Tax man stops 'most operations' – furloughs tens of thousands
The Internal Revenue Service has shuttered most of its operations and furloughed nearly half its workforce as the federal government shutdown enters a second week — a disruption that could slow mortgage processing nationwide, stall income verification requests, and add friction to an already fragile housing market.
Roughly 34,000 of the IRS’s 74,000 employees have been placed on unpaid leave after the agency exhausted its contingency funds. According to a statement posted Wednesday, “due to the lapse in appropriations, most IRS operations are closed.” About 53% of the agency’s staff — primarily those responsible for safeguarding IT systems and essential taxpayer functions — will remain at work.
For mortgage lenders and servicers, the news immediately raised red flags. Many underwriting processes depend on the IRS’s income verification service and access to Form 4506-C transcripts. With those systems running at limited capacity, lenders could face delays confirming borrower income, verifying employment documentation, and completing loan packages.
“Every day these employees are locked out of work is another day of frustration for taxpayers and a growing backlog of work that sits and waits for the shutdown to end,” said Doreen Greenwald, national president of the National Treasury Employees Union. “For frontline employees, the complete lack of planning left them in the dark about their work status until their supervisor informed them today.”
Key Bottlenecks for Mortgage Processing
The IRS has said it will continue functions “necessary to protect life and property,” including limited payroll processing and maintenance of certain data systems. But most public-facing services — including call centers, legal review, and non-automated collections — have been suspended.
That means many of the IRS’s business-facing services critical to mortgage lenders will slow or stop altogether. The agency’s Income Verification Express Service (IVES), used by lenders to confirm borrower tax data, is likely to operate at drastically reduced speed or temporarily halt if staff are unavailable to process requests.
Lenders that rely on IRS transcripts to finalize underwriting or meet investor due diligence requirements may be forced to use alternate verification methods. That can add days or even weeks to loan closings, particularly for self-employed borrowers whose income relies heavily on tax documentation.
The agency’s acting Chief Human Capital Officer David Traynor notified staff that unless specifically exempt, “you are being furloughed beginning October 8, 2025.” That leaves most administrative, legal, and policy teams — including those that handle guidance to financial institutions — out of commission.
Ripple Effects on Closings and Secondary Markets
Mortgage brokers and title companies are warning clients to brace for slower timelines. The IRS verification delays compound existing logjams from the Social Security Administration and Federal Housing Administration, both of which face staffing constraints during the shutdown.
A similar slowdown occurred during the 2019 government closure, when lenders reported widespread disruptions in loan processing and securitization schedules.
“Expect increased wait times, backlogs and delays implementing tax law changes as the shutdown continues,” Greenwald said. “Taxpayers around the country will now have a much harder time getting the assistance they need, just as they get ready to file their extension returns due next week.”
The IRS furlough also intersects with broader fiscal uncertainty. As Treasury markets react to the ongoing political standoff, mortgage-backed securities could experience volatility, particularly if investors grow concerned about payment processing or data reporting consistency from federal agencies.
Back Pay and Workforce Questions
The shutdown has revived debate over whether federal workers will be guaranteed back pay. The Office of Management and Budget floated a legal opinion suggesting furloughed employees might not automatically be compensated after the government reopens — a stance that drew immediate bipartisan criticism.
House Speaker Mike Johnson (R-La.) told reporters, “It’s my understanding that the law is that they would be paid… I think they should be. They should not be subjected to harm and financial dire straits.”
The IRS reassured staff that despite their “non-pay and non-duty status,” employees will be paid “on the earliest date possible after the lapse ends, regardless of scheduled pay dates,” referencing the Government Employee Fair Treatment Act of 2019.
The Housing Industry’s Broader Exposure
For the mortgage industry, the IRS’s shutdown isn’t just an administrative inconvenience — it represents a temporary break in the financial infrastructure that underpins loan origination and investor confidence.
The inability to access timely IRS income data could complicate compliance with underwriting standards set by Fannie Mae, Freddie Mac, and Ginnie Mae, particularly for loans requiring full documentation.
In addition, lenders dependent on automated verification platforms that link to IRS systems may face temporary service interruptions, forcing manual workarounds that add cost and time.
The Treasury Department has said that operations funded by the Inflation Reduction Act or deemed essential under long-standing procedures will continue. All others — including many functions supporting lenders and financial institutions — will pause until Congress restores funding.
Outlook
If the shutdown continues through mid-October, analysts expect mortgage processing pipelines to slow sharply, with ripple effects on home sales, refinancing activity, and warehouse liquidity.
A longer impasse could also delay tax refunds and dampen consumer spending — both key drivers of early-year housing demand.
As one former IRS commissioner noted after the 2019 shutdown, “IRS Filing Season employees are resilient and well know and respect the importance of processing returns and generating refunds… even with the inherent uncertainties of a lapse in appropriations.”
This time, the agency’s silence may be felt not just in Washington, but across kitchen tables where home closings and loan approvals are waiting for the lights to come back on.
