The government review of AT&T Inc.’s $85 billion takeover of Time Warner Inc. has reached an advanced stage, people close to the situation said, a significant milestone in a deal that was closely watched for signs of how the Trump administration would view large mergers.

The deal’s regulatory review has hit a late-stage point where AT&T lawyers are discussing merger conditions with the Justice Department, the people said. The review process has reached that point despite a vacant seat atop the department’s antitrust...