IRS to reduce workforce
Last season, taxpayers spent 13 hours doing their taxes, according to a report on ABC. How much we get taxed, how we submit our tax returns, and everything that happens after that could potentially be impacted soon, as early as late May of this year.
As with many federal programs and agencies, change is coming to the IRS as well. The Trump administration plans to reduce its workforce by 18 percent as a cost-cutting measure proposed by the Department of Government Efficiency (DOGE.) This would lead to the slashing of the jobs of some 7,000 of its probationary employees.
This year, the IRS is expected to collect about 97 percent of the revenues that fund the federal government, estimated to be around $5 trillion. Due to this upcoming restructuring, though, it is projected to lose out on about $700 billion in owed taxes, said Professor Natasha Sarin, speaking at an American Community Media briefing on April 11. She is a professor of Law and Finance at Yale and president of the Budget Lab, also at Yale.
Top 1% will pay less tax
The reason they won’t be collected is not because the vast numbers of those who earn a wage or a salary will not be paying their taxes. They will because their taxes are taken out of their paychecks, she explained. It is those who make money through means other than employment that are a lot less visible to the IRS, and it is they who have a lot of scope to pay less tax than what they owe.
“The vast plurality of underpayment is coming from those at the very top of the income ladder— the top one percent of the earners,” Sarin said.
Fewer staff means fewer audits
According to Sarin, reports suggest that the IRS could be trimmed by as much as 50 percent. That would be like having an IRS at levels not seen since 1960, when the U.S. population was around 60 million and the economy was much less complicated.
At the Budget Lab, Sarin and her team tried to gauge the consequences of such a measure. “What we found is that a shrunk IRS could lead to a loss of revenue of $400 billion over the next decade. But that number could go up to as high as $2.4 trillion if we take into account the indirect effect of the staffing reduction,” she said.
The IRS of the future will do fewer audits of the rich because it will have fewer resources to do so. And that will shape the behavior of taxpayers in a big way. Just as people are less likely to drive recklessly in the presence of speed cameras, so businesses are less likely to underpay their taxes or evade them if they see other businesses getting audited. “Take away the enforcement and you lose not just direct tax dollars, but also these indirect tax dollars,” she explained.
Impact of changes
Speaking about how these changes would be felt at the level of individual taxpayers, Michael Kaercher, Deputy Director of the Tax Law Center at NYU School of Law and former IRS attorney, said, “I see a couple of things playing out. An IRS that is going to see cuts at the level that is being talked about is going to have a hard time answering phone calls. There has been some strong messaging that the IRS may pull the software with which many Americans could do their taxes at no cost.”
Aravind Boddupalli, a researcher at the Urban-Brookings Tax Policy Center, focused on the recent agreement between the IRS and ICE to share data. This, he believes, will lead to three outcomes.
A) This arrangement will effectively reduce how much federal tax the agency collects because illegal immigrants, who do pay taxes, will stop doing so, for fear of being deported. They chip in over $60 billion to the U.S. economy.
B) It will erode public trust in the agency. Up until now, the IRS has kept taxpayer data highly confidential, bound as it is by §6103 of the federal tax code. “It has no stated exception for immigration enforcement.” As a result, folks who are not documented have paid their taxes in good faith, hoping that paying their taxes will, one day, enable them to acquire a legal status,” Boddupalli said.
C) It will have a chilling effect in other areas, too. Immigrants will be reluctant to engage not only with the IRS, but with other government agencies as well, and other spaces where they sense risk, such as going to see a doctor or sending kids to school.
Loss of Revenue
The purported goal of reducing the IRS is to reduce government spending and its operating costs. But paradoxically, this may lead to a loss of revenue, which could potentially exceed what could be gained through the reduction in the workforce, these experts warned. To offset some of that loss, there is a plan being contemplated to cut Medicaid and SNAP, which would harm low-income households.
Tariffs are being considered as a stream of revenue. But they are essentially “consumption taxes,” said Kaercher, which, again, would have a “far greater impact on the low-income households than the very rich.”
AI could replace some IRS agents, but who would train those AIs? Surely, that job would need humans.