UpTrajectory Review

The IRS has quietly become a two-tier operation, and paper filers are discovering they occupy the slower tier. A new government report confirms what many small-business owners and individual taxpayers suspected: the 2026 filing season functioned smoothly for the electronically connected majority while leaving paper-dependent filers stranded in processing queues. The culprit is a diminished IRS workforce combined with persistent technology failures—problems that compound each other when human staff must manually intervene where automated systems stall. For a revenue service that still processes millions of paper returns annually, this is not a fringe concern. It is a structural vulnerability that hits specific populations with disproportionate force.

Small-business operators should pay close attention because they populate the paper-filer category more heavily than the general public suggests. Many sole proprietors, partnerships, and S-corps still submit paper returns either by preference, by necessity due to complex attachments, or because they lack the accounting infrastructure to file electronically. The same operators who rely on timely refunds for cash flow—seasonal businesses, startups thin on working capital, firms awaiting ERC or other credit refunds—are precisely those least able to absorb a six-to-twelve-week delay. The report's framing of a 'normal' season for 'most' taxpayers obscures this concentration of harm among a commercially vital minority.

What merits skepticism here is the passive construction of the findings. 'Technology problems' and a 'smaller IRS workforce' are presented as meteorological events rather than policy choices. The IRS staffing reductions trace directly to congressional appropriations decisions and, more recently, to administrative restructuring efforts that eliminated personnel without corresponding automation investments. The technology failures, meanwhile, suggest decades of deferred modernization now colliding with sudden austerity. The report's reassurance that most taxpayers experienced normality functions as political cover for a deterioration that was predictable and predicted. We do not find this framing innocent or particularly useful to readers trying to understand their actual risk exposure.

The downstream effects ripple beyond individual refund timing. Taxpayers who receive paper checks rather than direct deposit—often older filers, the unbanked, or those with privacy concerns—face the same delays, meaning the most financially fragile households wait longest for money they are owed. For businesses, delayed refunds translate to delayed vendor payments, missed inventory purchases, or unnecessary credit draws. The IRS's diminished capacity also implies longer resolution times for correspondence, amended returns, and audit responses—all categories where small businesses are overrepresented relative to their share of filers. The cost is not merely patience; it is interest, opportunity, and in some cases solvency.

Operators should treat this as a signal to audit their own filing practices immediately. If you or your clients still file paper returns, the rational response is not hope that Congress restores IRS funding but elimination of paper dependency where possible. This means verifying e-file eligibility for all entity types you use, exploring IRS Free File or commercial preparer platforms for complex returns, and enrolling in direct deposit for any refunds. For returns that must be paper-filed, build delay assumptions into cash-flow projections and communicate timing clearly to any stakeholders awaiting tax outcomes. The two-tier system is likely to persist; which tier you occupy is increasingly a choice.

What to watch: whether the next appropriations cycle stabilizes IRS staffing or accelerates cuts, and whether the agency's ongoing technology modernization—long promised, rarely delivered—finally produces systems that reduce rather than increase manual processing demands. Also monitor whether Congress reconsiders the mandate that certain business credits be claimed on original returns only, which effectively prevents electronic amendment and forces paper filing for corrections. The operators who track these policy levers will have advance warning of whether the paper-filer penalty expands or contracts. For now, the prudent assumption is that it persists and worsens.

Takeaway: Eliminate paper filing and switch to direct deposit now—delay assumptions should be built into cash flow, not treated as temporary.