The Internal Revenue Service has furloughed almost half of its workforce as the federal government shutdown stretches into its second week. This closure is affecting many IRS operations and could cause delays for the insurance and financial industries that rely heavily on the agency’s services.
About 34,000 of the IRS’s 74,000 employees have been placed on unpaid leave after contingency funds ran out this week. The IRS confirmed that due to the lack of funding, most of its operations are currently closed. However, a bit more than half of the staff—around 53.6%—remain working to handle essential tasks like IT security and limited taxpayer support.
This shutdown has lawmakers and industry experts concerned, especially as insurers face crucial deadlines related to tax reporting and compliance. Tasks like filing 1099 forms and dealing with tax-qualified products could see significant delays. The timing is tough, with insurers getting ready for the 2026 filing season and adapting to new tax rules under President Donald Trump’s "Big Beautiful Bill," which notably changes rules on tip income and payroll exemptions.
Many IRS employees learned of their furlough status just days before it took effect on October 8, 2025, adding to the frustration felt by workers and taxpayers alike. The agency’s legal, planning, and research teams, which often help financial institutions interpret policies, are largely inactive during this closure. This silence could slow down communications between insurers, brokers, and regulators who depend on timely IRS responses.
For life insurers and companies managing retirement products, the pause means uncertainty. These groups look to the IRS for key decisions on tax-qualified status, annuity reports, and contribution limits. A long furlough might delay important private letter rulings and updates that these companies need to design and sell their products correctly.
The shutdown is also expected to hold up tax refunds, affecting individuals and small businesses. For insurers, especially those in personal lines, this delay could impact cash flow. Many clients use their tax refunds to pay premiums or add to annuities and life insurance plans. Advisors worry that even short interruptions could disrupt financial planning during this critical period, particularly with the October 15 deadline for tax extension filers coming up.
Despite assurances from leaders like House Speaker Mike Johnson that furloughed workers should eventually receive their pay, uncertainty remains after a memo from the Office of Management and Budget hinted that back pay might not be automatic once the shutdown ends. The IRS has promised to pay employees as soon as possible after appropriations resume.
This furlough goes beyond a simple staffing issue for the insurance industry. It creates a pause in government financial systems that support compliance, tax planning, and cash flow for millions of consumers and businesses. Past shutdowns have shown IRS backlogs can last for months, causing ripple effects in other agencies like the Centers for Medicare and Medicaid Services, which use IRS data to manage health plan subsidies.
International insurers and reinsurers also face challenges. Reduced IRS and Treasury activity could complicate FATCA and cross-border reporting, leading to delays and higher compliance costs.
As the shutdown continues, worries grow about the long-term impact. Interest rates and economic risks add to the stress as insurers watch Treasury yields closely amid the stalled federal operations. The IRS had hoped to keep more staff working using funds from the Inflation Reduction Act, but those resources are now mostly gone.
Only activities funded by the Inflation Reduction Act or deemed essential for “life and property” protection will keep going. Many other functions—like legal analysis and administrative planning—are on hold until Congress passes a new budget.
Industry experts warn that the longer this shutdown lasts, the bigger the strain will be on refund processing and compliance systems. Recovering from the backlog will take time, and the financial world tied to the IRS may not bounce back as easily as in previous shutdowns.
In short, this federal shutdown is causing far-reaching effects beyond government workers. It’s sending waves through the insurance world, impacting everything from product rules to client refunds, and could leave both industries and consumers waiting for months.