The IRS is navigating human capital challenges brought on by a decade of workforce reductions, forcing the agency to pivot toward fewer but deeper, technology-driven audits, according to former senior agency officials March 5 at the Federal Bar Association Tax Law Conference.
Impact of Workforce Cuts
A prolonged hiring freeze and subsequent workforce reductions have created deep operational challenges for the IRS. Former IRS Commissioner Chuck Rettig explained that a hiring freeze from 2011 to 2018, where the agency could only hire one person for every four who left, was devastating. The agency’s workforce has shrunk by about 25% from its peak of 102,000 employees to approximately 77,000 today, creating what Rettig described as lost generation of agents and a void of mid-career experience.
The personnel shortages are most severe in key operational divisions, according to panel moderator Larry Campagna, chairman emeritus at Chamberlain, Hrdlicka, White, Williams & Aughtry. The Small Business/Self-Employed (SB/SE) division has seen its workforce shrink by 35%, while Appeals is down 28%. Carolyn Schenck, a former national fraud counsel at the IRS, explained that these cuts have tangible consequences, manifesting in delayed case handling and a critical erosion of expertise.
“Years of hiring freezes combined with retirements have really created a gap in institutional knowledge, especially in complex areas” like international tax, partnerships, and fraud. “Investigations have historically relied on experienced agents and attorneys who’ve had decades of experience, and replacing that expertise is difficult.”
This has also dismantled informal mentorship networks, as new agents once learned the “craft by working alongside more experienced people,” she said.
Focused Compliance Enforcement
In response to its diminished workforce, the IRS is increasingly relying on data analytics to conduct more targeted examinations. Rettig explained that the agency uses its vast “compliance data warehouse” to pinpoint noncompliance, comparing the strategy to a military drone operation that identifies specific targets rather than patrolling a wide perimeter. “That’s what technology allowed the agency to do from a compliance perspective” and “from a taxpayer service perspective,” he said, noting that data scientists have become some of the most important people in the agency.
Schenck recounted how the entire IRS offshore credit card project of the 1990s began with a single auditor who noticed unusual expenses on a corporate return and began “pulling the threads.” Rettig pointed out that this landmark project occurred within an “underfunded, understaffed IRS” that had “zero technology.” This illustrates a fundamental move from a manual, reactive posture to one that is proactive and data driven. The result is “fewer audits, but maybe deeper audits,” Schenck observed. The agency now uses sophisticated tools to identify real problem areas, allowing it to decide where to focus an audit and where to exit if no issues are present.
This data-driven approach means audits often begin with extensive pre-audit analysis before a taxpayer is ever contacted, Schenck explained. She noted that when the IRS opens a case now, agents have already conducted significant data analysis, reviewing not only previous filings and information returns but also other data points like suspicious activity reports and banking documents filed with the Financial Crimes Enforcement Network (FinCEN). This preparation allows the agency to start an audit with a deep understanding of a taxpayer’s financial footprint.
Fraud Detection
With its human capital stretched thin, the IRS is sharpening its fraud enforcement by leveraging data analytics and placing a new emphasis on the quality of taxpayer disclosures. According to Schenck, the agency is attempting to shift from reactively reviewing filed returns to proactively using data to detect fraudulent schemes and identify key players early. While staff reductions will likely impact the total number of fraud cases pursued, the agency continues to prioritize high-impact issues such as offshore accounts and complex partnership arrangements.
For practitioners, recognizing the signs that an examination is shifting into a fraud investigation is vital. Schenck advised paying close attention if an agent’s questions turn to: “Who knew? How did you know? When did you know? Who told you not to do this?” Such inquiries may indicate an intent to establish badges of fraud. She emphasized that the examination level is the best moment to “debunk or demystify” such allegations, because once a civil fraud penalty is asserted, the case enters a complex internal review process that makes reversal difficult.
Recent Tax Court decisions involving syndicated conservation easements have added new nuance, holding that disclosing a position on a return can negate the intent element necessary for a fraud penalty.
Schenck advised practitioners with clients in high-risk areas to carefully consider disclosure strategies to avoid unintentionally establishing evidence of fraudulent intent. Rettig concluded with a call for empathy, noting the IRS workforce has “been through some really difficult, challenging personal times. And just respect that. Don’t overplay it, but respect that.”
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