The IRS Is Smaller. It’s Still Coming for Your R&D Credit.

There has been a lot of coverage this year about the IRS losing staff. Between DOGE-related cuts, buyouts, and layoffs, the agency went from roughly 102,000 employees in early 2025 to about 74,000 by December. That is a 27% reduction. The Large Business and International division, which handles most R&D credit examinations for mid-size and large companies, absorbed some of the heaviest cuts. LB&I lost a significant number of its most experienced revenue agents, the ones who had spent years working complex credit claims.

Clients keep asking us some version of the same question: does a smaller IRS mean less risk on the R&D credit?

No. And if you are counting on the IRS being too stretched to scrutinize your claim closely, that is not a strategy worth betting on.

Fewer Agents, More Selective Enforcement

When an agency loses a third of its workforce, it does not abandon enforcement. It gets more deliberate about where it focuses its remaining capacity. For the IRS, R&D credits have always been a priority target, not because the credit is common, but because the potential adjustments are large. A single examination of a mid-size company claiming a few million dollars in credits can result in significant revenue recovery. A leaner agency needs every dollar it can find, and it is going to go where the money is.

Bloomberg Law’s January 2026 coverage of the current IRS posture was direct about this: the R&D credit will remain a priority through the staffing reduction precisely because the financial stakes are high. Complexity combined with high potential adjustments is exactly the combination that keeps a credit on the examination radar year after year, regardless of how many agents the agency has.

There is also a political dimension to this. The IRS has faced public scrutiny over whether its enforcement capacity has weakened. Agency leadership has responded by emphasizing that enforcement will continue on high-value, high-complexity items. R&D credits fit that description. Walking away from them would send the wrong signal.

The LB&I Backlog

The staffing losses in LB&I have created a real bottleneck, but not in the way most companies hope. Audits are not disappearing. They are slower to assign and slower to resolve. Once an examination opens, it stays open longer. That means more time, more disruption, and more document management overhead on your end. It also means more opportunity for scope to expand during the examination, because examiners have more time to look at additional issues while a case sits in the queue.

There is also a change in how the remaining agents are conducting examinations. Practitioners who work regularly with exam teams are reporting less tolerance for inferential reasoning. Agents are requiring more direct evidence that activities qualify under the four-part test. Not just project summaries, but documentation that connects specific work to specific individuals, specific expenditures, and the actual process of experimentation. The agents who remain in LB&I have seen enough examinations to recognize when documentation was assembled for the audit rather than created during the work. That bar is going up, not down.

Data-Driven Enforcement

A smaller workforce does not mean less scrutiny. It means the IRS is relying more heavily on technology to do what people used to do. IRS leadership has explicitly called data-driven enforcement one of the agency’s top strategic priorities going into 2027. That means automated screening, analytics, and pattern recognition are doing more of the front-end work of identifying which returns to flag for examination. Fewer agents are required to generate the same number of examination referrals when the selection process is automated.

Form 6765’s new Section G was designed with exactly that in mind. Once R&D data is reported in a standardized, project-level format, the IRS can run screens across thousands of returns and identify outliers without a human reviewing each one. Unusually high credit-to-wage ratios, business components that do not fit industry norms, allocation percentages that look like estimates rather than measurements: all of that becomes visible at scale. Section G is optional for tax year 2025 but mandatory starting in 2026. We have a detailed breakdown of what Section G actually requires and how to build toward it.

Software Development Claims Are Getting Extra Attention

One area that deserves specific mention: software development R&D claims in financial services are seeing significantly more examination activity. Banks, investment management firms, and fintech companies that claim credits on software development work are increasingly likely to face scrutiny, and those examinations tend to be intensive.

The tension is between the IRS’s traditional model of research and how modern software development actually works. Agile sprints of two to four weeks, where each sprint is scoped based on the results of the last, represent a genuine process of experimentation. The uncertainty is real. The alternatives being evaluated are real. But documenting that process in a way that satisfies an examiner who is thinking in terms of hypothesis-driven laboratory research requires intentional documentation infrastructure. If this describes your company, the time to build that infrastructure is during development, not when an examination notice arrives.

What to Do With This

The practical implication of all of this is that the risk environment for R&D credits has not softened. The IRS is more selective about where it directs examination capacity, but more determined to produce results on the cases it does select. The combination of automated screening, reduced tolerance for inferential documentation, and mandatory project-level disclosure starting in 2026 means the standard for a defensible claim is higher than it has ever been.

A smaller IRS is not a safe harbor. The companies that get through R&D credit examinations cleanly are not the ones with the smallest claims or the ones who filed hoping no one would look. They are the ones with documentation that can stand on its own: records created during the work, business components described with specificity, wage allocations tied to actual data.

Want to talk through where your R&D credit process stands? Reach out. We would love to help.

Stephen Whiteaker, CPA

As MASSIE’s Director of Controversy, Stephen specializes in audit risk assessment and quality review. His proficiency in navigating complex tax law makes him an essential resource in addressing tax technical challenges for clients. His exten...