Inland Revenue says forced redundancies are likely if it cannot find 250 voluntary job cuts.
Yesterday Inland Revenue told staff it wanted to lose about 4 per cent of its 6000-strong workforce, saying it had to "tighten its belt" at a time of economic pressure.
The Public Service Association says that will hurt service levels at a time when the IRD is being relied on to help taxpayers and businesses through the recession.
It follows announcements of staff cuts at the Ministry of Social Development, Ministry for the Environment and Tertiary Education Commission as the result of the cap the Government has put on bureaucrat numbers.
Inland Revenue Commissioner Robert Russell said its cuts would have happened regardless of the cap. About 1300 extra staff had been employed since 2004 as a result of extra one-off funding boosts for the IRD to bed in new policies such as KiwiSaver, Working for Families and interest-free student loans. However, the projects were "winding down" and the funding was due to end.
Mr Russell said the reduction in staff levels would usually happen through attrition - about 700 staff left the department every year. However, over the past year the number of staff leaving had dropped significantly because of the uncertain labour market.
He could not rule out forced redundancies if not enough were made through a voluntary process.
He said he was confident the department could continue to meet its workload with fewer people. He was unlikely to accept many applications from frontline staff or those with essential technical expertise.
PSA national secretary Richard Wagstaff said the union accepted the department had to meet its budgets, but he was dismayed that the cuts were happening at a critical time.
Labour's spokesman Grant Robertson also said taxpayers would suffer from any drops in service at a critical time.
"IRD has been asked to work with businesses to help them through the recession with changes to provisional tax, for example. People are still looking to IRD for a level of service which I think is going to be diminished by these cuts. There's also tax changes, such as the new independent earner's tax credit they have to deal with."
Revenue Minister Peter Dunne said the staff cuts would not affect frontline services to taxpayers and were not the result of the Government's cap.
"These were positions that were always on a time-limited basis. It happens most years through natural attrition, and when we [the previous government] agreed to it it was on the basis that that wouldn't be a problem."
The Government has capped the numbers of core bureaucracy staff at the December 2008 level of 38,859 fulltime employees.
Yesterday, Finance Minister Bill English said he had been surprised by how much poor spending had been found in the line by line reviews of government departments. He said department heads had recognised that the restraint demanded from the public sector was permanent.
The IRD cuts follow changes at the Ministry for the Environment, which last month said about 86 staff would be affected by the decision to get rid of several projects. The ministry has said it hoped most staff affected could be reassigned to jobs in other areas. The Ministry of Social Development also aims to cut about 500 staff.