This Tax Season, an IRS in Crisis

Core Tasks Neglected Amidst Leadership Vacuum

Every year during tax season, please spare a thought for the IRS. It is our least loved agency, but one of our most important. Last year, I noted how an IRS modernization effort was making real progress in terms of improved service quality. The federal government was rebuilding a core but neglected state capacity.

It is hard to find much to be cheerful about a year later. The IRS is under what can only be described as a deliberate effort to dismantle state capacity.

Core tasks are being neglected. Less money will be collected, increasing deficits and putting pressure on spending for critical programs. The very rich, in particular, will benefit. Not only are they being handed an extension of Trump era tax cuts; they are also seeing a tax reporting environment where the IRS will simply be unable to keep up. The agency is experiencing a massive leadership vacuum and is being converted into a tool of mass deportation. IRS has never been in worse shape.

Defunding the IRS Will Cost the Government

Trump and DOGE have promised to cut the number of IRS employees by half. Already thousands were fired during tax season. Cuts have fallen especially hard on tax audit functions. The IRS was finally assembling teams with the skills to pursue complex tax scams, more likely to be undertaken by the very wealthy. Those teams, and the accompanying audits, are now falling apart.

Every dollar spent on the IRS generates somewhere between $5-12 in return, and every hour spent auditing the very wealthy generates $13,000. One tax official working on tax fraud said that their team of less than 10 people had generated $5 billion in revenue in four years. Another said:

All of a sudden, these cases are going to be closed and we’re going to look like idiots. There is no one left to work them. The remaining agents have full caseloads.

Because the early firings focused on probationary employees, many of those fired were new, but that does not mean they did not have substantial experience. IRS had focused on recruiting specialists in accounting and tax law who could keep up with their private sector counterparts. The unit that focused on billionaire tax evasion lost 38% of its staff even before the next round of cuts hits.

DOGE says it will write new code to replace the IRS system. This has served as a justification to stop the modernization effort. The new code might also be a disaster. But even if it’s not, it won’t perform auditing functions. There is no plan to replace expert human beings who generate much more revenue than they cost.

These cuts are a boon for wealthy tax cheats. The wealthiest 1% are responsible for about 28% of uncollected revenue. Trump just gave them a license to keep dodging taxes. If Musk and DOGE truly cared about closing the deficit, or tax fairness, they would increase the modernization investments. But their revealed preference is for a tax system that does not trouble the wealthy unduly, making taxation more voluntary, a tip jar for public services.

The former IRS Commissioner John Koskinen put it like this:

Large businesses and higher-wealth individuals are where you have the most sophisticated taxpayers and the most sophisticated tax preparers and lawyers who are attuned to pushing the envelope as much as they can. When those audits stop because there isn't anybody to do them, people will say, ‘Hey, I did that last year, I'll do it again this year…When you hamstring the IRS, it’s just a tax cut for tax cheats.

Danny Werfel, the most recent Commissioner said:

I always try to make it clear that when you cut IRS resources, you're not cutting taxes. It means you are just reducing the ability of the IRS to collect the taxes that have been enacted. And what that means is that those that don't play by the rules are more likely to get this free ride.

The Budget Lab at Yale estimates that the full effect of the proposed IRS cuts would be extraordinary once the incentive effect of noncompliance is taking into account, resulting in a $2.4 trillion loss over a decade.

When you add up these numbers you begin to understand how Donald Trump managed to bankrupt a casino.

DOGE is finding that actually cutting public funding is harder than expected, even with its chainsaw approach to government. It is failing to document many of those savings. (And yes, they are not really savings if we don’t understand the value of what is being cut. If I stop making my car payments, I have saved money. But when my car gets repossessed and I can’t get to work it will seem like a poor tradeoff).

But two things are almost certainly true. First, the biggest financial effect of DOGE will be their impact on IRS. Second, that effect will go in exactly the opposite direction of what they have promised, costing the government an extraordinary amount of money in return for relatively minor savings.

The IRS is Now Part of Trump’s Immigration Enforcement

DOGE quickly turned up at the IRS, demanding access to data. They were initially rebuffed, because it would be illegal to give them such data. There is no stronger conventional wisdom in the US federal government than the idea that third parties, including other government agencies, cannot get IRS data without an act of Congress. The Privacy Act of 1974 reflected fears about political abuses of tax data, but also, as Danielle Citron documents in Lawfare, deep concerns about how the technology allowed unprecedented surveillance the public.

But the IRS is starting to share its data without any Congressional oversight. Like many areas of Trump policy, they start with immigrants, a group that is less likely to draw large scale pushback. The Department of Homeland Security has deputized IRS agents. Now, they have an agreement with IRS to receive data about undocumented immigrants. ICE officials have told the IRS that they hope that tax information can help to deport as many as seven million people.

One very predictable effect is that such migrants will see the tax system as a risk to be avoided, and instead move into informal economy. Audrey Casillas, who helps low-income workers prepare their taxes in Los Angeles told the New York Times: “The fear is real. There a lot of no shows. Clients are asking us: ‘Is ICE going to be there when we do our taxes?’”

Beyond the human costs and fear, the financial costs to the United States are great. Undocumented migrants pay an estimated $66 billion in taxes, with $43 billion of that supporting Medicaid and Social Security, programs they benefit little from. If immigrants become half as likely to file, the Budget Lab at Yale suggests the losses would amount to $313 billion over a decade.

America will become one of the countries where tax payments is largely optional for the very rich, and avoided by poorer migrants.

A Leadership Void

Trump has nominated Billy Long, a Congressman with no experience running a large organization, to lead the IRS. The outgoing Commissioner Danny Werfel offered to stay in the position until the new Commissioner was in place. But Trump’s Treasury appointees would not meet with him. So he resigned. He was replaced by an acting Commissioner, a career official named Doug O’ Donnell. O’ Donnell was out just after a month, after he rejected calls to share IRS data. Next up was acting Commissioner Melanie Krause. She was seen as more aligned with DOGE, and put the Chief Human Capital Officer on administrative for not being responsive enough to DOGE. Krause resigned in early April after DHS succeeded in accessing IRS data.

The fourth IRS Commissioner since January is already out. Gary Shapley was installed in the position by Elon Musk without the knowledge or agreement of Scott Bessent, the Treasury Secretary who oversees IRS. Shapley was announced for the position on April 16, and out by April 18 after Bessent pushed back against Musk usurping his powers. Musk has since attacked Bessent on social media. He will be replaced by another acting Commissioner until Billy Long is confirmed.

So: the IRS is on its fifth Commissioner in three months.

And no Chief Human Capital Officer. The Acting Chief Counsel was replaced with someone more DOGE-friendly after he resisted DOGE requests for data. Oh, and a few other people resigned after the privacy violations occurred. The Chief of Staff. The Chief Financial Officer. The Chief Risk Officer. The Chief Privacy Officer. The Chief Information Officer and his two deputies.

That seems like a lot.

Presumably they will eventually find people to fill these positions, but you cannot absolutely gut the entire leadership of an organization without severe dysfunction and disruption. And yes, I know hostile takeovers are a thing that happen in the private sector. But this is one area where the public sector really is different. Institutional knowledge matters more because staff perform unique functions, know a lot about the very specific and detailed policy structure under which they operate, and rely on long-term relationships with Congress and stakeholders.

More to the point, we should be very worried when the entire C-suite of an organization exits because they do not want to be associated with what happens next. Who, exactly is running IRS right now? The richest man in the world’s personal government unit has pushed the revenue collection agency to the point where experienced leaders no longer feel they can serve.

Using the IRS to Punish Political Opponents

One final concern is that Trump will use the IRS to pursue his political enemies. This is standard practice for authoritarians, and indeed Nixon had pursued these practices to such an extent that they were included in the impeachment case that was mounting before he resigned. We have no evidence that this is happening, but there are worrying signs. Trump has mused about using the IRS in this fashion. He has also put a political appointee in charge of IRS criminal investigations for the first time since the Nixon era.

And now there are reports that the IRS might remove Harvard’s tax exempt status, and a direct and obvious retribution for their refusal to allow the Trump administration to take over key parts of their university. This sort of corruption can run both ways. Trump’s nominee for head of the IRS was able to pay off campaign debts he was personally liable for in large part because of donors in the tax consultant industry or people with tax-related legal issues.

There is already enough going wrong with the IRS, but it can always get worse.