Reductions to the IRS workforce and the current design of information reporting both hamper voluntary compliance and the tax gap, according to research presented during the first session of the 16th annual IRS/TPC Joint Research Conference on Tax Administration on June 25. The event’s opening session featured two papers and a discussion led by an IRS economist.
Staffing cuts directly impact tax compliance
In the first paper, Vishal Baloria, an accounting faculty member at the University of Connecticut, examined how IRS staffing reductions affect individual income tax compliance. The research used the approximately 11% workforce reduction that followed a December 2010 hiring freeze as its primary event.
To measure the impact, the study compared tax filing data from states that impose an individual income tax with data from states that do not. The hypothesis was that taxpayers in income-tax states are more affected by a reduction in IRS resources, both because they face a higher incentive for non-compliance and a greater compliance burden from filing two returns.
The study found that states more affected by the cuts saw a 3.2% decrease in tax filings. Both reduced enforcement and reduced taxpayer assistance drove the decline, with the analysis attributing roughly 2.5% to the enforcement channel and 0.7% to taxpayer services. The effect weakened in counties with more paid tax preparers per capita, who can fill the gap left by reduced IRS services.
The decline concentrated among higher- and middle-income filers, while lower-income filers, who often rely on free services, showed little change. Baloria said the results held across alternative tests, including a 1995 staffing cut and the pandemic.
‘Information architecture’ is key to the tax gap
In the second paper, Ali Ekmen, a former chief tax inspector, argued that the tax gap is not only a matter of taxpayer behavior but also an “information-architecture problem.” The paper reframes compliance by asking not just why taxpayers comply but how much room the system leaves for misreporting.
Compliance depends heavily on how and when tax-relevant information becomes visible to the tax authority, Ekmen said. The paper distinguishes between “self-reporting,” where the taxpayer builds the information base from personal records, and “system-reporting,” where the return begins with information already visible to the IRS, such as through third-party reporting.
Using IRS tax gap data, the paper highlighted a “visibility gradient.” Net misreporting is lowest, at 1%, for income subject to substantial information reporting and withholding, such as wages. It is highest, at 55%, for income with little or no information reporting. Ekmen cautioned that the relationship is descriptive rather than causal, since income types differ in other ways.
He noted that underreporting accounts for the largest share of the gross tax gap, making the reporting stage central. The paper frames system-reporting as a family of mechanisms — including withholding, e-invoicing, and pre-filled returns — and concludes the return “should not begin from a blank page,” subject to taxpayer correction and procedural safeguards.
Discussant stresses data nuances, agency role
Michael Udell, an economist with the IRS’ Research, Applied Analytics and Statistics division, served as the discussant for both papers. He offered technical feedback aimed at tightening the analyses for practical use, noting that the agency typically works with taxpayer-level data rather than the aggregate data the papers rely on.
On the staffing paper, Udell said the group of states without an income tax is highly heterogeneous and suggested that the location of IRS service centers may be a key differentiating factor, noting that two no-tax states that host service centers, Texas and Tennessee, lost few workers. He also raised concerns about potential endogeneity, particularly between the presence of local IRS examiners and tax filing volumes.
In response to the information-architecture paper, Udell introduced “agency” as a critical missing element. He argued that the U.S. tax system relies on agency relationships in which third parties act on behalf of the tax administrator. The W-2 system, in which employers withhold and report taxes, and the payment system, in which large banks process deposits for the Treasury, are the two most important examples.
According to Udell, the strength of these relationships is a key factor explaining the visibility gradient. He added that when the government reduces services and paid preparers fill the gap, those preparers act as agents of the taxpayer rather than the IRS, which research suggests can lower compliance.
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