As the Internal Revenue Service prepares to enter tax season full-bore, the agency is faced with a tightened budget, a shrinking workforce and an ever-more complex and increasing workload.

That combination, along with leadership changes at the top of agency, threatens to upend the gains IRS has made over the past few years to better manage its workforce, according to the Treasury Inspector General for Tax Administration, an agency watchdog.

The IG’s report, dated Jan. 11, was made publicly available this week.

Budget crunch leads to fewer employees

For two years in a row, Congress has pared back the agency’s budget. The $11.8 billion appropriated for fiscal 2012 was more than 2 percent less than the year before.

IRS was unable to make up for the shortfall only by reducing travel, training and contract spending, TIGTA reported. So, the agency halted hiring agencywide, only replacing departing employees in special cases. The agency also offered buyouts and early retirements to further trim its workforce size.

All told, IRS now has 5,000 fewer employees this tax season than last, TIGTA said. At the end of 2012, the IRS workforce — 97,717 employees — had dropped 9 percent from 2010 levels.

After the budget cuts, early outs and attrition, the workforce IRS is left with is rapidly approaching retirement age, according to TIGTA. Already, about 39 percent of all agency executives and nearly 20 percent of its managers are now eligible for retirement. Within five years, that number will grow to 70 percent and 50 percent, respectively.

Work growing more complex

But IRS is not just facing lower staff levels. The nature of employees’ work is changing and workloads are increasing.

“In addition to facing budget cuts and the potential retirement of many experienced employees, the work performed by IRS employees continually requires greater expertise as tax laws become more complex and far reaching,” TIGTA said.

Many of the new tax changes stem from the Affordable Care Act health-care overhaul. In 2012, Congress included a provision in the IRS budget allowing IRS to hire more than 850 additional employees to help implement the health law to be funded directly by the Health and Human Services Department. But the current budget includes no extra employees and no funding from HHS.

The budget crunch and shrinking staff levels could jeopardize the agency’s fraud-detection and identity-theft teams, TIGTA said. As tax season ramps up, many employees formerly tasked with handling these specific areas are also being asked to man the telephones to assist taxpayers with questions.

New leadership, old recommendations

As if that weren’t challenging enough, the agency is currently without a permanent leader. Former Commissioner Doug Schulman’s term expired in November, and he stepped down.

Steven Miller has served as acting commissioner since then.

The management of the IRS workforce has been repeatedly singled out as a problem area by TIGTA for the past decade. While improvements have been made — the agency has completed more than 75 percent of TIGTA’s recommendations since 2009 — there are still a number of outstanding recommendations the agency has yet to implement.

One of the unaddressed recommendations is to develop an agencywide strategy for integrating new employees into the workforce. IRS policy dictates that new hires be assigned mentors when they start with the agency. But TIGTA has found that about a quarter of new employees are never assigned mentors. Developing a better onboarding program could help boost retention rates, the report stated.

Among the successes, IRS developed and debuted an agencywide recruitment strategy to boost new hires. IRS also cut the time it takes to hire. In 2009, it took the IRS more than five month to hire an employee from outside the government. By 2012, it took an average of 54 days to hire new employees.

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