IRS Challenges in 2026: What Taxpayers (Especially S Corps) Need to Know

The IRS is still dealing with significant staffing shortages (down 25-27% from early 2025 peaks) and processing backlogs. This is leading to slower handling of correspondence, payments, amended returns, and responses to notices, and inconsistencies in what has been filed and what notices are saying.

Common Issues Right Now:

• Premature or duplicate notices: Many taxpayers are receiving letters (e.g., balance-due CP14 notices or information requests) for issues they’ve already addressed —

  such as payments made or documents previously submitted. These are often generated automatically before your response or payment fully posts due to backlogs.

• Delays in processing: Individual correspondence is still being worked on items from March 2026 (longer for businesses in some cases). Payments and responses can take weeks to months to update on accounts.

• Installment plans have already been set up and accepted, but then taxpayer receives a mail/notice requesting to pay within the next month or set up a installment plan. There is a disconnect between the manual set up of the installment plan and the pay now notices getting send out. Likely due to automated systems at the IRS running quicker than the manual counterparts.

What to do:

• Don’t ignore notices. Respond by the deadline with clear documentation and proof of prior actions (use certified mail or the IRS Document Upload Tool).

• Monitor your IRS online account regularly. See IRS Accounts here

• Keep excellent records and if you speak to an IRS agent, ensure you are able to reference documents already submitted.

S Corporations are facing some unique headaches amid the delays:

• Reasonable compensation rules: The IRS continues to focus on shareholder-employees taking low (or zero) salaries and large distributions. They can reclassify distributions as wages, triggering back payroll taxes, interest, and penalties. Proper payroll setup and documentation are critical.

• Payroll processing delays: With staffing cuts, quarterly Form 941 filings, deposits, and W-2 processing can lag, leading to unexpected notices even when everything was filed/paid on time. I am personally seeing this one with a lot of clients. Notices and letter sent for lack of payroll taxes/forms, but in reality, they have just not been processed yet.

Inconsistencies in IRS Letters/Notices:

This is one of the most frequent complaints in 2026 due to severe staffing shortages (IRS workforce down 25-27%), massive paper correspondence backlogs, and automated systems that don’t wait for manual processing.

• Processing lags: The IRS is currently working on individual general correspondence received as far back as March 2026 (business correspondence even earlier — back to November 2025 in some cases). Payments, amended returns, responses to prior notices, or documents you mailed can take weeks to months to post to your account

• Automated notice generation: Systems (like Automated Undereporter/AUR or balance-due modules) scan the master file in near real-time. If your prior action hasn’t updated yet, the computer flags it and mails a notice automatically. (This mean if they have not manually processed your forms that were submitted, the system will automatically just assume its not done and send a notice/letter)

Common examples:

• CP14 (Balance Due): You already paid (or responded), but it hasn’t posted → notice arrives anyway.

• Math error or information request notices after you’ve already sent documents.

• Collection reminders (CP503, etc.) even after timely response.

• S Corp issues: Notices questioning reasonable compensation or payroll even if filings were made, due to delayed posting of Forms 941/W-2 or cross-checks.

Overall impact of staffing shortages: About 3.6 million taxpayers saw delays beyond normal processing in recent data, with average extra waits of 7 weeks (e-filed) or 14 weeks (paper). Manual reviews and correspondence processing (still back to March 2026 for individuals) slow everything down

What to Do If Your Refund Is Delayed by an Issue:

1. Check Where’s My Refund? daily (updates every 24 hours) and your IRS online account for notices or transcripts.

2. Respond immediately to any notice (use Document Upload Tool or certified mail). Include all requested info + explanation of prior actions if it’s a duplicate issue.

3. For hardship: Contact the Taxpayer Advocate Service (independent help).

4. Monitor for First-Time Abatement (FTA) if penalties arise from delays.