong current of distrust between Congress and the Trump administration also runs through the talks, as both Republicans and Democrats note that ongoing efforts by President Donald Trump and Office of Management and Budget Director Russ Vought to redirect funds from Congress’ original intent make negotiations more difficult. The issue, which revolves around the core separation of powers laid out by the Constitution, is subject to ongoing legal challenges.

The Trump administration began reductions in force — permanent layoffs of government workers that it said would eventually affect about 10,000 employees — on Oct. 10, using the shutdown ostensibly to cut spending but also to target departments and programs it says do not align with the president’s priorities. After initially shielding the IRS from shutdown-related disruption for approximately the first week of funding dispute, agency leadership furloughed about half of its workers on Oct. 8. Days later, Office of Management and Budget Director Russ Vought announced reductions in force, including approximately 1,400 layoffs at the Treasury Department, most of them at the IRS.

The cuts reportedly came from human resources, information technology, and customer service at the agency. They also included the entire staff — about 100 people — of the Community Development Financial Institutions Fund. The fund was targeted for elimination in the latest administration budget proposal but has bipartisan support on the Hill. It administers 11 programs, including the New Markets Tax Credit, which award federal dollars to community banks, credit unions and other financial institutions that provide capital to underserved communities and markets. 

However, on Oct. 15 a federal judge with the U.S. District Court of Northern California issued a temporary restraining order on the layoffs at IRS and other federal agencies. 

“It is…far from normal for an administration to fire line-level civilian employees during a government shutdown as a way to punish the opposing political party,” Judge Susan Illston wrote in her order enjoining the administration from moving forward with layoffs until further legal arguments can take place. “But this is precisely what President Trump has announced he is doing,” the judge continued in her order, citing a social media post by Trump.

Illston found the temporary restraining order halting layoffs (and opening the door to reversing them) was “appropriate” because the government unions that brought suit against the reductions in force were likely to prevail in a hearing scheduled for Oct. 28, after the lawyer for the Trump administration “refused to answer the question of whether or not defendants’ action are legal, instead saying that defendants were ‘not prepared’ to address the merits today.”

‘Souring the soup’

The prolonged shutdown could ripple through a host of unrelated legislative matters, including efforts to overhaul the regulatory and tax treatment of cryptocurrencies or extend certain expiring tax benefits for businesses  included in the One Big Beautiful Bill Act. Any bipartisan work in the current atmosphere is unlikely at the tax writing committees.

“I’ll work with anybody on legislation that’s good for the American people and my district,” Rep. Mike Thompson, D-Calif., a senior Ways and Means Committee Democrat, told Bloomberg Tax. “But this does kind of sour the soup.”

Other major, regularly passed legislation around agriculture and transportation also faces stiffer-than-normal headwinds due to the current political environment.

Still, the Senate Finance Committee managed to advance multiple nominees to the IRS and Treasury on Oct. 8, largely along party lines. The nominations of Donald Korb for IRS chief counsel, Derek Theurer for Treasury deputy undersecretary (Legislative Affairs), and Jonathan Greenstein for deputy undersecretary (International Finance) were all reported favorably by the committee. Korb and Theurer, a recent Ways and Means and House Republican leadership tax policy staffer, will have a major hand in shaping implementation of the substantial tax policy signed into law as part of the One Big Beautiful Bill Act, if confirmed by the full Senate. Theurer was also appointed as acting deputy secretary, Treasury’s number two leader, on Oct. 7.

Treasury Secretary Scott Bessent, who also holds the role of acting IRS commissioner, recently named Social Security Commissioner Frank Bisignano to the newly created role of IRS CEO. According to an Oct. 6 release, Bisignano, the former CEO of payments and fintech company Fiserv, will manage day-to-day operations at the tax collector while maintaining his position as the head of the Social Security Administration.

Former Rep. Billy Long was confirmed as IRS commissioner in June but was removed by the administration after less than two months. Senate taxwriter Chuck Grassley, R-Iowa, says he has received assurance that the administration still intends to nominate a new commissioner and that Bisignano’s appointment is not a replacement. However, it is not clear how the responsibilities of the two roles will differ or how the jobs will be delineated.

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