More than 500,000 federal workers and retirees in the IRS's crosshairs: the FERDI crackdown, the $2 billion tax gap and the OPM rule that can now end careers

Tax delinquency among federal employees and federal retirees is rising in the United States—and the cost of being one of those delinquents is rising with it. Since June 2025, the Internal Revenue Service has sent more than 500,000 LT36 notices to current and former federal workers identified as having an "outstanding tax issue"—unpaid taxes, unfiled returns or both—as of April 30, 2025. Lawmakers, including Senator Chuck Grassley of Iowa, now estimate the federal-employee tax gap at more than $2 billion, up from a $1.5 billion figure that the Treasury's own watchdog reported just a few years earlier. And a separate Office of Personnel Management rule, published in the Federal Register on June 3, 2025, lets agencies fast-track dismissal of employees for unresolved tax debt for the first time at scale.

Together, the three moves—the LT36 wave, the rising tax-gap estimate, and the OPM "suitability and fitness" regulation—mark the most aggressive federal-employee compliance push since the Federal Employee/Retiree Delinquency Initiative (FERDI) was created in 1993. They also collide with a parallel OPM 1099-R rollout that has left thousands of federal retirees unable to get the very tax documents they need to comply.

The trend the numbers actually show

The most authoritative picture of the trend comes from a 2023 report by the Treasury Inspector General for Tax Administration (TIGTA) on federal civilian employee nonfilers. TIGTA found that between fiscal years 2015 and 2021, the number of delinquent federal civilian employees rose by 32%. By the end of FY 2021, about 149,000 federal civilian employees collectively owed roughly $1.5 billion in unpaid federal taxes—a 36% rise in aggregate debt over the same period. The delinquency rate among federal civilian employees moved from about 3% in 2014 to 5% by 2021.

Two additional findings sharpened the picture. Over 42,000 federal civilian employees repeatedly failed to file tax returns for multiple years between FY 2016 and FY 2020, suggesting persistent rather than one-off nonfiling. And more than 1,000 of the nearly 150,000 delinquent federal employees had been delinquent for six years or longer. For context, the general US population's tax-delinquency rate is estimated at around 9%, so federal employees as a class are still more compliant than the wider taxpayer base—but the direction of the curve is wrong, and that is what set off the enforcement push.

What FERDI actually is

The Federal Employee/Retiree Delinquency Initiative, codified in IRS Internal Revenue Manual § 5.1.7, was established in 1993 to identify and collect delinquent tax debt from current and former federal employees. The program matches the IRS taxpayer database against federal payroll and pension records to surface noncompliance. It covers a wide population: civilian employees, civil-service or FERS retirees, active-duty military, military retirees, National Guard and Reserve members.

There are limited statutory protections inside FERDI. Collection activities are suspended while a taxpayer is serving in a combat zone; standard collection resumes once that status ends. IRS employees themselves are held to a stricter regime—they can be removed from federal service under IRS Notice 99-27 for unresolved tax issues, separate from the FERDI program. And FERDI is not about lifestyle audits or pattern-of-deductions reviews; it is, structurally, about "have you filed" and "have you paid", with the federal payroll database providing the cross-match.

The LT36 notice wave

The LT36 is the procedural face of FERDI in 2025-2026. In June 2025, the IRS began mailing LT36 notices to current and former federal workers with unresolved tax issues; the Taxpayer Advocate Service (TAS) confirmed in August 2025 that the notices were tied directly to the FERDI program. By the time the rollout reached coverage in trade press in July 2025, the LT36 mailing list had grown to more than 500,000 current and former federal employees. The notice does two things simultaneously: it tells the recipient that the IRS has identified them as noncompliant, and it warns that collection actions can begin without further direct human contact.

The mechanics matter for federal workers reading the envelope. Most FERDI cases are handled by the IRS's Automated Collection System (ACS), unless the aggregate assessed balance exceeds $1 million or the taxpayer is an IRS employee. Under FERDI, the IRS can garnish wages and salaries, withhold pension or Social Security payments, and apply other automated collection actions. As TAS puts it in its August 2025 alert: "FERDI permits wage garnishment, pension withholding, and other automated collection actions." Recipients are directed to verify the notice via the IRS Online Account, sign in via QR code, or call the dedicated helpline at 800-829-7650 to dispute errors.

An important nuance often missed by federal workers receiving the notice for the first time: you can receive an LT36 even if you do not owe any money. Failing to file a return is enough to qualify as noncompliant for FERDI purposes, and the LT36 will go out on that basis alone. That is why 42,000 repeat nonfilers identified by TIGTA are central to the enforcement push.

Which agencies are most exposed

FERDI applies across the federal workforce, but two agencies show consistently elevated tax-delinquency rates: the United States Postal Service (USPS) and the Department of Veterans Affairs (VA). Public estimates referenced in Senator Grassley's correspondence with the IRS, and echoed in Taxpayer Advocate Service materials, identify these two as the highest-concentration employers for affected workers. Two structural factors plausibly explain the elevated rates: both are large workforces with significant numbers of lower-paid employees for whom underwithholding and shifting household financial pressures translate quickly into delinquency, and both have complex pay structures—Postal Service mail-handler grades, VA clinical and clerical mixes, multiple bargaining units—that increase the likelihood of withholding errors.

Other agencies with sizeable workforces—Department of Defense civilian components, Social Security Administration, Department of Homeland Security, the Department of the Treasury itself—appear in the data but at lower-than-average concentration. Some smaller, higher-compensated agencies—Federal Reserve System, Securities and Exchange Commission, certain intelligence-community components—have shown notably lower delinquency in past TIGTA work.

The OPM rule that changes the stakes

The single most consequential 2025 development for federal workers reading their LT36 is the Office of Personnel Management rule published in the Federal Register on June 3, 2025, under the heading "Suitability and Fitness" (document 2025-10067). The proposed regulations allow agencies to fast-track dismissal for ethical issues, including unresolved tax debt. In practice, that means a federal employee with an open FERDI matter no longer faces only an IRS collection problem; they face an agency adverse-action problem on a compressed timeline. "What used to be a private financial issue can now become a career-ending one," Frost Law tax attorneys Jessica Marine and Glen Frost wrote in their July 2025 explainer of the rule for FedSmith.

The OPM rule sits alongside long-standing federal-workforce ethics doctrine—5 CFR § 2635.101's "Basic Obligations of Public Service", which expressly require federal employees to "satisfy in good faith their obligations as citizens, including all just financial obligations, especially those—such as Federal, State, or local taxes—that are imposed by law." What the new rule changes is procedural speed: where adverse-action procedures historically required documented warnings, formal opportunity to respond, and full appeals to the Merit Systems Protection Board (MSPB), the suitability-and-fitness path is faster. Federal-employee unions are likely to challenge that procedural compression on due-process grounds, but until and unless those challenges succeed, the rule is operative.

Why retirees are caught in the squeeze too

The "retiree" half of FERDI is often overlooked, but the LT36 wave reaches former civilian employees and annuitants on the Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) rolls. For retirees, the IRS can withhold from pension payments under FERDI, in addition to Social Security withholding under existing federal-payment levy programmes. That is a particularly hard collection lever because the affected taxpayer often has fewer alternative income sources to substitute.

Retirees are also currently sitting inside a separate, compounding compliance problem. As of March 2026, the OPM is running weeks behind on the delivery of Form 1099-R—the federal-retirement distribution document that retirees need to file accurate returns. OPM in October 2025 changed its policy to default to digital delivery for retirees with an email associated with their Retirement Services Online account, with paper copies mailed only on active request. Many retirees who never logged into the new system have still not received forms; the National Active and Retired Federal Employees Association (NARFE) has reported that members "cannot request mailed copies via the phone" and "cannot get through on the phones to OPM, even if that would help." A group of House Democrats led by Rep. James Walkinshaw (D-VA) and Rep. Frank Pallone (D-NJ) wrote to OPM Director Scott Kupor demanding answers.

The practical risk is straightforward: a retiree who cannot get their 1099-R on time files late, drifts into nonfiling, and then surfaces as a FERDI candidate for the next LT36 round. The OPM processing failure is therefore not a tangential customer-service story; it is structurally connected to the IRS enforcement story.

What recipients should actually do

Tax-administration and federal-workforce specialists converge on a clear short list for anyone holding an LT36 envelope. First, verify the notice. The Taxpayer Advocate Service flags possible errors including incorrect calculations, misapplied payments, notices sent to the wrong taxpayer, tax liabilities created through identity theft and other IRS errors. The IRS Online Account is the fastest place to confirm the balance the agency is claiming.

Second, if the balance is real but cannot be paid in full, request a payment plan. The IRS offers short-term plans (180 days or less, no setup fee for individuals), long-term installment agreements (with reduced setup fees for online enrolment and direct debit), and Offer in Compromise for taxpayers whose financial circumstances make full collection impossible. Enrolling in any of those programs typically pauses collection-enforcement actions like wage garnishment.

Third, if the issue is unfiled returns, file them. A return filed with a balance still cannot be paid, but the act of filing converts the case from a nonfiler matter (which OPM's suitability-and-fitness rule now treats with particular severity) into an installment-agreement-eligible balance-due matter, materially improving the federal employee's adverse-action posture. Fourth, federal employees with significant exposure should consult a tax professional, an MSPB-experienced employment attorney, or qualify for assistance through a Low Income Taxpayer Clinic before any agency adverse-action process begins.

Where this is heading

Three structural pressures will continue to drive the federal-employee delinquency story through 2026 and 2027. First, the IRS is unlikely to slow the FERDI cadence. The combination of payroll and pension data-matching capacity, automation of the ACS system, and political pressure—including from Senator Grassley and other oversight Republicans—gives the agency both means and motive to keep mailing LT36 notices in waves. Second, the OPM suitability-and-fitness rule, once finalised, will give agencies a faster firing path that union legal departments will contest but that will, in the interim, function as live policy.

Third, the underlying macroeconomic stress on federal-employee household budgets—diminished real-wage growth in lower civil-service grades, 2025-26 healthcare-premium inflation, the impact of the Iran-war energy shock on commute and home-heating costs—will continue to push some workers from current to delinquent. That dynamic is not unique to federal workers, but federal workers are uniquely visible to enforcement because of the payroll data-share that makes FERDI possible. Compliance becomes a labour-market question, not just a personal-finance question.

Bottom line

The FERDI crackdown of 2025-2026 is not a new program; it is the same 1993 program operating at a higher cadence, with automated collection technology that did not exist when it was created, against a federal workforce whose delinquency rate has been climbing for at least a decade. The new development is the OPM rule allowing agencies to fast-track dismissal for unresolved tax debt, which converts an IRS problem into a job-security problem. Anyone holding an LT36 notice from June 2025 onward—whether they owe money or simply missed a filing—has roughly the time it takes the Automated Collection System to spin up a wage levy to verify the notice, file what needs filing, or arrange a payment plan that pauses enforcement. After that, the federal-workforce machinery moves faster than it ever has.