The Internal Revenue Service (IRS) is also preparing for a sea change. Recent firings and buyouts will soon see it lose nearly a third of its workforce. The agency has been the sudden beneficiary of $80 billion in unexpected new funding from Congress. As staff at the IRS continue to dwindle, they cannot adequately enforce tax laws or collect revenue, particularly from high-net-worth individuals and their complex corporate structures.
The IRS is currently recruiting younger, more tech-savvy accountants and engineers to help. This hiring push comes in the wake of planned staff reductions, meant to bolster their capacity to untangle complicated tax returns filed by the very rich and private corporations. This strategic repositioning helps strengthen the agency’s ability to maneuver through even more complex fiscal realities. Experts are sounding the alarm that these steps aren’t enough to offset the impending exodus of seasoned staff.
In its 2024 list of “Dirty Dozen” tax schemes, the IRS has included syndicated conservation easements, underscoring its commitment to tackling aggressive tax avoidance strategies. The agency’s High Wealth division recently added Wesley Stanovsek, a regional authority on S-corporations, trusts, and partnerships. At the same time, the Large Business and International unit recruited Jack McCumber, a highly experienced real estate and business appraiser with deep expertise in information technology. Both hires indicate the IRS’s ambition to step up its auditing muscle per wealthy taxpayers and large pass-through businesses.
With the IRS’s workforce shrinking by 29%, fears about tax enforcement are mounting. Using the agency’s automated systems, the IRS can impose tax liens on any assets. These systems have not been able to match the added burden with sufficient staffing. This situation is uncannily similar to the budget cuts of 1999 and 2000. Those cuts caused the creation of a huge boom of dark money tax structures, which later were found to be illegal.
And the IRS’s enforcement ranks are dying faster than they can die—which is worrisome given how badly collections from the richest Americans depend on it. A Yale Budget Lab study estimates that tax revenue could decrease by at least $160 billion over the next decade due to these staffing reductions.
Scott Bessent, Treasury Secretary for the IRS, addressed concerns about the agency’s ability to maintain its collection efforts despite cost-cutting measures. When pressed in a March interview with CNBC about whether these reductions would threaten the ability to collect revenue, he responded with “No.” Critics, including the California Transit Association, counter that the facts show that’s not the case.
“I attribute that to a lack of personnel.” – Romashko
Auditors are discovering it harder and harder to peel back the layers on these complex cases without enough staff to support their staff. Taxpayers who owe substantial amounts—such as one individual facing an open audit case for up to $8 million—are likely to experience delays and complications as the agency grapples with limited resources.
Experts have raised alarms regarding how automated systems could disrupt the auditing process. In a world with too few auditors, automated systems can more easily flag potential issues based on missing annual filings or discrepancies in taxpayer submissions.
“Normally for an auditor, it’s like they open the closet door and start digging around and asking questions,” – Pakenham
Pakenham says that the IRS’s practices today are like having “X-ray vision.” The good news is that auditors can identify these issues without fully understanding their nuances. This fundamental change begs the question of how much knowledge and context human auditors actually contribute to audits that investigate more nuanced concerns.
The IRS’s new regime has left many wealthy taxpayers and their attorneys struggling to navigate the complexities of compliance amidst ongoing changes. Automation is picking up interest across the agency. Many are concerned that it could fall short of the deeper insights that only human interaction can teach.
“With a human, you can reason and explain,” – Romashko
Romashko discusses the need for a human element to be included in tax audit procedures. He cautions that excessive dependence on artificial intelligence may foster a level of misinterpretation that is difficult to overcome.
“If AI comes to the wrong conclusion, it’s much harder to shake it. You can’t talk to a computer.” – Romashko
While the IRS contends with each of these issues, the environment surrounding tax enforcement is rapidly changing. Strategic staff cuts, technological advancement, and new generational funding boom complicate and cloud the fate in this perfect storm for taxpayers. This swirling landscape is having a profound effect in shaping and challenging the agency.