A method of manufacture an integrated circuit packaging system includes: providing a base substrate; mounting a first base integrated circuit over the base substrate; mounting a second base integrated circuit over the first base integrated circuit; attaching a stacking interconnect to the base substrate and adjacent to the first base integrated circuit; and forming a base encapsulation, having a recess portion from a corner of the base encapsulation and a step portion adjacent to the recess portion, with the step portion over the second base integrated circuit and the recess portion exposing the stacking interconnect.